Reimagining Trade Finance Through Network Interoperability
The pandemic, labor shortages and rising fuel costs have resulted in unprecedented challenges for MSMEs in obtaining financing and market access to the trade finance market. The gap in trade finance availability has exceeded $1.7 trillion, according to a McKinsey report.
Of the estimated $5.2 trillion annual global trade finance volume, 55% is concentrated in Asia-Pacific. There’s a clear need for MSMEs in the region to have access to digital technologies that offer the promise of improved supply-chain efficiency and transparency to facilitate trade and finance.
McKinsey sees an opportunity to reconceive, redesign and rebuild the global trade finance ecosystem that harnesses modern technology to position the sector for the future and deliver benefits to all participants, including buyers and suppliers, financial institutions, technology providers, logistics providers, trade organizations, and governments and regulators.
Adopting standards at scale
The starting vision is a new interoperability layer for current and new market players that would serve as a virtual framework promoting the sharing of standards (such as ISO standards), processes, protocols and best practices among participants. Several existing standards can be adopted as scale for operational interaction such as those for compliance, digital trade and product taxonomy. An interoperability layer should promote financial inclusion, giving MSMEs and emerging markets a fair chance to participate.
Additionally, the trade finance community should be encouraged to develop and adopt additional interoperability elements necessary to foster greater accessibility within the industry. One such way is with uniform data models that would govern how a specific product should be represented and rules about transaction records. One recent example is the Commercial Data Interchange (CDI), a consent-data infrastructure launched by the Hong Kong Monetary Authority in June 2021.
Best practice sharing
Finally, global trade finance participants should aim to work as a global trade finance think tank to create blue books and best practices that will enable the dissemination of common rules across different functions to trigger further economies of scale. Best practices could address AI technologies, omnichannel and work flows for credit assessment.
For instance, the Asia-Pacific Facilitation Report in 2019 identified more than 50 trade facilitation measures based on best practices in order to streamline regional trade finance. Their focus is rightly on MSMEs, which are the most vulnerable to trade uncertainty.
McKinsey also offers the concept of shared utilities, specializing in the pooled provision of non-differentiated services, such as digital identity, KYC and anti-money laundering, real time trade credit risk assessment and API gateways for value-added services.
Benefits to MSMEs
Each participating segment would benefit from this revamped ecosystem, especially buyers and suppliers, especially for MSMEs—giving them increased access to liquidity, reduced transaction complexity and optimized costs, and greater access to B2B markets. Financial institutions would attract much-needed new credit capacity to the industry from institutional investors and others.
The McKinsey report lays out a detailed road map to global interoperability, which, when implemented in full, would require 5 to 10 years. However, some of this could be deployed at an accelerated path. This would require a strong commitment, especially from banks.
Triterras is at the center of the global trade finance ecosystem, providing technology services to participants and facilitators. Our blockchain platform Kratos and analytics uplifts the user experience and creates more visibility into trade finance assets.
We agree with this vision for interoperability. We are working with other participants on the digitization of trade processes and the integration of institutional investors and logistics providers into the trade network.
We look forward to continuing to collaborate with these participants to support growth and opportunities for our MSME customers.