Reducing the Friction: What Trade Finance can do to Improve the Future of Trade

UK businesses have received the strongest indication yet from government ministers that 2020 will mark the end of ‘frictionless’ trading between the UK and EU. This marks a step into the unknown for many businesses accustomed to smooth cross-border flows – not just with the EU but with other trading nations around the world.

A new trading relationship comes with new challenges in terms of operational practices as well as financing of trades. It is here that the trade finance sector has a key role to play. The industry is able to set an example as to how the future of trade can be conducted, what solutions should be considered and how to ease the strain that the UK – and other nations –might face.

Revolutionising long-standing traditions

Trade finance practices need to evolve to meet the demands of buyers and sellers, as well as those of the broader economic and political landscape. Changes to long-standing practices, agreements and processes are nothing new. Whether it has been aligning a nation to the World Trade Organization Treaty, or adapting to Trade and Investment Framework Agreement (TIFA), evolution in the transfer of goods is a staple of the sector.

Today, many countries adjust and respond to geopolitical developments and alter how they import or export goods. However, despite the sector experiencing consistent change, some key practices have not evolved in the manner and speed that some expected. The lack of technological innovation has long been a cause of inefficiency.

In recent years, this has begun to change. Digitised letters of credit (LoCs) can ensure that – even with change – trade can still be conducted efficiently. Differences in regulations or privacy laws can be overcome through using an improved system that is able to recognise – and adapt to – variations in a country’s laws. An evolution in this regard has the potential to showcase what businesses and their governments can do to avoid increased strain on a fundamental part of a nation’s economy.

In short, the new trading dynamic presents an opportunity for businesses to evolve and establish better ways to conduct business across borders.

Long-term planning

Innovation should be recognised as part of a wider strategy to meet longer-term demands of clients, governments and broader societal concerns. The need for instant communication in an increasingly fast-paced world means organisations must look for better methods to keep all stakeholders involved in a trade updated.

Blockchain is one example of a technology through which communication can be improved. This is achieved by establishing a transparent network that aims to completely remove the numerous bilateral conversations that previously was the norm in trade finance. By being connected on a single network, everyone in the process can have a clearer understanding of the status of a trade, limiting confusion and improving transparency for all parties involved.

This consolidation of communication within trade finance can also help to meet wider demands relating to environmental support and carbon reduction by making each trade more efficient. Whether it is limiting the reliance on paper with digital LoCs, or better supply chain management through up-to-date information, innovation in trade finance can meet a broader demand for the economy.

Keeping the trust

Through harnessing the connectivity that technological innovation provides, corporates as well as banks can better communicate, issue LoCs and conduct trade internationally. Establishing these core practices for the sector is vital to maintaining smooth trade operations in years to come.

Trust is key to how companies trade with each other, and with fresh or different relationships being established between nations due to new trading channels being built from trade wars or dissolved agreements, corporates must ensure they are dealing with a reliable company that can ensure payment.

Once again, technology and transparency are two key factors that can maintain and strengthen these relationships. Through having a network where contacts have visibility on their trade partners and the in-process documentation that facilitates the payments, international trading will continue to function regardless of variations in regulation or laws.

This level of accountability can bolster the sector and give those trading that much-needed trust in cross-border business. With a strong foundation in trade finance supported by bank networks using new technology to match the needs of a new generation of traders, this attitude can then be more broadly adopted through government buy-in.

Although there is a natural concern when a nation changes its trading relationship with a partner, it also offers a significant opportunity for corporates and banks to utilise this transition period to evolve how they trade. Technology can play a part in supporting this change and enable businesses to trade effectively with one another.