Although the disruption of trade by the Covid-19 pandemic has been profound, affecting both supply and demand, the operational flow of cross-border goods has in fact proved remarkably resilient. One of the main reasons for this is digitalisation. The digital supply chain has developed over the last few years to a point where it has made a significant positive contribution to the robustness of trade during the pandemic.
Three key components of digitalisation have proved vital to crisis-hit supply chains. Firstly, the onboarding of counterparties onto the system, with due diligence taking place electronically and a massive increase in the use of digital signatures, has eliminated much paper documentation. This means that new suppliers of life-saving PPE equipment, can be sourced speedily and successfully.
Secondly, digitalisation has enabled a vast improvement in bank-client connectivity, with banks connected digitally to client accounting platforms via APIs, host-to-host applications and web uploads. Thirdly, as instant payments can flow globally as part of both trade settlement and of an integrated supply chain, finance through electronic trade platforms has been vitally important to companies on both sides of a trade. This has been particularly true of sectors at risk of a liquidity shortfall, such as energy, consumer, hardware and industrials.
In addition, digital platforms play their part at the other end of such transactions, as an engine for the distribution of trade assets among investors. While major banks may sponsor the platforms, they can include a whole range of funders including peer group banks, challenger banks, non-bank FIs and private investors. This is beneficial for both banks and companies – access to digitalised investors able to participate in trade financing facilitates scaling up the size of facilities, plus the optimisation of assets, while reducing the risk of finding disruption. It is through a combined approach involving many different funders that companies can most effectively be supported.
Even so, the business environment remains challenging. Consumption has increased, investment has been put on hold. Any weakness or inefficiencies in supply chains has resulted in price volatility for certain goods, or goods sourced from unfamiliar suppliers. This affects the cash flows and profitability of industries in many different sectors, triggering downgrades leading to difficulties in gaining access to funding. Among those most hard hit in this respect are aviation, shipping, travel, hospitality, fashion and luxury goods.
Recovery will take time and will require government help. Most governments and central banks have indeed stepped up to the plate, introducing helpful measures such as cutting interest rates and easing restrictions on commercial banks as well as increasing loans to states and businesses.
One issue that has emerged as a result of the pandemic has been an increase in fraud, but here again advanced digitalisation is proving a key feature of defence. Banks are implementing specific processes to assess new suppliers of medical equipment, for example, to determine if they are genuine transactions with use of digital firewalls with password-protected digital identities established and digital KYC checks.
Finally, while the pandemic is creating a new trade environment, the sector must not lose sight of its recently acquired sustainability goals. Citi continues to be a major advocate of sustainability within supply chains, with all counterparties required to meet ESG standards. As the industry comes together to find ways to support global trade during the pandemic and its aftermath, it’s clear that once we emerge from the current situation the world of trade is going to look very different. Supply chains will have been re-evaluated and the true value of digitalisation appreciated. But future progress depends on today’s actions, which must be focused on the long term despite the immediate demands of the crisis.