The Roaring Twenties were driven by technological progress, developments in economic infrastructure, and defined by a flowering of post-pandemic parties and an explosion of economic activity. Sound familiar? Christoph Gugelmann, Co-Founder and CEO, Tradeteq, explores the likelihood of history repeating itself.
Today’s parallel economic conditions have led economists and historians to declare that the Covid-19 crisis will give way to another Roaring Twenties era whereby consumers and businesses will emerge from their pandemic bubbles and pent-up demand will drive a global economic boom.
But is the global economic infrastructure, the enabler of this growth, able to facilitate a booming , post-pandemic global economy? In the context of international trade, the backbone of today’s global economy, the answer is debatable.
Paper hinders comeback
Much like how the conveyor belt, cheaper electricity and new production techniques shaped the 1920s economy, containerisation, global supply chains, and an embedded international finance regime moulded today’s global economy into its contemporary, globalised form.
The burden of outdated paper-based documentation processes, however, threaten to unravel this progress and limit the prospects of a thunderous post-crisis comeback.
Despite the size and sophistication of the trade finance industry, many of its processes and the laws underlying them are based on practices developed by merchants hundreds of years ago.
A trade transaction, for example, is accompanied by a small forest’s worth of paper that criss-crosses between buyers, sellers, ports, customs officials and banks. Each one is physically delivered and signed before moving on to the next signatory. Research undertaken by SWIFT uncovered that one transaction typically involves 20 entities and between 10 and 20 paper documents, totalling more than 100 pages.
The fact that trade finance remains predominately a paper-based industry is archaic, inefficient, and wholly unsuited to a world in which processes and transactions are increasingly in digital form.
In addition to being extremely inefficient, this cumbersome process makes global trade dangerously fragile, especially when hit with a crisis such as the recent Suez Canal blockage or the global microchip shortage. The pandemic has made one thing clear – there is undoubted scope to improve the manner in which global trade operates going forward.
Another leading issue is the lack of small and medium-sized enterprise (SME) access to trade finance. Under Basel III, the small number of global banks that dominate trade finance lending have had to raise their capital requirements and simultaneously reduce their standardised risk weights.
At a time when banks are being more selective about the businesses they lend to, it has become even more important for businesses seeking finance to share data on their trade history and operations, which many have struggled to do due to the size and scope of their operations.
These post-financial crisis changes in lending standards have meant that many SMEs have seen their access to trade finance diminish. According to the International Chamber of Commerce (ICC), the number of SME exports has declined progressively since September 2017 with small and micro exporters seeing their revenues drop between 5 and 25% respectively.
As a result, it’s common knowledge that a trade finance funding gap of circa $1.5tr., which equates to approximately 10% of global trade, has emerged.
With the forthcoming introduction of Basel IV standards, which will place even tighter restrictions on banks’ capital requirements and standardised risk weights, the gap is expected to grow to $2.5tr. by 2025.
New technology for all
Fortunately, much can be achieved by updating the trade finance infrastructure that connects banks, corporations and SMEs. Implementing technology, such as artificial intelligence (AI) and cloud-based delivery systems, could help grease the wheels of the global economy.
Workflow management technology can automate the entire trade asset distribution process and empower market participants to increase deal flow, seamlessly collaborate and unlock liquidity in the multi-trillion-dollar trade finance market.
Employing AI to provide enhanced error recognition and automatic uploading and scanning of documents can simplify the workflow process and eliminate complexity and inefficiencies – saving time and reducing costs.
Additionally, cloud-based technology and API integration can create a seamless user experience for banks and institutional investors, enable flexibility to move data between funder and buyer safely within the current regulatory framework, and ultimately reduce costs and eliminate the errors associated with manual phone calls, emails and attachments.
According to the International Chamber of Commerce (ICC), digitising transferrable documents will generate £25bn in new economic growth and contribute 25% extra to SME trade by 2024. For SMEs, there will be a 35% improvement in businesses efficiency and a 13% increase in international business if trade is digitised.
For banks, these technologies will increase the velocity of cash flow, streamline cumbersome manual-driven processes, all while enabling them to remain compliant with international regulatory frameworks. For institutional investors, these technologies provide easier access to asset providers, while at the same time opening new bank pools.
The efficient use of technology could help construct a global hub for trade finance distribution and connect it to deep capital markets. Updating the trade finance infrastructure will create a modern trading environment, underpinning the Covid-19 economic recovery, and facilitating further frictionless cross-border economic activity.