Insight
Trade & the big winners of automation
While banks and other participants in global trade flows worth trillions of dollars annually stand to benefit from potentially billions of dollars in savings from digitising the voluminous paperwork involved, the greater benefit lies in preventing fraud, meeting the growing demands of regulators and facilitating economic growth.
That’s the view of ANZ Managing Director for Transaction Banking Mark Evans, who also cautions the transition to digital platforms is likely to be a gradual process given the number of parties – and countries – that need to be involved.
“Digital trade is good for the economy,” Evans says. “It removes unnecessary costs and bureaucracy and helps us detect and prevent suspect financial transactions.”
For every container physically moved around the globe, screeds of paperwork are involved with financiers, customs officials, shipping companies and the buyers and sellers all wanting assurance the transaction is legitimate.
While digitisation pervades most of the industries underlying global trade, the transactions still depend largely on physical documentation.
At the same time lenders face a growing burden of proof to satisfy regulatory measures, such as the Know Your Client (KYC) rule to combat money laundering, terrorist funding and other risks such as tax evasion and bribery
“Digitising trade is the holy grail in terms of removing bureaucracy and helping to facilitate economic growth,” Evans says.
“But trade continues to be paper based because we haven’t found one form of technology to provide the solution.”
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“Digitising trade is the holy grail in terms of removing bureaucracy and helping to facilitate economic growth.”
– MARK EVANS
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Trawling
Satisfying any current request from an anti-money laundering authority requires manually trawling invoices for suspect names.
“It’s trying to find a needle in a haystack,” Evans says.
Digital record keeping would help ensure a container was not double financed, or on a vessel breaking a trade embargo (such as an Iranian ship travelling to the US).
“If a container is reported as being in two different places on the planet on the same day, you know you have a problem,” Evans says.
A digital transition would also help to foster more trade in the first place by lessening the barriers faced by smaller companies seeking trade finance.
An Asian Development Bank survey of 515 banks suggests a $1.5 trillion annual funding gap, being the value of rejected credit applications mainly from small to mid-sized enterprises (SMEs).
The ADB cites the prohibitive cost of banks satisfying the ‘Know Your Client’ requirement as a key reason. To fill the funding gap, “digitisation must be used to make due diligence on credit risk, performance risk and Know Your Client (procedures) more efficient, cost-effective and reliable,” the ADB says.
Evans says while most SMEs excel at their core activities such as manufacturing, their strength rarely lay in paperwork.
“For example, a purchase order might be split between two shipments or can’t be found at all,” he said. “It’s incredibly costly for banks to look for it and it’s frustrating for buyers and suppliers.”
“It’s also the place where so much fraud and operational risks take place, such as double financing a shipment or photocopying the same purchase order and submitting to four different banks.”
TIN
ANZ is one of seven global banks participating in the recently-created Trade Information Network, which aims to streamline and stimulate global trade by entrenching consistent industry standards.
The other members of the heavyweight grouping are Banco Santander, BNP Paribas, Citi, Deutsche
Bank, HSBC and Standard Chartered.
Using digital platforms for documents and communications, the member banks can instantly verify the credentials of their own clients at the request of a counterparty.
Evans says the venture is about leveraging the fundamental trust trade counterparties still place in a bank.
“In the real world (corporate) treasurers still trust banks; we are one of the better counterparties,” he says. “Most goods won’t be handed over until a bank says on behalf of an importer “we will pay”’’.
ANZ is also participating in emerging technology solutions via separate trade finance ventures in Hong Kong and Singapore.
In 2018 ANZ joined eleven other major banks in Hong Kong to launch eTradeConnect, the world’s first blockchain-based trade platform.
Facilitated by the Hong Kong Monetary Authority, the platform will enable clients to conclude purchase orders, invoices and trade finance applications.
As well as reducing costs and increasing credit availability, this vehicle will help reduce the risks of duplicate trade financing.
Blockchain (distributed ledger) platforms replace multiple ledgers maintained by trade counterparties with the one ‘source of truth’, maintained by all users. No single party controls the ledger, while all parties must agree a transaction is valid before the ledgers are updated.
In Singapore, ANZ is one of nine banks participating in the Network Trade Platform, a digitised one-stop trade platform that connects all the players across the trade and supply chain.
On the one platform, traders can access trade related services such as cargo freight booking, trade financing, cargo insurance, customs declarations and payments reconciliation.
Evans says the bank hoped to apply the knowledge gained from the venture to its Australian and New Zealand home markets.
But he cautions that blockchain technology faced scalability and consistency issues given the number of jurisdictions and players involved in global trade.
“The challenge is not performing a one-off transaction, but doing it at scale as a regulated entity,” he says.
“No one has really moved it forward on a scalable basis and truly disrupted the market, but a lot has been learnt and it will happen over time.”
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