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Trade finance digitization faces 'tipping point' amid coronavirus lockdowns

Demand for digital trade finance solutions is growing in light of coronavirus lockdowns, with technology companies saying the crisis could be a tipping point for the traditionally paper-heavy and manual business to go digital.

Stories of cargo being stuck at ports while parties in a transaction are waiting for paperwork to arrive are not uncommon in the trade finance industry in normal times. With coronavirus closures, the challenge is becoming ever more obvious.

"We heard from a corporate that could not get hands on the goods because closures of courier services in China prevented the trade documents from reaching the bank issuing the letter of credit," Jacco De Jong, global head of sales at electronic trade finance solutions provider Bolero International Ltd., told S&P Global Market Intelligence.

A century-old business, trade finance has been slow to modernize. Trade documents such as the bill of lading are mostly paper-based and therefore dependent on courier services to be transferred between participants in a transaction. Meanwhile, banks' checking of trade documents for compliance and regulatory issues still relies on manual processes and legacy systems.

This has caused trade finance to become one of the virus' many victims, at a time when companies globally need working capital support more than ever.

Flight suspensions have prompted disruption to postal services, which is having "severe consequences" for trade finance providers depending on delivery of physical documents, said André Casterman, an independent consultant and chair of the fintech committee of the International Trade and Forfaiting Association, speaking on a March 25 webinar.

And with bankers now forced to work from home, their dependence on traditional, office-based systems is slowing down the volumes of trade finance documents that can be processed, said Sameer Sehgal, CEO of Traydstream Ltd., a startup that digitizes and automates document checking. This is negatively impacting liquidity for corporates, he told S&P Global Market Intelligence.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

New technology

The situation is forcing participants in the trade ecosystem to look to technology as the solution. Sehgal said Traydstream has received interest from multiple banks and companies for its cloud-based product in order to process documents remotely.

Bolero has also seen "a big spike in the interest" for its electronic bill of lading from both financial institutions and corporates since the outbreak of the pandemic, according to De Jong.

"It is crystal clear that electronic documents cannot get stuck in physical distribution channels," he said.

For banks that have already been working to develop new trade finance technology, the crisis is helping them get clients on board.

"We have seen increased interest from the corporate side as it looks to put more information online. We expect adoption to increase significantly as organizations adapt to remote working and recognize the benefit that a paperless process can bring," Carl Wegner, CEO of Contour, a technology company that digitizes the letter of credit, told S&P Global Market Intelligence.

Contour was launched in January and is backed by large trade finance banks including HSBC Holdings PLC, Standard Chartered PLC, Citigroup Inc. and BNP Paribas SA.

Read: Trade finance revenues to take coronavirus hit as risk of default hike looms

Tipping point

Plenty of digital options already exist within the industry. Companies such as Bolero, Wave, essDOCS Ltd. and CargoX d.o.o. offer electronic bills of lading, while we.trade Innovation DAC digitizes payment guarantees and Contour the letter of credit. The likes of Traydstream, TradeSun Inc and Conpend BV use optical character recognition and artificial intelligence to support document checks, and platforms such as GT Nexus Inc. and Tradeshift Inc. allow banks and corporates to manage their supply chain finance programs digitally.

But adoption of new technology for trade finance has so far been slow due to a lack of priority within the banks, Casterman said. Now the coronavirus outbreak may provide the change in mindset that tech companies have been waiting for.

"Banks have taken a commercial approach. Where is the business case, where is the client demand? Here we have a new reason to invest in those technologies, from a business continuity planning perspective," Casterman said.

"It feels like the tipping point," Wave CEO Gadi Ruschin said. In order to provide immediate support amid the current crisis, Wave has already started implementations with some carriers and shipping companies before finalizing commercial terms, he told S&P Global Market Intelligence.

There will, however, be some way to go for the trade finance industry in its digitization journey. For example, legal uncertainty around the enforceability of electronic documents remain in some jurisdictions, such as the U.S., where there is still no regulation or law that adequately recognizes electronic versions of negotiable instruments.

As such, the growth of technology needs more than just commercial appetite, Casterman said, adding that policymakers around the world play "a key role" and must adapt the laws so they support digital trade finance.