The benefits of digitising your trade finance

The benefits of digitising your trade finance

Relying on busy people and pieces of paper to manage significant debt through the provision of credit support for major projects and trade is not only potentially costly, but risky too. Taking a digital first approach is a smart way forward.

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Organisations in industries such as construction and trade have the continual need to manage the provision of credit support such as Letters of Credit (LOC), bank guarantees and bonds, which are vital to their ability to do business. These trade finance instruments are essential to help facilitate business transactions and international trade.

 As these sectors grow in response to the push to decarbonise the economy, build new infrastructure to support population growth and the improvement in seaborne trade, the paperwork and management surrounding project finance requirements will only increase. If you are in these sectors, you will no doubt see this activity as positive for business growth. However, a problem that we are seeing is that numerous organisations are still treating trade finance processes as manual and paper-based – taking up time, resources and potentially increasing cost and risk exposure.

A smarter approach could be to take advantage of the increasing array of digital platforms and tools that can make trade finance faster, more efficient and importantly, reduce risk and cost through increased transparency. 

Inefficient processes, greater risk

Manual approaches to trade finance may have been suitable when the pace of business was slower or more simplified. However, with companies now managing complex projects across multiple states or countries, or trading far across the globe, finance operations have become more dispersed and it can be hard to maintain consistent processes around trade finance.

A key challenge with manual processes is that it can quite simply be hard to keep track of what trade finance arrangements exist, where they are in their lifecycle, and what fees or interest are being paid.

We have seen situations where a bond agreement – a piece of paper – sits on someone’s desk or is lost. Long after the project was complete the bond agreement remains in place costing the company money in bank fees. 

Alternatively, suppose that project or shipping delays have meant that a bank guarantee has expired without a company noticing, and then the customer goes into administration. The bank would not honour the expired guarantee, and the guarantee holder becomes an ordinary creditor, waiting months or years for potentially only cents-on-the-dollar of what was owed – despite customer insolvency being one of the very risks the guarantee was meant to protect against.

Manual processes also don't offer the ability to see how the debts are reliant on the actions of others in your supplier or partner ecosystem. When sectors are going through volatile periods – such as construction in Australia for example – this lack of oversight can mean exposure to more risk than is necessary.

Digital solutions

While digital solutions in trade finance have existed for some time, awareness of their availability and potential have been less well known. However, if your organisation has a significant LOC, bank guarantee or bond programme, and you are still using manual processes and paperwork, it would make sense to consider the new technology platforms available and make the digital shift.

A number of digital platforms have been designed specifically to make trade finance simpler, more efficient, transparent and secure for organisations. Some platforms are based on the SWIFT international messaging system, which tend to be leading in the space of finance issuance. Others are based on blockchain and have strengths when it comes to building a secure centralised digital process for bank guarantees and LOCs.

To get the most from the various platforms, it is best if your organisation, plus your bank and supplier and partner ecosystem are on the same platform. However there are real benefits from even partially digitising part of your trade finance process and continuing this as more suppliers and customers potentially come on board.

Efficiency and transparency

With trade finance managed digitally, it is easier to have consistent processes and centralised oversight of your organisation’s trade finance obligations, when debts are due, when bonds expire, what will need renewal, and what ecosystem dependencies you have. Digital trade finance can help reveal where you are paying interest and fees, and help you to better manage your working capital. With some of the technology platforms available, it is possible to have the whole life cycle of a trade finance commitment – from issuance to settlement – in one place, and easy to track and trace. With the centralisation of your debt commitments, risk exposure and control are also easier to manage.

Another benefit of digital trade finance is that it assists with accurate financial reporting to the board and to stakeholders. The transparency and assurance could lead to new opportunities for the business.

Getting you on the digital path

At PwC, our Treasury team understands the processes involved in trade finance and the potential for technology to digitise these steps, increase efficiencies and reduce risk. We uncover the pain points in your processes, help you build a business case for change, and to select the technology platform that is suitable for your needs. We can get the right data together, establish the platform, build your new process map, undertake deployment testing, and get you on track to see benefits as quickly as possible. We will also help with a post implementation review to refine the approach.