Democratising the Trade Finance process through digitalisation

Aug 18, 2023

The World Trade Organisation (WTO) estimates that 80–90% of world trade relies on trade finance. It is a mechanism that not only ensures security between importers and exporters but can also extend a line of credit to companies desperately needing cashflow to get their operations moving.

Pandemic disruptions, political upheaval and currency fluctuations have made companies more nervous to trade internationally.

“With every crisis, trust among the participants goes down and that’s when you reconsider the risk that is involved in open account transactions,” says Jai Shah, Director Sales and Product Innovation at Kyzer Software.

“The more insecure these financial flows to physical supply chains are, the more you want to secure them with a guarantee” from trusted financial intermediaries. Unfortunately, trade finance has not always been a straightforward solution due to an excessively manual process, and a lack of access to smaller corporates who might not have the know-how to get the best deals.

However, this is a narrative that Kyzer Software wants to change. “For the last 7 years we have provided trade finance solutions to banks for transaction processing. Now we are providing solutions to a far broader space … complete Regulatory Reporting Suite, Trade Finance Corporate portals as well and growing our solution offerings,” says Shah.


Why can trade finance be so challenging?

Historically, trade finance has been tied to paper because it relies on ownership of title documents, for which it is difficult to implement a universal digital solution.

“As a bank, I have to agree with my customers, not only on the details of the transaction, but on how we process and exchanges the transaction details, and the one global standard that provides interoperability is paper,” says Shah.

“Trade finance has been the only business where digitisation is attaching a PDF to an e-mail.”

This system is slow because contracts must be agreed, written, and approved within, sometimes incompatible, working hours. Guarantees can take days, by which time exchange rates or demand could have shifted and can result in burdensome fees and time wasted.

Documents can get lost in the process leading to further delays, poor limit management, or banks chasing for already paid fees. All these factors create instability and could damage trading relationships in the process.

There has long been a trade finance gap between MNCs and SMEs, that makes access far more difficult for smaller corporates. While a major disparity is due to smaller enterprises having less data to prove they are a good risk for financing, they also lack the knowledge and manpower to get the best deals.

“MNCs have easier access to capital markets than SMEs and will have dedicated and sophisticated trade finance teams … an SME may only have a Head of Finance,” says Shah.

This means that smaller corporates “may not even be aware that there is a trade finance instrument available that could serve them,” and have no way to bridge the gap because they are limited by the types of financial institutions they work with.

For all these reasons, it is becoming essential that the trade finance process moves with the times and becomes more streamlined. This will not only help systems move more quickly, but can also improve access to smaller corporates via banks, giving them greater opportunity to grow their businesses.

 

Digitalising trade finance is the solution

To open the door and democratise trade financing requires digitalisation, which will help create connectivity and communication between banks and corporates of all sizes to access the services they need. The first step in this process is to provide an easily accessible portals for all parties, which automatically helps move things away from a paper-based system.

This will allow converting documents to a digital record and building trust in transaction management that this is a safe and viable solution.

This will not only help to keep documents secure and organised, while offering the same security as a paper-based system but can also help businesses meet their ESG goals by reducing waste. It will also give treasuries the push they need to adopt electronic documentation, which to this point has not been a major concern and has led to low innovation.

Not only this, Kyzer Software’s TradeKonnect, provides access to huge amounts of data and are a great way to help corporates, especially SMEs, to evaluate their options for financing.

But as banks across the world are demanded by their corporate customers to deliver a more efficient service, more and more are now opening up to process automation, which is in turn leading corporates to realise the benefits of a collaborative trade finance platform.

“This is precisely the concept that Kyzer Software is striving for with our TradeKonnect and TradeZone platforms,” says Shah, “to provide technical access that is as open as we possibly can be to streamline the process for companies of every size.”

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