While the Ever Given has now been dislodged from the Suez Canal and global trade continues to flow, we have all just been treated to a spectacular display of the fragility of global trade. A rogue gust of wind caused the 200,000-tonne barge to lodge itself
across the canal, halting approximately 10% of global trade for a week, and the knock-on effect of this blockage is likely to be felt for weeks across the world’s ports.
The situation in the canal was extreme, but it’s a powerful visual reminder of how obstacles at one crucial point can cause delays across entire supply chains. While not all of these weak points will cause disruption on such a global scale, this should serve
as a wake-up call for participants in international trade to look for other potential “blockages” in the system.
Bureaucratic blockage in trade finance
While a team of engineers sought to figure out how to unstick the Ever Given, almost 200 vessels were held up in a nautical traffic jam on both sides of the ship. An analysis by Bloomberg showed
that around 300 ships were affected by the blockage globally.
Outside of logistics, bureaucratic blockages are caused by manual paper-based processes which also hold up the flow of flow of goods across borders. And in both cases, the industry needs to upgrade existing infrastructure to keep up with the demands of today’s
Looking at the bigger picture, it is noteworthy that trade finance – a USD15 trillion a year industry that has been in existence for centuries – remains largely paper-based. Inevitably, this leads to errors and delays as documents must be signed approved
and shared with many parties.
Addressing regulatory blockage
There’s another type of blockage that persists in this industry: the accessibility of trade finance funding. Due to a combination of regulatory pressures as well as the perceived risk of investing in an unestablished business, banks are often limited in
their capacity to offer trade finance to SMEs. In turn, this creates the infamous USD 1.5 trillion gap between the credit banks can offer and the amount needed by the world’s SMEs.
One solution is to distribute trade finance asset to alternative, non-bank investors. If non-bank investors were to invest in the trade finance market through the purchase of trade finance assets, they could take some of the risk from the banks’ balance
sheets to lower the capital requirements, as well as opening up an asset class with higher yields than bonds and lower volatility than equities.
However, this requires industry-wide collaboration, as well as new infrastructure to accompany the required digital transformation to make this happen. The much-cited USD1.5 trillion trade finance gap highlights the need for financial institutions and fintechs
alike to search for methods that streamline the financing process.
How technology can help
It is widely known that greater automation makes the provision of trade finance more cost-efficient for banks, and we are already seeing progress in some key areas.
Modern developments in technology, coupled with unprecedented levels of cooperation between banks and fintechs, means the infrastructure now exists to turn trade finance into a scalable, efficient and accessible asset class.
Distribution of these assets also frees up the originator bank’s balance sheet and unlocks crucial capital that can be used to finance further transactions. In other words, they can work their balance sheets harder, allowing them to support more cross-border
transactions without adding to their risk levels. This adds greater velocity to the global trade ecosystem.
Not only does this enable banks to remain compliant with international regulatory and capital frameworks but the hope is that, over time, it marks an important step towards reducing the trade finance gap.
Automation will also improve reduce friction in the global trade process. Many activities surrounding trade finance rely on manual processes and unstructured data such as emails, phone calls, faxes and signed paperwork. The use of an Application Programming
Interface (API) and other automated tools will make some of these practices much more interoperable, improving operational efficiency.
Smooth sailing from here
It’ll take more than a rising tide and an excavator to dislodge this blockage. Instead, an industry-wide effort led by banks, credit insurers and technology providers is needed. By distributing their trade finance assets, banks have the opportunity to not
only to improve the sector but to reduce their own costs and achieve more with less, while investors and other banks can gain a foothold in a multi-trillion market. But perhaps most importantly, it will provide lasting positive economic effects that would
be felt by SMEs, their counterparties and supply chains all over the world in the years to come.
A small handful of banks can no longer be the sole providers of trade finance for millions of businesses around the world – its time to pull the plug and open up trade finance as an asset class.