Now is the time to digitalise trade finance and restore confidence
Digitalisation and collaboration hold the key to combating fraud and injecting efficiency into an industry yoked to manual paper processes
IF INTERNATIONAL trade is the lifeblood of the global economy, trade finance is the beating heart that helps keep US$25 trillion worth of goods flowing.
Spanning a diverse set of solutions and instruments, including letters of credit, supply chain financing and trade loans, trade finance provides both financing and risk mitigation. This is invaluable in keeping international trade moving, by ensuring importers receive their goods while exporters receive payment. The World Trade Organization estimates some 80 per cent of global trade today is supported by trade finance, highlighting just how instrumental its role is.
Yet, many segments of this industry remain yoked to archaic paper-driven processes. For a single shipment by sea, traders track extensive paper trails that can involve as many as 36 original documents and 240 copies across 27 parties. This tedious, manual process is highly susceptible to fraud due to the ease in which paper documents can be doctored. This impacts how reliably businesses – especially smaller ones – can access trade financing, ultimately driving up costs for consumers and inhibiting global economic growth.
The industry is ripe for digitalisation to ensure it remains fit for purpose to meet the demands of modern global trade. Beyond the economic gains in efficiency and fraud mitigation, digitalisation also unlocks new capabilities in data sharing and supply chain transparency. Collectively, these enable trade financing programmes to be more inclusive and sustainable.
Building an efficient and trusted digital trade ecosystem
Trade finance fraud manifests in several ways. Bad actors may overstate inventory balances or forge sales invoices to obtain credit lines. Others may engage in duplicate financing where the same document – such as a commercial invoice, bill of lading or a proxy – is used to secure financing from several lenders.
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The common trait across these approaches is the exploitation of the industry’s reliance on document-based processes and information silos that prevent the sharing of information across institutions. This also impacts business continuity when disruptions occur: when the pandemic triggered lockdowns, importers incurred demurrage charges at ports because the physical bill of lading had yet to arrive to claim the goods in a timely manner.
Several initiatives have sprung up to address these issues, such as electronic bills of lading (eBL) – the digital version of a document that represents legal proof of ownership of goods in transit. In August 2023, the first fully paperless shipment between Singapore and India was completed using an eBL. Facilitated by DBS, the transaction leveraged the United Nation’s Model Law for Electronic Transferable Records, giving the eBL the same legal recognition as its paper-based counterparts.
A report by McKinsey estimates that the complete adoption of eBLs by the container sector alone could unlock US$40 billion in global trade due to efficiencies gained, highlighting its potential.
Digital information channels are also critical in fighting trade finance fraud. In June 2022, several supply chain ecosystem partners – including DBS – came together to form SGTraDex, a digital data highway that facilitates secure sharing of trade data. Through SGTraDex, several use cases are being enabled to leverage data: for instance, to provide confidence in the authenticity of trade and to avert the risk of fraud in holding certificates and bunker delivery notes.
The Association of Banks in Singapore, together with DBS, conceptualised and developed the Trade Finance Registry (TFR) – a central utility for all trade finance transactions supported by banks in Singapore. With TFR, banks are better equipped to identify transactions that are simultaneously financed by other banks, mitigating duplicate financing risks. TFR can also provide validation on the authenticity of trade transactions, while enabling seamless exchange of information, by tapping on API connections with SGTraDex.
Bridging the trade finance gap and achieving sustainability goals
Beyond addressing the shortfalls of paper-based processes, digitalisation also injects new capabilities into the trade finance industry.
Often, supply chains contain valuable financial and non-financial data that are trapped in siloed trade platforms and buried under paper processes. With digitalisation, alternative data – such as inventory levels and real-time trading activity – can be used to better underwrite risk and expand financing programmes for small businesses via alternative trade lending approaches.
Financial institutions can also collaborate with trade platforms to embed financial solutions within the platform where businesses operate. This results in simpler, more efficient yet highly scalable access to trade and working capital financing, and could help bridge the US$2.5 trillion trade financing gap in the market as reported by the Asian Development Bank. DBS has established several such partnerships, including industry leaders such as Cainiao and JD Logistics.
The transparency and data sharing that is enabled by digitalising supply chain data also empowers the green transition towards net zero. With enhanced traceability in areas such as emissions validation and claims certification, financial institutions can work with businesses to embed sustainability performance targets within trade finance programmes to incentivise and fund sustainable supply chain practices.
Navigating a path forward
In recent years, some major banks have responded to trade finance frauds by cutting or ceasing trade and commodity finance activities altogether. At a time when businesses need additional support to navigate macroeconomic headwinds, geopolitical tensions and supply chain fragmentation, this trend only threatens to widen the trade financing gap even further.
These issues could be better addressed as the trade finance industry transitions from analog to digital, with industry-wide collaboration further enhancing monitoring capabilities and trust.
In the long term, the success of these digitalisation initiatives will depend on conviction at the highest levels. Different jurisdictions and industry bodies need to collaborate with the trade ecosystem – banks, buyers, sellers, shippers as well as logistics providers – and develop common, interoperable standards that all stakeholders can rally behind.
Already, the offshoots of such industry collaborations in Singapore are showing promise with the likes of TFR and SGTraDex, and DBS is pleased to have played a role in helping navigate a path forward. As the industry continues to collectively innovate and digitalise, the enhanced trust and confidence across the whole ecosystem will also further strengthen Singapore’s role as a key trading hub.
The writer is group head of Global Transaction Services Product Management at DBS Bank.
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