The Covid-19 challenge
The year 2020 has seen several aspects of the fundamentals of business being restructured throughout the global economy, owing to the ever-increasing impact of the Covid-19 pandemic. More than half a year in, the popular narrative surrounding Covid-19 has slowly changed from ‘when it ends…’ to becoming ‘the new normal’. Global sentiment is increasingly tilting towards adapting to a new way of life and doing business, as a return to the ‘old way’ seems too far fetched a thought given the current circumstances.
The potency and nature of the Covid-19 virus have forced even the most powerful of the economies to go into total lockdown, creating an adverse impact on businesses and cross border trade. The Singaporean port which is one of the world’s busiest container ports has reported a year-on-year 40% decrease in the number of vessels entering the port for the month of June 2020 when compared to June 2019. The reluctant “unlocking” procedures come from immense pressure from business owners and citizens to revive failing economies before long-lasting repercussions of an ‘extended’ lockdown could take effect. The Covid-19 pandemic has had a disproportionate impact on lesser developed countries and emerging market economies. The adversities of frozen trade and supply chains are only adding to the challenges that already existed in these countries, hampering the growth of their SMEs and MSMEs.
Coupled with the fall in investment activity, the receding value of exports in most sectors has put a dent in the order books and toplines of small businesses worldwide. With the exception of the medical export sector which is experiencing exponential year-on-year growth, almost every major sector is experiencing a tremendous pullback in aggregate trade. Data from the UNIDO index for industrial production reveals that total industrial production in the month of April 2020 has fallen by a minimum of 20% on average in 93% of all of the countries on the planet when compared to the month of December 2019. These businesses are further burdened by the growing cost of financing, resulting mainly from the increase in perceived risk of the unsecured debt market during a period of time where even previously reputed organizations are defaulting on their obligations. In many nations in South East Asia, financial institutions are also burdened with the shortage of liquidity and depleted foreign reserves to facilitate such transactions.
The newly enforced social distancing norms have required businesses to rethink their modus operandi in order to continue operating their businesses safely and effectively. The increased frictions in transacting have further added to the costs of doing business, forcing struggling enterprises towards digitization. Several large financial institutions have diverted large investments towards facilitating responses to these adversities through the adoption of digital technologies.
A case for digitization in business.
One sector that is greatly affected by this crisis is the commodities trade sector. This sector forms the lifeblood of global supply chains, empowered by cross-border trade finance that provides liquidity and leverage to optimize gross transaction volume. While global retail sentiment has had an adverse impact on the trading volumes and opportunities present in this sector, it is essential for organizations involved in this sector to ensure thorough digitization of their business processes in order to maximize efficiency as well as the opportunity for the future. The next stage in the evolution of business has already dawned upon us prematurely, with the adoption of digital technology accelerating in recent months. Experts have estimated that the Covid-19 virus has forced industries to jump ahead to an extent of more than 5 years forward in their digital evolution life-cycle. Traditional ways of conducting business are undergoing rapid changes as the adoption of technologies that enhance connectivity and data management has increased significantly.
The digitization drive for commodity trading SME/MEs is largely aimed at enhancing the way in which these organizations manage and share their data assets. It is common to find a strong reliance on archaic methods such as paper-based documentation and centralized storage databases without backups. As such, the commodity trade finance industry is uniquely challenged in that it’s still one of the few industries that rely on the exchange of paper-based documents for business transactions. Each transaction typically involves a long trail of intermediaries, each with its own legal obligation to conduct thorough due diligence of all the trade collaterals, serving various risk-mitigating functions in trade. Such a business practice is highly vulnerable to documentary fraud, worsened by the restrictions created by the ongoing pandemic and its social distancing norms. The challenges, however, do not end there; another major challenge for the industry is ineffective and reliable credit risk and counterparty risk assessment & mitigation. When dealing with overseas counterparties, especially those from lesser developed and emerging market economies, a large amount of time & resources is spent in conducting counterparty due diligence, a large part of which is difficult to access.
For an $8.9 trillion industry, trade finance has a long way to go in its journey of digitization to eliminate its reliance on paper and transition towards the electronic exchange of title and funds, in end-to-end secured transactions. Technological innovations like blockchain can make this a reality with immutable digitization of ‘real world’ assets and documents for secure and instant exchange. With newer innovations, enhanced digital infrastructures that are compliant with existing banking protocols will potentially allow enterprises to move funds across jurisdictions at a faster speed at significantly cheaper costs. Digital platforms now enable instant and reliable counterparty KYC and AML verifications from meticulously aggregated private datasets at the click of a button. The seamless information capture of these platforms is enhancing trust in trade transactions, allowing for more effective counterparty risk management. In many ways, the drive towards digitization predates the onset of the Covid-19 pandemic as all these technologies have existed before this pandemic took shape. Several platforms have sprung up, offering the industry a suite of solutions to tackle the most common issues it faces. The aim has been to allow businesses to better track and maintain their data, which can potentially be used to optimize business practices.
The ‘new normal’ of tech — interoperability
The challenge, however, does not simply end at the digitization in trade processes. With the widespread use of digital technologies across each function of various enterprises, large amounts of data are being generated behind each step of a transaction. However, the business-to-business interactions of these technologies are presently complex, inefficient, and highly prone to errors. As a result, the data generated remains siloed, existing in several different places at once. Inter-business collaboration becomes difficult since all the parties maintain and preserve what is their version of the “truth”. The digital siloes formed in such a system are often referred to as “digital islands”, where solutions aimed at making individual processes more efficient, coupled with a lack of infrastructure to facilitate communications across platforms and networks hamper the potential for businesses to use data effectively.
As the adoption of various tech platforms grows, there is a greater need for ‘interoperability’ between digital networks and standardization in technology. The International Chamber of Commerce (ICC) has recognized this move and taken steps to develop trade standards to facilitate interoperability among various blockchain-based solutions in the industry.
The function of interoperability in a holistically digitized cross-border commodity environment is key to its success and ease of access. A holistic environment includes several stakeholders in a commodity trade transaction including the logistics providers, commodity traders, financiers, and even underwriters. For this environment to be successful and scalable, it must take into account the possibility that the various stakeholders are either using different data management platforms or even have their own custom-built in-house platform as it is highly unlikely (however possible) that all of these stakeholders will be consolidated onto the same platform at any given point in time. Without a stringent standard and framework for interoperability, stakeholders become isolated into silos that are unable to transfer data in real-time to enable efficiency in commodity trade. For example, the data management platform that the seller of a commodity uses to manage receivables must be able to securely and quickly communicate with the platform that a trade financier uses.
It is therefore imperative that the digitization in trade finance be interoperable with the solutions being used by other major stakeholders in the ecosystem. The accelerated adoption of technology during this pandemic could hold the answers to closing the $1.5 trillion trade finance gap and technologies that ensure interoperability between various digital frameworks will be at the heart of the answer.