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Trade’s vital balancing act

The impact of lockdown on trade has been monumental with the repercussions of Covid-19 stretching long into the future. One aspect that will undergo a significant change will be how organisations treat paper-based processes. Sectors that utilise Letters of Credit (LCs) will need to review the implications these documents will have and adapt accordingly. Aside from the longstanding legacy issues around the manual and time-consuming process LCs hold, in a post-lockdown world, there will also be significant health and security concerns to consider. As countries exit lockdown, businesses will begin to consider how they can innovate these processes, making them fit for purpose in the modern world. 

Recognising the barriers

Covid-19 has underlined some of the major challenges that affect how an LC operates. The overreliance on manual processes and lack of accessibility with the document – often due to it being a paper document that needs to be physically transported through the process – have made LCs slow, expensive and cumbersome for decades. Working remotely has disrupted ingrained processes and forced companies to change their working practices very quickly and sometimes imperfectly. This has put additional strain on the LC process when teams cannot even get to the office to receive their mailed documents.

Governments, financial institutions and corporations are now conscious of the transmission challenges that exist in using physical documentation – as well as the vast delivery networks they require that have been interrupted by flight disruptions. Combined with the increased risk of security that exists when individuals work remotely serves to highlight the need for finding a new way to manage LCs. As lockdown eases across the world, these challenges will not go away. The entire trade ecosystem needs to collaborate to build a workable alternative for the future. 

Interoperability – the key to digital communication

Digitisation will be a priority for companies over the coming years, but it is impossible to expect every organisation to make the same decision at the same time. The danger is that this leads to a market filled with companies utilising different providers and software that may struggle to communicate with one another. This would create a new, but no less damaging, barrier to an effective LC market. 

Competing organisations are naturally suspicious of sharing systems. However, as businesses exit lockdown, and consider investing heavily in technology to digitise LC documents, they must also welcome interoperable systems into their new set-up to avoid creating a new, digital version of the current siloed and ineffectual setup.

Banks and corporates should look at the technology they use as enhancing their processes, but also seek out methods to allow clear and effective communication with the systems run by other businesses. Rather than hinder a healthy competition between different organisations, this approach will do the exact opposite. Organisations can still have the advantages of the latest technology, without limiting the way it engages with partners and other companies in the trade. Better communication will allow companies to forge new connections, open better avenues of trade and strengthen existing relationships. In short, the entire industry can digitise together, or it can risk failing separately. 

Start with a standard

To build acceptance of a new product or set new standards is an educational challenge that takes time and money. In an area like international trade, where banks and regulators involved, the barriers to change are even higher. So starting small is a more prudent path to take. Well-known brands like Amazon are a prime example –it started building the acceptance of purchasing online by choosing a simple product that had the least risk – books. People then became accustomed to buying online and now it’s a ubiquitous service covering a wide range of items. 

For trade finance, LCs are the standard product that everyone understands and therefore improving the LC process should be the first product to digitize. Perhaps the oldest financial tool in trade finance, it provides a common standard and process that is globally understood and governed by the International Chamber of Commerce (ICC). If all institutions can establish best working practices by digitalizing the LC process, the industry can then go on to tackle more complex forms of documentation which lack common standards altogether. 

To do this, LCs need a neutral, decentralised backdrop that allows the various technology solutions, corporates and banks to work together. It is here that technology such as blockchain can be hugely effective – providing the infrastructure needed for different organisations to integrate existing software into the network, communicating with counterparties and improving the process of utilising an LC. Blockchain also allows maintenance of individual databases rather than centralised ownership of data, which is also a requirement for acceptance in this more geopolitically polarized world.

This change to the industry is not about decisions by individual organisations, but a collaborative effort. It is about connecting banks and corporates as well as the various shipping and customs organisations together. Establishing a series of networks that connect at the intersection of common clients in the LC process can achieve this and change the sector for the better.
While lockdown restrictions begin to ease over the coming months, there will be an increasing drive to improve the technological capabilities of traditional industries. However, this cannot come at the sacrifice of clear communication and efficiency. As more organisations begin to embrace technology to mitigate the risk of a post-Covid world, there still needs to be an effective solution that allows for the various nuances that exist in the sector to work together and for the benefit of the industry. As an accepted standard that has been established for over a century, LCs are the ideal trade finance product to upgrade to set the baseline for the new online interconnected world.

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This item appears in the following sections:
Financial Supply Chain Platforms
Trade Finance
Trade Transaction & Payment Services
Treasury insights

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