Billions of people were sent home from work as the Covid-19 pandemic took hold and digital solutions marked the way forward for most of us. The international trade sector was no different, where individuals and businesses were left scrambling to ensure business continuity in an industry that has long been reliant on paper-based transactions.
From a slowdown in courier services carrying paper documents to housebound bankers unable to issue letters of credit, there is a clear incentive for those involved in international trade to ramp up digitization efforts in order to be more shock-resistant in the future.
Although sometimes used interchangeably, there is a difference between the two terms. Digitization is the act of converting data and documents from a physical format into a digital one. When this process is leveraged to improve business processes, it is called digitalization. The digitalization of trade is the concept that by using digital tools, businesses can increase the scope, speed, efficiency and volume of trade.
Urgent orders to digitize
Due to Covid-19 disruptions to trade, the International Chamber of Commerce (ICC) posted an urgent memorandum to governments and banks urging them to void the legal requirement for paper-based documentation in favor of United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) .
Under UNCITRAL’s model, documents such as bills of lading, warehouse receipts and promissory notes would be acceptable in electronic form. However, few countries have enacted the model.
Digitalization will dramatically increase efficiency in international trade, an industry that has always been slow to embrace new technologies. An increased uptake in verified electronic documentation would allow for secure transactions, with better protections than paper, to be carried out at a greater speed.
Increased resiliency, reduced costs and a lower barrier to entry are all likely outcomes from a digitalization of trade processes. Previously, a physical presence was required on site in order for the signing of bills of lading, bills of exchange and checks, among others. With the advent of digital signatures, a significant hurdle can be eliminated.
“The use of electronic signatures has exploded, increasing efficiency in contracting and the delivery of products and services for both governments and enterprises,” an ICC working group on trade-related aspects of e-commerce said.
Platforms driving efficiency
Trade finance platforms have played a key part in the digitalization drive. Offering a single location for buyers, suppliers and financiers to conduct business, they have been able to reduce human error, increase operational efficiency and improve communication for all stakeholders.
The most adept platforms are able to create purchase orders, allow users to track payments and shipments and leverage artificial intelligence (AI) to move from paper-based transactions to automated electronic invoicing and accounts payable.
The digital transition is unlikely to be quick or without pushback, however. Although the quest for digitalization is one that will drive huge efficiencies, concerns remain over the prevalence of fraud. A consistent theme across digitalization is to create a single source of truth amongst counterparties and to maintain high security standards where access and activity can be authenticated and auditable. An example of this is e-signature technology provided by software as a service (or SaaS) companies which use security protocols and encryption to protect the integrity of signatures.
Interoperability is paramount
With a lack of industry standards, companies designing technological solutions are not working hand-in-hand, risking the creation of digital islands, where platforms are siloed from one another.
“Digital silos are an issue. As the adoption of digital solutions increases, it’s important to avoid fragmented platforms that will end up inhibiting growth as opposed to fostering it,” said Bryan Maloney, president and co-founder of Harbor, a platform-based global trade finance provider
Without standards that create interoperability, even the most well-intended digitization drives will struggle to succeed. The introduction of the ICC’s Digital Services Initiative (DSI) is directed at addressing that. The DSI is aimed at standardizing digital processes across more than 130 countries by enabling convergence of both technology systems and legal frameworks.
Promising signs ahead
Large strides have been made this year in the move toward a digital transformation of trade.
Optimism also remains, especially in emerging countries. In Asia, advancements in mobile payment systems have driven high participation rates. Usage rates of fintech-powered services have doubled, and in some cases tripled, across key Asia-Pacific markets, according to an Ernst & Young report. In these countries, SMEs are particularly heavy users of banking and payment services demonstrating a willingness to lean into digitalization.
Though under the unfortunate circumstances of a global pandemic, an opportunity has been created to dramatically accelerate digitalization efforts that will create a safer and more resilient trade industry than ever before.
Harbor is a Supply Chain Finance provider offering working capital solutions to improve the cash conversion cycle. Our programs allow for early payments to suppliers so that buyers can optimize their own liquidity through trade credit.
The HarborTrade platform not only injects liquidity into the supply chain, but it allows for better vendor and procurement management by allowing buyers and supplier to interact, creating streamlined processes. With improved cash flow and administrative efficiencies, users of the HarborTrade platform can quickly adapt to the changing global economy and leverage technology to remain competitive.
Harbor facilitates trade both domestically and internationally with offices and representatives in Miami, Los Angeles, New York, Hong Kong, The Netherlands, Germany, and Mumbai.