Even before the coronavirus struck, a handful of well-known banks started to withdraw from financing oil and gas transactions because of the operational risk and losses they incurred.
The pandemic has not only caused massive disruption to trade, but it has also exposed opportunities for fraud, prompting warnings from the US Attorney General, US security agencies and Interpol. Tech giant IBM has also warned how the current anxiety and economic uncertainty can create opportunities for fraud as behaviour becomes less rational.
The closure of offices during anti-coronavirus lockdowns in many areas of the globe has added hugely to risk, exposing the vulnerability of paper-based trade finance processes. Banks had previously worked on many different business continuity scenarios, but none in which nearly all their staff would have to work out of office for long periods of the year. The pandemic meant corporates were confronted with their paper documents being stuck with couriers, postal services and yes, even banks.
The vulnerabilities of paper trade documentation were always there for us to see but have been greatly amplified by the virus outbreak. Presenting key paper documents such as bills of lading under letters of credit to comply with the terms of their issue is extremely difficult when bank staff are forced to work from home. As paper documents disappear in couriers’ networks, delays in their delivery and processing become even greater, disrupting business continuity and increasing the opportunities for fraud.
Disruptions of business continuity have not only impacted the use of payment instruments such as letters of credit, but also frustrated the processes for the likes of bank guarantees as well. Whereby corporates have had to handle guarantees by falling back on the use of insecure and unstructured email processes between their banks and counterparties. This is an area where direct communication to multiple banks under a single digital platform would clearly add value for corporates, giving them a secure interface without the vulnerabilities of paper.
Continuing uncertainty makes the caution of banks understandable, but it does not help their corporate clients if they just pull back. It makes it much harder for any type of company to conduct and finance cross border transactions.
Digitisation resolves the business continuity and security challenges in trade
This all makes the strongest case possible for the digitisation of trade. From a business continuity perspective, digitisation removes physical location as a constraining factor. Applications for trade finance, including letters of credit, standby letters of credit and guarantees can be submitted safely from any location including someone’s home, with approval given remotely by all parties. The immediate digital transfer of documents is fast and secure.
Instead of delays and missing paper documents, the use of a reputable digitisation platform for such transactions gives banks and corporates a secure line of communication, with each party knowing who, what, where and how the document or message was sent. This introduces new levels of trust and reassurance. All parties benefit from traceability and audit trails of transactions, have an organised view of instruments and reporting. In-built levels of authorisation to approve and send messages and the removal of easily-forged paper hugely reduces the risk of fraud and makes it ten times harder for false documents to slip through.
Encryption and electronic audit trails provide constant visibility of documents to counterparties. Secure digital transmission removes the costly delays of couriering and is far safer and better-organised than emails. Certain bi-lateral agreements and rule books may also be put in place, having legally enforceable protocols to maintain correct global use of such digital platforms, again substantially reducing any further risk. Questions of ownership in relation to electronic bills of lading (eBLs) are resolved because ownership is conferred by a dedicated eBL title registry, requiring layers of approval.
Multi-banking trade finance solutions increase comfort
While reducing fraud risk, digitisation also injects far greater comfort into the relationships between corporates and banks. Although some big-name banks have withdrawn from commodity finance, there are still plenty of options for corporates, satisfying the changed appetite for risk mitigation.
Multi-bank trade finance solutions especially reduce levels of anxiety since they have established rule-based networks that make it easier for corporate treasuries to conduct and monitor their transaction.
Once companies have signed up and provided the necessary level of authentication, they can solidify relationships with banks and use a single solution to monitor and optimise credit lines, letters of credit and guarantees.
As corporates finance and conduct transactions on the solution, the efficiency benefits will start to emerge. Banks, on the other hand, know and trust the origins of the transactions and electronic documents they must process, speeding up approvals.
Digitisation cannot eliminate fraud, which, like death and taxes, will always be with us. Yet the case for digitisation could hardly be more obvious in the current uncertainty when the pandemic is still playing out, the Brexit deal threatens confusion and companies involved in commodity transactions focus on their core business while still requiring financing and risk mitigation.
If global trade is to recover quickly from the pandemic and address longer-term problems with trade finance, it needs to remove paper from the equation and shift rapidly to digitisation and multi-banking trade finance solutions.