How Digitization Brings New Opportunities In Trade Finance?

ISO 20022 will turn into a new universal standard for electronic information exchange between financial institutions by December 2025. Although many nations have set a go-live date in 2023, several banks & corporations claim that they’re unprepared, which experts say is expected.

Financial institutions are showing their unpreparedness is quite justified as many of them handle new complexities and explore new trade finance digitization opportunities. The Covid-19 pandemic compelled several institutions which didn’t have pre-planned strategies for digitization to immediately incorporate for survival. While they recorded enormous benefits from digital solutions, the strategy for the reception has been in silos and designated at certain areas of the business.

However, only by welcoming total digitization would companies, especially financial institutions and corporations be able to resolve new issues in trade finance, according to the experts at the Trade & Supply Chain Conference 2023.

Traditionally, large financial institutions tend to create, support, and implement standards without considering inputs from other organizations. The outcome is increased cost of operations and shortcomings in service delivery.

Segun Aribisala, Product Manager, Union Systems, stated rectifying these shortfalls is the reason why the new standard ISO 20022 from ICC and SWIFT is vital for organizations in terms of trade finance. The standard is a way to further improve the data being circulated and shared amongst the stakeholders. 

It is again a way for SWIFT messaging standards to further improve the data being circulated and shared amongst the stakeholders, in the payment settlement and trade especially. 

He stated, “There is another standard that will be introduced for uniform guidelines for trade finance strategies. All of these guidelines are to additionally enhance digitization and of course the acceptability of digitization.”

Union Systems has been proactive in developing solutions that seek to acquire consistency in trade finance operations. For example, the Kachasi Trade Finance software is the first native trade finance software application created to automate the whole lifecycle of global and domestic trade finance operations. According to the company, it is the result of more than 20 years of experience executing and customizing several global trade finance software applications for banks across Africa.

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The organization additionally fostered the Optimus Multi-bank Trade Finance Portal in 2020. The cloud-based application enables corporates to have combined access to all their trade transactions with different banks without requiring them to visit the banking hall. 

In as much as banks have incorporated the solutions, Segun says many of the corporates are still inspecting their decisions. 

“It is more OK in the banking sector where you complete payments on behalf of the customers. But the acknowledgment from the corporate point of view is still not yet there and that is what the URDTT of ICC rule is going to resolve. ”Segun said.

URDTT is an acronym for Uniform Rules for Digital Trade Transactions which came into effect on October 1, 2021. A digital trade transaction is a process, whereby electronic data is used to highlight the underlying transaction of goods or services and the incurring of a Payment Obligation.

The URDTT will apply when the terms & conditions of a Digital Trade Transaction indicate that it is subject to these rules.

Manji Gofwan, head of Foreign Operations, at Union Bank, stated the complexities banks and corporates have in adhering to the rules because many of them still feel comfortable with the traditional ways of performing instead of incorporating total digitization. Hence many, if the digital solutions that are being implemented in banks are only similar to traditional solutions, with the difference being that it is now electronic. Not much troublesome creativity is being put into these solutions. 

“For example, to apply for a letter of credit, there are 20 to 30 fills that you need to fill, to apply for a letter of credit, you develop a digital channel and we give you 20 fills to fill. We have digitized it with a similar mentality. That is where we are. We are on a pathway but I think that in the trade space, we are still playing catch up.” Gofwan said.

He explains that automation can help corporates to better position their trade business in different ways.

Segun says it is appreciating that the CBN is already operating toward enhancing its digital infrastructure ensuring there is more effectiveness in the banking system. It implies the controller is in tune with comparable developments around the world. 

“We have witnessed the effect at the high level in Asia and Pacific areas. We have seen different trade arrangements coming up to further avail the full benefits of trade digitization,” he said.