ICC, in collaboration with Fung Business Intelligence and supported by McKinsey & Company, has today launched a report outlining a new vision for the global trade finance ecosystem.
The report is based on a year-long effort by the ICC Advisory Group on Trade Finance to raise awareness and address the challenges facing micro-, small- and medium-sized enterprises (MSME), particularly in the emerging markets, in accessing the trade finance needed to support their growth and the global recovery. According to the Asian Development Bank, the trade financing gap reached US$1.7 trillion in 2020, an increase to 10% of global goods traded, from 8% in 2018. MSMEs account for 40% of trade finance application rejections by banks.
The report is based on over 150 interviews with end-users and subject matter experts in 12 countries, and an ideation and review process covering leaders from trade, finance and technology.
ICC Secretary General John W.H. Denton AO said:
“The difficulties faced by small businesses in accessing trade finance have almost become an accepted facet of international commerce since the global financial crisis. Today’s report is a direct challenge to this status quo — setting out a roadmap for systemic change to address the root causes of the estimated US$1.7 trillion trade finance gap. If we want to enable trade as a real vector of peace and prosperity in the wake of COVID-19, it’s time to stop applying sticking plasters and tackle the need for wholesale reform and effective digitalisation of a market which is currently unable to serve the needs of the real economy.”
Today’s trade finance system is characterised by a complex web of decades-old manual processes, and more recent, isolated “digital islands”—closed systems of trading partners formed to address specific pain points. The report therefore sets out a road map for digitally connecting and facilitating interoperation among existing networks through sets of shared standards, processes, protocols and guiding principles.
Victor Fung, Co-chair of the ICC ATF said:
“With global trade under enormous strain, there is an urgent need to overhaul and modernise financial systems that support the lifeblood of the world economy. Buyers and suppliers would like to see more liquidity, lower costs, less transaction complexity, and greater availability to credit markets. The entire trade ecosystem has to become far more efficient and benefit from digital innovation.”
The construct set out in the report would be built on three main logical blocks: first, digital trade enablers, which would be standards enabling digitisation of both trade finance and global trade at large; second, standards enabling specific digitization of the trade finance industry; and third, best practices for trade finance interoperability. Governance could be provided by a single global industry entity or by a consortium.
Bob Sternfels, Global Managing Partner of McKinsey said:
“We are proposing real-world solutions, many of which already exist in some form, to address long-standing issues in global trade finance: the report sets out a global framework for existing and future standards, protocols, and principles, with the goal of connecting all those who participate in the global trade finance ecosystem to both present and future networks. This will be a complex project. But its benefits would be both wide and deep, with the prize being a global economy that is more sustainable and inclusive.”
Key to the vision is to drive access for MSMEs to these emerging digital processes by scaling innovations such as digital identity, paperless trade, and transaction-based credit assessment in addition to traditional balance sheet credit scoring.
The report is available here.