Clarissa Dann Welcome to Trade Finance TV in lockdown. Today, we have in our studio John Bugeja (Co-Founder of Trade Advisory Network) and Enrico Camerinelli (Senior Analyst, Aité Group). They’re going to look at the potential effects of COVID-19 on the digitalization of trade finance.
Enrico, John, welcome to Trade Finance TV in lockdown.
John Bugeja Hello, Clarissa, lovely to see you.
Enrico Camerinelli Hello, Clarissa from Italy.
Clarissa Dann We’ve seen some worrying statistics about the slowdown in trade as a result of the lockdown, but on the bright side, it’s forcing people’s hands about developing digital solutions. What are you seeing?
John Bugeja Up until now, digitalization was seen as either an efficiency opportunity or a market business development opportunity, an opportunity to develop more products. The ICC always talk about a 1.5 trillion dollar funding gap for SMEs, particularly in emerging markets, and they try and position digitization as a way of filling that gap. With the events that we’ve seen over the last few weeks and months and the impact of COVID-19 , the difficulties associated with moving paper around the world have suddenly become extreme. So the financing of settlements of supply chains has become really difficult and really slow. As a result in the banking world, digitalization is now a business-continuity issue rather than just an efficiency opportunity or a business proposition, development opportunity.
Clarissa Dann Enrico, what are your thoughts on this?
Enrico Camerinelli When I’m looking at supply chain finance platforms and initiatives, the value proposition pre-COVID-19 was and still is having access to better financing or extending your payment terms or getting cash earlier. But I would say even before that, the main reason why, especially in small and medium enterprises might be attracted to participate in these programs, it’s because they have a way to accelerate their sort of digital transformation. And also the fact that by jumping onto digital platforms that are modernly designed and structured, they can start getting acquainted with what it’s going to mean being digital in the near future. But this is also putting the responsibility on corporations to do their own homework.
Now, if you really want to move from the same manual operations into digital, you need to get your processes straight. And so digital transformation can go as fast as the companies are able to remove inefficiencies from their existing processes. Otherwise, the risk is that by digitizing or digitalizing their processes, if they are not improved and streamlined, they will just make their mistakes faster and faster.
John Bugeja Yeah, I think it’s interesting that if you look at this from a FinTech and a bank collaboration perspective, there is a lot more collaboration going on now. And the urgency behind the banks, because of the business continuity element, is such that they’re now chasing the FinTechs for progress. And it’s interesting to see how much more prompt the banks are, how much quicker they are now in coming back to the FinTechs, saying, ‘well, we need to move this forward because it’s a COVID-19 backed project.’
One of the big discussions we have is, what does this look and feel like to the client? And is it worth their while to change their operating model, to adopt whatever the new solution looks like? And if there’s a lack of demand from the client for the digitalization solution, BPO is a good example. The clients didn’t know anything about it, couldn’t see an application for it, and basically were massively disinterested in the whole process. So even those banks that were committed and interested didn’t really get any traction or certainly not enough to make it worthwhile.
But that’s still an issue today, so even though we might be working on digital solutions, which are really practical and will definitely deliver benefits to the end user, that’s the seller and the buyer, the corporate counterparties in the transaction. Unless they understand those benefits and understand how their operating model needs to change and preferably can see that the operating model changes are not that dramatic, they will not adopt those solutions. And we’ll just have lots of very shiny, new toys, but nobody available who wants to play with them.
Enrico Camerinelli One of the digital tools which is part of any kind of research is an Excel spreadsheet. So Excel is the most hated, but also the most real solution. Now, how many functions of Excel do you really use? Personally think I’m using 20% of that. I don’t know how to do pivot tables fx, or other things. So the risk is that over-engineering solutions, we’re not really listening to what customers were also thinking. They want more and more and then finding out that they are going to use us like an Excel spreadsheet, so a tiny fraction of all its capabilities.
I’m doing research right now asking banks and FinTechs, what are the major drivers to develop open banking, but I forgot to put the option of that, the biggest beneficiaries will be corporations themselves. I said, would it be banks, ERP vendors, FinTech themselves? And then I had more than 50% of the FinTech answering, saying, ‘you forgot to put the corporate treasurer as the beneficiary,’ while I had only 16% of banks that said the same thing. So the risk is that perhaps the FinTech has that closer proximity to what the corporations need, and it might be a decision that banks want to have these intermediaries between them and the corporation, because the more digital you go, the more flexible you have to be. And so they might outsource it to the FinTech who has that closer understanding of corporate needs.
John Bugeja And whilst we’re all evangelists about digitalization, because that’s part of what we focus on and what we do, in the corporate world they’re not. I mean, they’re interested in digitalization of their business. And we have to remember that supply chain finance and trade finance is not actually what they wake up every morning thinking about. Automating their businesses and their business processes is going to make a much bigger impact on their cost efficiency, and their profitability and their sustainability. And we shouldn’t forget that paper has certain advantages and we can’t replicate those advantages in the digital world. We’re going to struggle to get adoption in the corporate world.
So the obvious advantages are: a piece of paper doesn’t need any technology for somebody to read it. Paper can be transferred to somebody else. So if I’m holding the piece of paper today and I give it to Enrico, I no longer have it and he does. Electronic files, by and large, do not distinguish between originals and duplicates. So copies, they don’t evidence possession and therefore they can’t evidence transfer. Some of the technology that’s being developed through the consortia assumes that you overcome those problems by being a member of a club and you sign off on a contract, you sign up to a set of rules. And in order for that to be digital throughout the entire end to end supply chain, every party that’s involved in a supply chain has to be a member of that club and you have to pay to join the club.
Clarissa Dann Is block-chain a club or does that actually get around that problem, Enrico? Or is block chain a bit of a digression?
Enrico Camerinelli The entire block chain is exactly to ensure possession of a digital asset without necessarily having a central authority acting like the trusted party. The technology makes that possible. Block chain in all its different flavors, I don’t want to get into that, the point is that there is a new way allowed by using cryptography and peer-to-peer exchange. The reality is that it’s all about collaboration. So what block chain does is it puts a company in front of the fact that you can really do collaboration with your partners, clients and suppliers. But of course, collaboration means trust and nobody controls that level of trust. So again, fortunately, it’s back to humans. So the more digital we want to go, the more human we have to be, somehow. You want to be collaborative, and block chain allows you to do it, so now, do you really want to do it?
John Bugeja If I can jump in there. I agree. The technology has been proven and we know that block chain is a massive enabler for that, it’s not the only tool in the box; there’s artificial intelligence, machine learning, other sorts of databases all have their place in this. And the challenge now is not the technology. The challenge is legal. So in the UK fx, we talk about the Bills of Exchange Act 1882. There’s nothing in the Bills of Exchange Act that says you can’t have a digital bill of exchange. In fact, the word paper is not used in it, except once I think in one paragraph. Everywhere else it talks about documents and an electronic record is not a document. You have to be able to transfer possession by delivery. And that’s how a negotiation of a bill of exchange works.
Common law in the UK and written law in other jurisdictions doesn’t recognize possession of an intangible. There’s no law that’s been written that says that. It’s simply, that was the ruling of a judge in a case many years ago, and that’s been used as a precedent. So what’s required and we’re working with IPFA and also with the ICC UK, who are lobbying very, very hard with the law commission, to say basically they need to change that aspect of the law. I gather it’s not that difficult. It doesn’t need a bill through parliament or anything like that, it’s a relatively straightforward process once it’s agreed. Basically to say, ‘under English law, you can have a digital document as opposed to an electronic record simply containing data,’ and by digital document, what I mean is: ‘an intangible thing which replicates the properties of paper. In other words, you don’t need a machine to read it, but a machine can read it. You can distinguish between an original and a copy. And one party has sole possession and can transfer possession to another party.’ Outside of a contract-driven consortium it has to work in common law in order to get scale.
Enrico Camerinelli You know, John, you make me think of something perhaps a little bit more philosophical than anything else, but let’s say that COVID-19 has heightened the sensitivity of people that things may happen. So the S-word may happen on a global scale. So it could be that at some point you have a huge blackout, but no electricity for a long period of time. Of course in that case, I don’t know if the concern would be having paper invoices or not, but really the fact of having something that can be used without the need of having a device, because also somebody could argue that your paper can burn, so you have a big fire.
John Bugeja Absolutely.
Enrico Camerinelli Perhaps the thing is that big things can happen for real is something that will probably imperil worlds.
John Bugeja I mean, absolutely, because paper has to be securely stored. It has to be filed. It has to be moved from A to B, all of which takes time, cost money and it’s very unsustainable as well. We’re destroying lots of trees and forests in the process, so there’s massive disadvantages with paper, all of which can be overcome with digital, but there are those advantages, and until digital is seen to replicate those advantages, scalability is going to be a challenge
Clarissa Dann John, Enrico, thanks so much for coming in to the Trade Finance TV in the lockdown studio today.
John Bugeja Thank you, pleasure.
Enrico Camerinelli Thank you.
Clarissa Dann I’d like to thank them for their insights on Trade Finance TV in lockdown today, and of course all of you for watching. To see more Trade Finance TV episodes, go to TRADEFINANCETV.NET.