With the growing demand for a consumer-like personalized interaction in trade workflows, alongside efforts to digitalize the industry, there is an emphasis on the need for ecosystem collaboration in trade finance. Agility and collaboration between banks, fintechs, and other third-party software providers will help drive innovation in meeting customer needs whilst maximizing return on investment – crucial in the current economic landscape.

At the same time, reliable Environmental, Social and Governance (ESG) data is becoming increasingly important, particularly in showing positive sustainability impact, offering incentivized rates for ESG scoring criteria and driving potentially greater access to finance for SMEs. A digital, connected ecosystem can help bring ESG data together in a more consistent and effective way, helping to support business decision making.

Digital and interoperable trade finance

Trade finance involves three main “flows”: the physical movement of goods, the documentary flow, and the financial flow. Thus, it is crucial to integrate these ecosystems, as well as digital islands within each flow, and technology is a vital enabler to this challenge. To achieve interoperability, banks need a robust trade finance stack that covers infrastructure, applications, and business operations. Cloud-based infrastructure, for example, provides a strong foundation that gives banks the necessary agility to adapt to new demands, seamlessly integrate new functionality and services, and scale resources at a lower cost and faster time to market.

Additionally, the Model Law on Electronic Transferable Records (MLETR), which enables the use of digital documents to support trade transactions, is helping to lay the groundwork for a more cohesive industry and creating opportunities for further digital transformation efforts globally. The UK’s Electronic Trade Documents Act (ETDA), which came into force on 20 September 2023, will help reduce the reliance on paper, improve efficiency, and lower the environmental impact of trade worldwide. Given that English law governs up to 80% of global trade, the World Economic Forum estimates the legislation may reduce CO2 emissions by up to 12%. In addition, legislation is in process in other jurisdictions.

By helping to rectify deficiencies in the treatment of electronic trade documents under English law, ETDA will allow businesses to take advantage of reduced costs and accelerated transaction timelines, increasing trade and access to trade finance. It will give electronic equivalents of paper trade documents the “same legal treatment, effects and functionality” as their paper equivalents.

ESG and fears of greenwashing

With growing emphasis on ESG across many industries, this discourse has shifted towards trade finance, where banks are increasingly allocating financing to industries with robust ESG practices alongside reporting on their own credentials. This aims to steer investment towards measurable initiatives that deliver tangible environmental and social benefits.

However, incorporating ESG considerations into business and finance practices demands a high level of transparency, diligence, and accountability from banks. And this is not without challenges. For example, the complicated nature of global supply chains can make it difficult to accurately assess sustainability performance and the lack of standardized metrics and comprehensive data exacerbates this. This has led to a heightened concern surrounding greenwashing. For banks to be more transparent in their ESG practices and to avoid mislabelling or misrepresenting their products, having access to data – and being able to effectively use that data – is crucial.

The correct partner selection and technologies such as generative AI (Gen AI) are enabling banks to better harness that data, enhance their own reporting processes and, when it comes to sustainable trade finance, make more informed decisions based on a customer’s unique situation.

The importance of strategic partnerships

With corporate customers demanding a more seamless, transparent and engaging transactional experience, banks need to adapt with a dynamic front-to-back working capital finance ecosystem for trade and supply chain finance. They also need to evolve from on-premises to Cloud in order to tap into a future-proofed ecosystem of services that support digitalization of the full transaction lifecycle.

An intelligent trade finance ecosystem provides access to services that help institutions effectively unlock access to data, deliver increased cost efficiencies, and address ESG concerns. It fast-tracks the journey towards paperless trade, greater automation, and open account trading, alongside effective ESG reporting and financing capabilities, via technology partnerships. The availability of open APIs makes adding new products and services into the overall customer offering much faster and facilitates straight-through processing (STP) through cross-product workflows within a bank’s wider application architecture.

Institutions should look for partners that can effectively help them both upgrade their trade finance stack and provide access to a robust ecosystem of services. Above all, this approach helps banks to stay competitive and relevant, as they prioritize embracing technological advancements and ESG practices that define the future of trade finance.