The long walk to digitised trade finance

May 20, 2019

Don’t blame the technology; the real hurdles are governance, res­ponsibilities and the ability to em­brace change.

When taking a closer look, the execution of commodity trading may appear outdated to people unfamiliar with the industry. Handling paper documents remains the basis of transac­tions, and lots of time and energy are invested in reconciling information between the par­ties or internally between various IT tools.

Within the trade finance industry, most people would agree that transacting via data only would be easier, quicker and cheaper. Avoiding redundancies of data and interfacing tools should save costs. We at last see more po­tential integration between the post-trade executions of commodity merchants and the fi­nancing of those transactions. The challenge is not about sharing a common long-term vision, but implementing the first steps to reach it.

As with social networks, blockchain projects will add value to users once many of them are interconnected. For instance, replacing the means of communication between banks for documentary credit by a blockchain solu­tion requires a minimum adoption by a pool of banks. By developing komgo, Voltron or Marco Polo in consortia, banks address this network effect requirement.

Defining the appropriate governance of such a structure is another challenge. From a re­gulatory standpoint, it must comply with competition laws. On the economic side, their business models encroach on the bank origination and distribution. Over time, we can also imagine a divergence of interests between the parties involved.

Unfortunately, the whole transaction pro­cess involving many parties cannot be digi­tised at once, so we have to start somewhere and then manage the rupture. At some point, the new processes need to be plugged into the existing ones. This raises new questions, for instance, how do you produce a paper version of the shipping documents if your client has purchased a digital set of shipping documents, but his buyer is only willing to receive a set of paper documents? Here, the idea is to define a set of rules and responsi­bilities that are new and agreed upon by the parties to manage the boundaries.

Ultimately, those digital platforms need to be interfaced with the banks’ “legacy”. The banking industry was once one of the first to be computerised and therefore their IT sys­tems beat the life expectancy of those in most industries. Considering the implementation cost of such connections, banks have to arbi­trate between its resources, the various pos­sible platforms, and the remaining shelf-life of the tools to be connected.

Rome was not built in a day and trade finance will not be digitised overnight. Embracing the agile and lean methodologies and invol­ving users within the design process of IT tools has already accelerated the time-to-market for the delivery. It has also ensured a better design through a simpler communication between users and developers. While it is critical for banks to manage their cost structure to re­main competitive in a fast evolving world, they also need to be connected to their clients. Now it is time to roll up the sleeves and start imple­menting these new platforms and adapting to new challenges on the way.


Article written by Louis-Jérôme Monnier, Origination & structuring manager agribusiness, BNP Paribas in Switzerland. Published in Agefi’s  special edition on commodities on April 2019.