The ICC and Coriolis Technologies report on the UK business case for aligning the acceptance of digital trade documentation suggests that if the law is amended to allow for electronic bills of lading, bills of exchange and promissory notes, then UK trade could increase by 25% and 3 million jobs could be created. Interational business activity would increase by around 13% and trade finance as a sector could become 35% more efficient.
These are big claims, but think about this: it costs about £60,000 to onboard an SME for trade finance; in 2019 for every transaction, the documentation cost alone could be said to have been around £57,000. In simple terms, this documentation is all about the proof that a business has shipped the required volume of goods to a given buyer at a certain price. These documents become financial instruments in their own right, to improve working capital while the goods are in transit, as I talked about in my last blog.
There is no reason why this process cannot be done digitally, but despite the fact that there is now the technology available to do this securely, some 80% of the processing of these types of documents is still manual – hence why the costs are so high and why, if these costs can be brought down, then there is potentially such a big proportionate impact on the UK export base.
Its not just about reducing costs, improving efficiency or, indeed, reducing the scope for fraud in the documentation. There is no better moment to seize hold of the trade agenda for the UK as a whole. Trade has fallen in value terms since December 2020 by around 18% to the end of February 2021. Similarly, the number of exporters, their revenues and their turnovers have also been dropping progressively since the 4th quarter of 2019 by anything between 5% and 25% depending on the size of the firm. The only exception is larger businesses who have seen their revenues increase even though there are fewer of them and they are employing fewer people.
This is a picture that the banks recognise. They know that the SME sector has been struggling since the last financial crisis with the increase in documentation to comply with the regulations, rules and capital requirements that have been introduced to ensure the systemic security of the financial system since then. During Covid, access to finance for SMEs worsened because many of the big insurers stopped insuring riskier trade finance deals which, almost by definition, many SME deals are, simply because they are small. Post-Covid and post-Brexit, there is no sign that the regulations are getting any simpler and fraud and sustainability checks will only become more arduous over time as regulators seek to manage risks within the financial system.
Yet the financial system can itself help these small businesses if the costs are reduced. According to the survey conducted as part of the ICC / Coriolis Technologies research, digitising these documents was estimated to reduce the number of days involved in a transaction by around 75%. This would enable banks to provide finance to SMEs on a much more efficient and lower cost basis.
In the UK alone there is around £72bn of trade finance intermediated through banks annually. SMEs account for around £2.3bn of this. Calculating the impact on different types of financial product from the survey questionnaire, the research found that reform to the law to enable digital documents would create an additional £1bn of trade finance annually, or over 40% more trade finance to this sector.
The business case speaks for itself. The issue is whether or not governments and regulators are ready to step up to the plate.
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