Discussion on the Future of Global Trade Finance

Yalin Alakoc
Head of Global Trade
Qatar National Bank

April, 2023
 Future of Trade Finance
• Digitization of trade, OCR, electronic signatures, smart contracts, etc.
• Application Programming Interfaces (API), allowing different
systems to communicate with each other
• Artificial intelligence, to automate credit checks, risk assessments,
and fraud detection.
• Sustainability is a major driving force on changing global economy.
What is the role of banks and corporates?
• Trade finance networks, allowing buyers, sellers, and financial
institutions to collaborate (i.e. SCF), streamline processes, reduce risks
and enhance financing options.
• Legislation, to be an enabler, rather than an obstacle.
 Impact of trends and unexpected events
• According to the WTO, the total value of world merchandise trade in 2020 decreased by 5.3%
(YOY), due to the COVID19.
• The average tariff rate on goods traded among G20 countries decreased from 8.7% in 2005 to
4.6% in 2019, indicating a trend towards greater liberalization of trade (IMF)
• Pressures on supply chains: Awareness of vulnerabilities has grown. Companies are adjusting
production strategies to prevent prolonged disruptions.
 Marsh’s Political Risk Report 2023 - Deterioration
• Political instability, compounded by inflation, threatens economic and social environment.
• Competition for strategic resources (agri, metals, fertilizers, chips) is intensifying as a result of
the Ukraine conflict.
• Governments focus on national economic security, often at the expense of free trade,
fragmenting international alliances.
• Supply chain diversification brings new risks, to mitigate against soaring material prices,
fluctuating exchange rates, increased shipping costs, and government intervention.
 The role of financial institutions (Banks vs. Fintechs)
• Changing landscape. Global financial sector is estimated to be worth $26.5tn. in
2022. Fintech share at c. $187bn. (Source: tipalti.com), and will grow exponentially.

• Fintechs provide expertise in specific fields, and banks are having to collaborate
with them, for providing solutions for trade finance and payments.

• Platform banking. Who needs a physical branch any more?

Relevant risks. Who is responsible?

• Cyber attacks and data privacy as more data is shared online, there is greater
risk breaches and privacy violations.
• Compliance with regulatory frameworks, including AML and KYC regulations.
• Operational risks, including insurance for system failures or fraud.
Perspective for corporates – choosing the right partner
Corporates need to manage this transition and ensure they have contingency
plans to mitigate any disruption to their operations.

• SCF visibility to identify potential bottlenecks and cash flow constraints.

Comprehensive understanding of suppliers and customers, including their
payment terms and creditworthiness.
• Efficient processes, including automated invoicing, payments, and
reconciliation, to reduce costs and improve cash flow.
• Collaboration with suppliers and other stakeholders, building trust and
transparency, sharing information.
• Digitization of trade may lead to the displacement of traditional
intermediaries, such as banks and freight forwarders, and disrupt existing
supply chains.
 ESG impact on the future of Trade Finance
For Corporates: For Banks:

• Mitigate supply chain risks: Source from • Mitigate credit risk: Evaluate ESG practices,
suppliers with strong environmental and social identify potential risks and ensure that the
practices. clients have a sustainable business model.

• Improve financial performance: Attract • Meet regulatory requirements: Banks are

investors and customers who value ESG. increasingly subject to ESG reporting
requirements. Integrating ESG into credit
• Enhance reputation, and brand value, leading decisions and operational practices, can help
to increased loyalty and market share. banks comply with these requirements.

• ICC: 80% of respondents said ESG were important in their trade finance decisions.
• Bloomberg: The value of sustainable finance deals, reached $732bn in 2020, 29% increase yoy.
• WTO found companies that integrate ESG into their finance practices attract more investment.
• UN Environment Program estimates the global sustainable trade finance gap at $1.5 to $2.5 tn.
Blockchain impact on future of Trade. Hype or reality?
PROS
• Increased transparency: Tamper-proof record of all
transactions, reduced risk of fraud.
• Improved efficiency: Streamline SCF processes,
such as invoicing, reconciliation, improve cash flow
management.
CONS
• Technical complexity: Implementing blockchain
requires significant technical expertise and
resources.
• Lack of standardization: Leading to interoperability
issues, which slow down the adoption.

• Enhanced security: Cryptography to secure
transactions and protect sensitive data, reduce the
risk of data breaches.
• Greater accessibility: Access to SCF for SMEs that
may not have access to traditional financing.
• Regulatory uncertainty: Relatively new and rapidly
evolving field, creating regulatory uncertainty
• Potential for misuse: Can be used for illicit activities,
such as money laundering, which can create
reputational and legal risks for companies and
banks.

• Marco Polo Network case: It was announced to be appointed to administrators, as of February

2023. Significant investments from various global banks, including BofA, maybe at risk. (Source:
tradefinanceglobal.com)
 AI impact on future of Trade Finance
AI will transform trade finance by improving efficiency, reducing costs, and enhancing risk management
capabilities.

• Automation of processes, such as document verification, credit checks, and fraud detection, reducing costs.

• Improved risk management: By analyzing large volumes of data and identifying patterns, AI can provide more
accurate and timely risk assessments, enabling banks and corporates to make better decisions.

• New business models: AI can enable new business models, such as dynamic discounting and supply chain
finance. These models can provide more flexible financing options for corporates and improve working capital
management. Fintech companies like Taulia, for instance are using AI in their solutions.

• Enhanced customer experience: AI-powered chatbots and virtual assistants can provide faster and more
personalized customer service, improving the overall customer experience.

There are also challenges associated with the adoption of AI. These include data privacy concerns, regulatory
compliance issues, and the need for expertise to develop and implement AI-powered solutions.
 API - Application Programming Interfaces
• Efficient transaction processing, improving data accuracy and transparency.
• Bank websites may become app-stores!

Potential use cases:

• SCF. With APIs, data on the movement of goods can be collected in real-time, which can help
banks take informed decisions about financing options. APIs can automate the verification of
invoices, B/Ls, reducing the need for manual processing and improving the accuracy of data.

• Payments: With open banking (fintech), APIs became a key enabler of innovation and competition.

• Personalized service, by accessing data, businesses see customers' spending habits.

• Payment security, by enabling stronger authentication and fraud detection measures by integrating
3rd party fraud detection services.
 Legislation – to be an enabler
Digitization of Negotiable Instruments: Legislation about to be passed in the UK, for accepting
digital Promissory Notes, can be a critical step, as English Law is used globally.

APIs: Open banking and data sharing can facilitate development of new solutions. EU's Payment
Services Directive 2 requires banks to open their payment infrastructure (and share transaction data)
to third party providers (TPP), fueling innovation.

SCF: Transparency and standardization can drive greater adoption of SCF, and access to financing.
The Global SCF Forum has developed a set of legislative standards, to ensure consistency and reduce
risk for all parties involved.

ESG: EU's Taxonomy Regulation defines criteria for sustainable economic activities, which can help
investors identify and invest in sustainable projects. Legislation that requires banks to disclose their
ESG risks and impacts could promote greater transparency and accountability in trade finance.