Digitising trade to unlock economic growth

Huny Garg, Executive Director & Country Manager, SWIFT contends that there has never been a better time to digitise trade, to reduce friction in global commerce and support global economic growth, currently hindered by the aftermath of the Covid-19 pandemic.

Trade has always been central to economic growth in the Middle East. Located on the old Silk Road, the region has long held a strategic position in international trade, connecting Europe to the Far East, and more recently establishing itself as the main hub for Asian exports into Africa, developing into a dynamic business and financial centre.

The Middle East is also home to one of the youngest populations in the world. This generation grew up with technology firmly embedded in their daily lives, only a fingertip away from the rest of the world. As they enter the workforce and become key actors of the economy and business leaders, they expect the same convenience that technology offers in their business interactions.

Digitisation, across all sectors, is high on the agenda of Middle Eastern governments and policymakers. Cisco’s 2019 Digital Readiness Index shows that the United Arab Emirates (UAE) has forged ahead with digitisation across various areas. For example, Dubai aims for all government transactions, where possible, to be digital by the end of next year. Meanwhile, Saudi Arabia has pledged to become one of the world’s top-20 digitally innovative nations, positioning digital transformation as one of the four pillars of its Vision 2030 programme. Other GCC markets like Qatar, Bahrain and Oman have also set out their vision and strategy to leverage digital transformation.

Why now is the time to digitise trade

Trade is an extremely complex ecosystem, involving not only an importer and an exporter but also a myriad of other actors across physical and financial supply chains, covering multiple countries and industries. This gives rise to differing standards, rules, regulations and legal frameworks.

Digitisation has been at the heart of some of the most significant changes in our lives in the last decade. With high-speed broadband, ubiquitous smartphones, smart offices, smart homes and cars, and the proliferation of apps for every aspect of our lives, this digital way of life is growing exponentially, and so is the appetite for seamless and convenient customer experiences.

Trade digitisation and its potential benefits have long been discussed by the industry, and while the banking sector has made significant progress in digitising customer interactions, trade remains one of the few areas that still rely heavily on manual and paper-based processes.

Advancements in technology have already sped up supply chains and brought down the cost of doing business. With better connectivity, richer data and new technology, there has never been a better time to digitise trade.

How the pandemic acted as a catalyst to trade digitisation.

Our recent paper “Digitising trade: the time is now” outlines how the pandemic has magnified the vulnerabilities of manual and paper-based processes in global trade and suggests how efforts to digitise trade could reduce friction in global commerce and support economic growth.

The COVID-19 pandemic has accentuated the friction, inefficiencies, risks, and control challenges associated with paper-based processes, and demand for digital solutions in trade shot up as businesses and banks across the world looked for ways to keep international trade in motion.

By late April 2020, documentary trade finance substantially declined by as much as 49% week on week as documented by SWIFT Watch. However, despite a substantial drop in global trade in the past year, the usage of SWIFT’s Digital Trade Channel solution (MT 798) grew by 72.4% in 2020. This highlights the appetite for digitisation among corporations.

As the world emerges from the pandemic, trade is paramount in enabling the global economy to recover and digitisation has an essential role to play, removing the frictions that ultimately impair access to liquidity and optimisation of financing, with knock-on ramifications for business and growth.

The conversation is now shifting beyond operational efficiency to become a matter of business continuity and risk management. The question of trade digitalisation is no longer ‘if’ or ‘when,’ but simply ‘how’ and ‘how fast?’

Rising to the challenges of trade digitisation

For trade to be truly digitised, some challenges such as legal harmonisation, standards and interoperability remain to be addressed.

One of the main challenges with trade is that we are not only looking at technology. We are looking at a complex ecosystem with a myriad of actors, rules and regulations, both across physical and financial supply chains, in multiple countries and industries.

Digitisation is already well underway in the region, and this is reflected across the financial industry. In a survey from the International Chamber of Commerce (ICC), 44 percent of the respondent banks in the region have indicated that the implementation of digital trade solutions is part of their strategic roadmap in the next one-to-three years. This positions the region very strongly to usher in greater adoption of digital in trade.

Although COVID-19 made it challenging for governments to deliver services in person, the region doubled down on digital solutions and GCC countries recorded 30% higher adoption of online services compared to the rest of the world[1]. Banks in the UAE have reported receiving as much as 80-90% of their trade transactions through digital channels in 2020.

Addressing legal harmonisation

Governments in the Middle East have been investing heavily in their physical and digital infrastructures in a bid to diversify their economies, and trade is a key focus. In the GCC, as governments strive to reduce their dependence on hydrocarbons, the pace of transformation has dramatically accelerated in recent years. Ports in the region feature among some of the most efficient in the world, with the UAE ranking in the top 20 for ease of doing business.

To further accelerate this digital shift, governments in the Middle East and across the world have been working to remove legal barriers. Meanwhile policy makers in the region are already introducing various measures to support ‘electronic transferable records’ to help banks digitise negotiable instruments. For example, Bahrain was the first country in the Middle East to have enacted the UNCITRAL Model Law on Electronic Transferable Records (MLETR). This is often considered a key enabler for digitising international trade. In the UAE, the Abu Dhabi Global Market (ADGM) implemented the new “Electronic Transactions Act”, a set of regulations that aim to confirm that electronic signatures, contracts, records and documents are legally enforceable in the same way traditional non-electronic versions are.

Further adoption of MLETR in the region will be key to enabling the seamless flow of trade data across industries.

  • Streamlining standards and Interoperability

Global trade is a complex and broad ecosystem, and standardisation and interoperability play a crucial role in ensuring connectivity between both physical and financial supply chains.

A typical trade transaction often involves several banks, sometimes from multiple countries, operating across different jurisdictions. This process is often laden with challenges and the potential for inaccuracies or incorrect data entered is high (with manual entries), many a time resulting in delays to transaction processing and ultimately leading to losses.

This calls for standards that foster interoperability, such as ISO 20022, and address friction and fragmentation. Combined with emerging technologies such as APIs, it should allow for newer value-added services for banks and corporates, while also automating and integrating end-to-end transactions.

Richer data offers greater insight into supply chains, helping foster transparent and efficient trade finance. This helps to promote greater financial inclusion by enabling more corporates – notably small and medium enterprises (SMEs) – to access trade finance.

How SWIFT can help

Today, SWIFT digitises more than USD 2 trillion in global trade. Through common standards, identity, and security protocols SWIFT enables interoperability between thousands of banks and corporates in over 200 countries and territories. This expertise lends itself to the co-creation of a trade ecosystem – that is standardised, scalable, and interoperable – tackling friction and fragmentation, agnostic to financing structures and solutions.

Now is the time to digitise trade, to work in collaboration with all participants to ensure a global, interoperable, and trusted trade ecosystem emerges from this defining period in history.

[1] https://www.bcg.com/en-mideast/publications/2021/digital-government-services-help-build-trust-of-gcc-citizens