Global trade has been dominating the headlines all over the world recently. The tension between the US and China has resulted in 2019 seeing the slowest pace in global growth since the 2008 financial crisis.
However, there’s something else that deserves equal attention when discussing global trade these days, and that is how innovative technologies of the Fourth Industrial Revolution are transforming it, bringing efficiency and dynamics to the table. Global trade has never been more dynamic than it is today – new types of providers are emerging, banks are digitalising their internal processes, and innovative technologies are entering the arena. Roberto Azevedo, Director-General of the World Trade Organisation, noted that, “From the invention of the wheel to the railways to the advent of containerisation, technology has constantly played a key role in shaping the way we trade – and this phenomenon is accelerating like never before.”
In recent years, various innovations such as optical character recognition, radio frequency identification, QR codes and basic digitalisation of trade documents have improved the efficiency and reliability of global trade. What’s more, new, unprecedented developments such as the Internet of Things (IoT), artificial intelligence (AI), advanced robotics, 3D printing and Blockchain are unlocking many opportunities and changing the global trade system from many different angles: from reshaping consumer habits to increased product diversity, technological advances in cutting trade costs and changing the overall structure of the global trade – all of which are leading to an expansion in global value chains.
And what about the cross-border payments – an expensive, time-consuming and overall tense area for financial institutions? According to McKinsey, the elite consulting firm that advises many of the world’s largest and most powerful institutions, the global cross-border payment landscape is now at the centre of several trends that could fundamentally change competitive dynamics.
Today, everyone expects goods and services to move more quickly and across greater distances than ever before. The same goes for money: payments need to go from account to account faster – even instantaneously.
The World Trade Organisation estimates that as much as 80% of global trade relies on trade finance or credit insurance, making this sector of particular importance. As a result, the world of cross-border payments is undergoing a digital transformation, which is all about eradicating long delays, friction and eliminating high transaction costs.
Furthermore, cross-border payments are becoming a key driver of economic growth. According to McKinsey, the global payments market is expected to reach $2.9 trillion by 2022, and more than a half of this growth – $1.6 trillion – is expected to come from the Asia-Pacific region. It is estimated that the global cross-border payments market will grow by 74% by 2026.
According to Michelle Bullock, the Assistant Governor at the Reserve Bank of Australia, “Cross-border payments are widely regarded as an area in which significant efficiency gains exist. Current processes are slow and costly, involving significant compliance burden and a number of different financial institutions in different jurisdictions. New technologies and new business models could be used to address some of these frictions.”
One of the new technologies sweeping the cross-border payments system is Blockchain. It is estimated that investment in Blockchain technology will rise by 90% this year – from $1.5 billion to $2.9 billion. This impressive rise is driven by a huge interest in how Blockchain and smart contracts could facilitate cross border payments, making them faster and requiring fewer intermediaries.
Even though at first glance Blockchain technology might seem hard to understand, it’s actually not that complicated. Essentially, instead of completing several steps, Blockchain provides direct transactions between the sender and the receiver, whilst also storing all the related data in a secure distributed ledger.
Deloitte, a leading global advisory firm, estimates that business-to-business and person-to-person payments with Blockchain result in a 40–80% reduction in transaction costs and take an average of 4–6 seconds to finalise, compared to 2–3 days using the standard transfer process.
The International Data Corporation (IDC), the world’s leading market research company, noted that “Blockchain is maturing rapidly, and we have reached an inflection point where implementations are moving quickly beyond the pilot and proof of concept phase.”
Several financial institutions, including the Bank of America, HSBC, the Infocomm Development Authority of Singapore and Barclays, seem to have already figured out that Blockchain might just be the future of the cross-border payments system. And a group of European banks have also joined forces, launching a trade finance Blockchain platform in July 2018. That same year, the Hong Kong Monetary Authority announced plans to launch a trade finance Blockchain platform as well.
Trade organisations such as the Dubai Chamber of Commerce and Industry have also launched an initiative to leverage Blockchain technology to address the main global trade and cross-border payment issues – high costs, lack of transparency and security.
It turns out that Blockchain can solve all these problems, and provide significant advantages to both businesses and consumers. Blockchain-based payments are cost-effective, almost immediate, secure and transparent.Christine McDaniel, international trade economist and a former senior economist with the White House Council of Economic Advisers, commented that, “A large number of intermediaries and corresponding administrative costs in trade finance tend to fall particularly hard on SMEs and the relatively higher cost of each transaction makes SME financing less attractive to banks. If Blockchain can reduce the costs of trade finance, more small and medium-sized businesses could trade globally.”
Due to strict collateral needs and credit history checks, as many as 50% of all SME funding applications are rejected by banks today. This has resulted in a $1.5 trillion gap in trade finance.
Blockchain can change that, Not only can it help expand the pool of companies that can access trade finance, but it also has the potential to bridge the trade finance gap. Furthermore, as we already know, cross-border payments is a centuries-old business that has progressed very little throughout the years – it still follows certain procedures and processes and is heavily paper-based. Kerstin Braun, president of Stenn Group – a provider of trade finance – noted that, “On average, a cross-border transaction requires the exchange of 36 documents and 240 copies.”
But that’s about to change. Corporates, banks and financial technology companies are now endeavouring to develop a proof of concepts (POCs). These efforts are concentrated on using smart contracts to digitalise trade documents and register these new documents into the Blockchain.
According to McKinsey, Blockchain can help to reduce up to 20% of the actual physical paper costs associated with global trade. Tim Cummins, president of the International Association for Contract and Commercial Management, says that, “Many of the documentary contracts currently used in trade finance could eventually be replaced by self-executing smart contracts that run on Blockchain. This would mean contracts could be executed quicker and more simply, for instance when someone speaks into their phone to confirm shipment.”
At the end of the day, global trade is initiated by individuals connecting with one another. Up until now, it was based on a handshake. But as the future of global trade and cross-border payments is, indeed, digital, that handshake will indisputably and increasingly be taking place in a digital universe.