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The power of SMEs: Driving the digital trade finance revolution

Although large and multinational corporates tend to grab the trade tech headlines, when it comes to digital trade finance innovation, SMEs not only stand to benefit from digital trade finance tools, but are well placed to help drive wider adoption.

When it comes to digital innovation in trade finance, SMEs are in danger of being overlooked by banks. Indeed, these unsung heroes of the global economy stand to benefit from such innovative solutions just as much as their larger counterparts, and could be the drivers of wider, mainstream adoption, benefiting the industry as a whole. The movement is clearly underway: collaborative efforts to develop advanced supply chain finance (SCF) platforms, blockchain-based initiatives, and new digital financial instruments such as the Bank Payment Obligation (BPO) have led to an increasing number of solutions geared towards SMEs. This trend must continue.

Why are SMEs so important? For one, they represent the backbone of the global economy, making up 50% of global GDP and two thirds of global employment, according to data from the World Economic Forum. SMEs are also highly agile, typically have healthy risk appetites, and can incorporate new technologies or business models without facing resistance from longstanding and deeply entrenched systems and methodologies that are often present at larger companies.

SMEs therefore represent ideal incubators for fostering use cases for new instruments within trade finance. With SMEs comprising the vast majority of businesses across the world, even a small proportion successfully incorporating innovative digital tools would bode well for the development of new solutions and help bring them into the mainstream.

Catering to SMEs along the supply chain

UniCredit strives to offer European SMEs the best possible service and for this reason we are continuously asking ourselves how we can better cater to SMEs and harness their potential.

One answer lies in the fact that many SMEs are involved in growing supply chains, where bank-mediated SCF is on the rise. This is partly due to the continuing shift to open account trade, as well as the availability and accessibility of such SCF solutions. The alignment of objectives in certain corporate departments is another contributing factor. Corporate treasury, sales and procurement departments are increasingly looking to bring their goals in line with one another, ensuring healthy supply chains as well as optimised working capital and balance sheet metrics.

This is leading them to consider SCF techniques. Indeed, according to the International Chamber of Commerce (ICC) Banking Commission’s 2016 Global Survey on Trade Finance, nearly 35% of respondents – mainly banks – reported an increase in SCF deals, while 39% reported an increase in interest from their customer base in SCF solutions. This is good news for SME suppliers looking to capitalise on their buyers’ strong credit ratings – promising not only fast access to their receivables, but also improved flexibility and an enhanced relationship with trading partners.

Advanced digital platforms only serve to increase the value-added. Innovative banks are now using big data to create additional functionality on their platforms, such as enabling participating SMEs to create their own “supply chain communities”. For example, two or more participants in the supply chain can agree to share data, such as real-time details on the location and condition of goods, to arrange mutually beneficial payment terms and initiate automated payments. This is just one example of how bank platforms are beginning to offer corporates and SMEs a way to improve access to finance while also promoting transparency, confidence and collaboration between trading partners.

Blockchain-based innovation for European SMEs

Collaboration between banks is bringing further innovation to SMEs. One prominent example is Digital Trade Chain (DTC) – a blockchain-based trade finance and supply chain management platform for SMEs in Europe developed by a consortium of several major European banks, including UniCredit.

Blockchain’s ability to securely record, store and transfer data makes it an ideal technology to apply to trade finance, and DTC will allow stakeholders in a cross-border transaction to securely track the transaction throughout the entire trade process in a completely transparent manner, using both mobile or web-based applications. Maintaining secure records on a distributed ledger will accelerate the order-to-settlement process and decrease paperwork, while the platform’s transparency will give SMEs confidence to initiate trade with new partners both at home and in other European markets.

Particularly impressive is the scale of DTC, with seven major European banks working together to ensure sufficient coverage for SMEs across Europe to adopt the solution en masse at the first phase of implementation, set to launch later this year. As we are currently in the early stages of adoption of blockchain in banking, collaboration is essential to explore and unlock its potential, and the DTC consortium represents a compelling new collaboration model for the industry.

Digitalising documentary trade

Of course, there are other digital solutions in the industry available today that simplify and streamline transactions by digitizing end-to-end processes within the trade ecosystem. The BPO – a new, standardised payment instrument that entirely digitizes transaction flows and removes the need of transferring physical documents – is seeing increased uptake, with payment risk, processing times, errors and costs all drastically reduced.

A most encouraging trend we have seen at UniCredit is that those of our clients that have implemented the BPO have provided extremely positive feedback, in many cases expanding its usage to their counter parties. SWIFTS’s Multi Bank MT798, a trade envelope that simplifies the digital exchange of trade documents between corporates and banks is another successful example. Of note is the fact that, among the clients today using SWIFT services for cash and payments, many are not aware that it is also possible to digitize trade documentation through SWIFT services as well.

If banks can continue to develop and tailor digital innovations such as advanced SCF platforms, blockchain based applications, and digital tools such as the BPO to SMEs – a crucial segment of the business world will receive a much-needed boost. Not only will they enjoy increased trade finance provision and more efficient transactions, but they can help promote mainstream adoption of a new category of digital trade finance tools. Close collaboration – between banks, SMEs and larger corporates – is the way to ensure the most effective value added services are developed successfully, and that the potential of SMEs is fully unleashed.  

Comments (2)

  • William Laraque
    William Laraque, US-International Trade Services 14 July 2017

    Barisaac, excuse me.

  • William Laraque
    William Laraque, US-International Trade Services 14 July 2017

    I'm betting the ranch on e-commerce platforms, quantum computing and ARML, Augmented Reality Markup Language to provide SMEs with a sustainable ecosystem for financing their engagement in global trade.. Jack Ma demonstrated in Detroit the potential impact of the globalization of SME global entrepreneurship. The ensuing economic growth will convince entrepreneurs in China (more than will OBOR), SME entrepreneurs in Europe (more than SCF and BPO) and SME entrepreneurs in the US (more than Bannoneconomics) that there is a better way forward. Thank you Monsieur Barrissac for your intelligent discussion on this important subject.

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