Digitisation in trade finance: accelerating transformation and engaging new investors

Author: Nigel Houghton, Managing Director, LMA

Technology will transform trade finance, improving efficiency and transparency while attracting new investors, a panel of industry leaders told the Loan Market Association 2024 Loans Conference.

Disrupting the paper trail

Paper documents have long played a crucial role in trade finance as a cheap and effective way to transfer legal ownership of goods and debts.? However, the Electronic Trade Documents Act (ETDA) is disrupting the sector, with digital documents gaining legal equivalence and lowering the barriers to fully digitised trade finance. It is now possible to transform the bill of lading, a key transactional document, into a digital asset, helping to streamline operations and reducing the paperwork and bureaucracy associated with cross-border trade.? The use of so-called eBLs – electronic bills of lading - is set to increase exponentially over the coming years.

Investor interest

Interest from non-bank investors in the sector has grown significantly over the past decade, thanks to the combination of technology-driven transparency, good creditors and attractive risk-return profiles.

New tech platforms are addressing issues such as risk management and a lack of transparency that have historically kept trade finance out of the investment mainstream. Technology can now automate the otherwise onerous manual process of checking invoices and transform highly diverse pools of invoices into standardised investable products.

Technology can also link credit ratings and other information to documents as they pass through the supply chain, a key benefit in a sector in which a supplier in one country often does not know their counterparties in the goods’ onward destinations.

Looking forward

However, a gap remains between what technology can enable and what some people working in the sector can accept and adapt to. For example, many people are concerned about technology being hacked, despite similar fraud issues also existing with paper documents. “Paper nostalgia” is also often cited as a hurdle to overcome.

While the digitisation in trade finance still faces obstacles, the combination of regulatory support, new technological solutions and interest from a broader investor base has laid the foundation for rapid change.

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