2020 was a challenging year, and it wreaked havoc on the state of trade finance. The COVID pandemic, fraud scandals, and allegations were just part of what put the market in such dire straits.
But 2021 is providing a new beginning, and with that the volume of trade finance is expected to grow.
This article highlights how 2020 affected trade finance and the predictions for 2021 and beyond.
Understanding Trade Finance
Trade finance encompasses the financial instruments and products used by companies to facilitate financial trade and commerce to make transactions feasible. It includes activities such as credit lending, forfaiting, export credit, financing, and factoring. The process involves several parties including the buyer and seller, the trade financier, export credit agencies, and insurers. Some of the documents involved in the process are Letter of Credit, Bill of Lading, Bill of Exchange, Packing List, Commercial invoice, Certificate of Origin, and the list goes on.
To provide some context, in the early days of international trade, exporters were never sure when importers would pay them for their goods. Exporters tried to reduce the risk of not being paid while importers worried about making payments in advance since there were no guarantees that the seller would actually ship the goods.
Trade finance was created to eliminate these risks by accelerating payments to exporters and assuring importers that goods would be shipped. Letters of Credit would be received by the exporter’s bank acting as a type of credit insurance payment once shipment documents are presented.
Another option of trade finance is for the exporter’s bank to give the exporter a business loan while processing the payment made by the importer. This keeps the supply of goods active while the exporter waits for the importer’s payment. The loan is recovered by the trade financier once the bank receives the payment.
The Effects of the Coronavirus
We can’t really talk about 2020 without mentioning the coronavirus pandemic.
When the pandemic first hit, the travel restrictions put in place brought global trade and trade finance almost to a standstill.
Once trade started moving again, it was still hampered by confusion due to varying restrictions in place throughout the world. Although loan support was provided by governments, software issues got in the way, making it difficult for companies to get the funding they needed.
Export credit agencies rolled out billions of dollars in support at a considerable risk. Supply chain programs surged to cover supply issues but many were met with distrust due to questionable disclosure rules and the conduct of buyers and providers.
However, there were some initiatives that were successful, chief among them being the Debt Suspension Initiative. Launched in April of 2020, the DSI was established to help countries in need of support, so they could boost their credit profile and borrow at a lower rate.
The Initiative has been extended to June 2021 and, along with hope on the horizon in the form of a vaccine, experts are hoping that financial activity will get back to pre-crisis level by mid-2021.
Advances in Trade Finance Tech
Trade finance is a powerful money-making tool for financial institutions, but it comes with its share of risk when it comes to potential for fraud, money laundering, and breaches to regulations. 2020 certainly saw its share of these illicit activities.
2021 will be seeing advancements in technology designed to deal with these issues. One example is Cleareye.ai’s Intelligent Trade Screening Platform.
Cleareye.ai uses advanced Artificial Intelligence (AI) to improve the effectiveness of Trade Finance Operations and Sanctions Screening processes while increasing productivity by 70%. The platform processes trade finance transactions documents, performs automated reconciliation against UCP and ISBP rules, and seamlessly integrates with Sanctions Screenings and TBML (Trade Based Money Laundering) systems. It is user friendly, intuitive, and it will ensure Trade Finance Compliance across the board.
2020 has shaken the world of trade finance, but it has also taught us valuable lessons that will pay off in the new year. Advanced technology will work to minimize fraud and promote growth, while the introduction of the vaccine means increased hope all around. Here’s to a brighter financial future.