What trade finance startups can learn from Amazon’s market impact
Through all the advancements seen over the past century, international trade has been slow to change. For example, Letters of Credit (LCs) continue to be an important trade finance product for global traders, but they rely on paper-based processes, which are fundamentally slow and prone to error. Now, with the need to change how organisations work in a post-COVID world, there is a greater need to improve how trade and trade finance operate
Technology is seen as the way to overcome these obstacles but collaborating on technology in a concerted effort has been a challenge. Perhaps it is time that tech startups in the trade finance industry look to parallels in the consumer market for inspiration.
It’s easy to forget that when Jeff Bezos started Amazon in 1994, it was not the one-stop-shop that it is today. Amazon initially offered only books where they felt they could improve on a traditional shopping experience. This allowed it to establish itself in the market with limited scope, build user acceptance and perfect its processes before expanding. Trade finance startups should try a similar structure.
Due to its size and complex matrix of participants, geographies and regulations, attempting to digitise all of international trade at once is a near-impossible task. However, choosing a single process where value can be created can provide a strong foundation from which other processes will follow. The LC is perhaps the most infamous trade finance tool, both for its benefits to traders and for its rigorous process. The experience of using an LC - for banks and corporates - has remained largely unchanged for over 100 years, and it provides the perfect opportunity to show immediate value through process improvements and digitisation.
An LC is a full ecosystem transaction, with buyers, sellers, and multiple banks all communicating and mailing stacks of paper documents for a single transaction. It is a known process, however, with a common global standard governed by the International Chamber of Commerce (ICC). Thus, bringing all participants together on a common network to streamline that process and removing paper can allow for expanded trade digitisation.
Startups aiming to digitise trade must go beyond removing paper and deliver practical improvements and efficiency gains to achieve wide-scale adoption. Fortunately, this can happen with the right technology. For example, distributed ledger technology allows industry participants to transact on a common network and reduce LC presentation processing from up to 10 days to 24 hours.
Speed and efficiency are often the enablers for mass adoption. As with Amazon’s industry-leading next-day ‘Prime’ delivery service, improving LC presentation times can show the power of technology and enable wider trade finance innovation.
Building a network
However, Amazon’s most inspiring feat may not be its service times, but its network. Over 26 years, it has amassed a host of subsidiaries and partners, allowing Amazon to extend its book-buying experience into almost every conceivable good and service.
For a trade finance startup to thrive, it must also look to establish a diverse and inclusive global network rather than focus on a small group of participants seeking a competitive advantage. A lack of a common network has been a fundamental reason why LCs - and trade finance in general - have yet to digitise. With no standard connectivity between banks and corporates, data remains in silos, preventing process improvements and meaningful digitisation.
A common network will need to meet the demands of large corporates and leading trade finance banks, as well as be accessible for smaller institutions and enterprises. This industry-wide change will ensure that the entire sector - and not just a few players - will reap the benefits of digitised trade.
This, in turn, will build a base for a wider offering like regulatory services and other financial products to be added to the ecosystem, in much the same way that Amazon brought a wider offering to its bookselling platform.