Change has always been the only constant in human history. From the ancient times of Heraclitus to the present day, technological advancements and innovations have accelerated at an exponential rate. Humanity has experienced three major industrial revolutions and is now at the brink of the fourth one. The ongoing advancements in AI, the Internet of Things, digital transformation, and human-machine interaction are revolutionizing various sectors, including international trade finance. These technological disruptions are enhancing labour productivity, improving efficiencies, and optimizing communication in the global economy.
The financial system is also experiencing constant change. Markets are evolving from weak to semi-strong and strong forms of efficient markets. As businesses grow and become more efficient, they reach economies of scale, and their gross and net margins initially increase. However, with competitors entering the market and new technologies disrupting traditional business practices, these businesses ultimately face compressed margins and the end of their business cycle.
Developed economies have always had an advantage in terms of market efficiencies and innovation, driven by their strong and stable currencies. Fierce competition and price pressure in the financial sector are common, with significant implications for sectors like trade finance. This area has been attracting substantial investor attention globally, especially given concerns related to supply chain, supplier diversification, and higher interest rates. The global trade finance market was valued at $9.3 trillion in 2022, while the trade finance gap has grown to $2.5 trillion, according to the Asian Development Bank (ADB).
The era of high margins, high risks and returns, and untransparent transactions in trade finance is long gone. The modern digital world, with its emphasis on higher levels of transparency, sanctions, and regulatory compliance, no longer accommodates such practices. Robust regulations and technology-driven reforms are driving changes in the trade finance and SME lending industry.
Several factors are contributing to a future where trade finance is fully commoditised. Technology, embedded finance, information flow, and various regulatory initiatives are reshaping the trade finance landscape. Each of these factors is playing a pivotal role in enhancing industry efficiencies, mitigating risks, and improving transparency in the global trade finance market.
For instance, technological innovations such as Generative AI (GenAI) are transforming data analysis and classification based on visual, numerical, and textual data. Distributed Ledger Technology (DLT) is improving transparency, rendering payments, and automating operational processes in trade finance. Similarly, the Internet of Things (IoT) is revolutionizing logistics, providing real-time data on the location and condition of inventory and goods in transit. Quantum Computing is offering instant analysis and verification of vast amounts of trade-related data. These technological advancements are driving efficiency and transparency in trade financing.
In addition to technology, embedded finance is playing a crucial role in reshaping the trade finance industry. Enhanced integration with Enterprise Resource Planning (ERP) systems, strategic partnerships with large corporations, and streamlined payment solutions are all contributing to ease of access to finance for businesses engaged in cross-border trade. Furthermore, regulatory initiatives like the Model Law on Electronic Transferable Records (MLETR) and Electronic Trade Documents Act (ETDA) are enhancing standardisation and legal frameworks for electronic trade documents, thus improving transparency, fraud protection, and operational flow in the trade finance market.
As a result of these ongoing changes, the trade finance industry is evolving into a more scalable, lower cost, and semi-efficient market. The future promises less fragmentation in cross-border trade and significant benefits for small businesses and consumers alike. Despite potential threats from technological tools and geopolitical tensions, the trade finance and SME lending industry is on a path towards greater efficiency, reduced costs, and increased transparency.
In conclusion, the evolution of international trade finance is an ongoing process driven by technological innovations, regulatory reforms, and industry dynamics. As the sector moves towards full commoditization, businesses and consumers can expect greater transparency, efficiency, and opportunities in the global trade finance market.