Trade finance technology (abbreviated TradeTech, tradetech, or sometimes Trade Tech) refers to the use of technology, innovation, and software to support and digitally transform the trade finance industry.[1] TradeTech can be seen as a subcategory under FinTech.[2] As digital information becomes more readily accessible, convenient, and available, the trade finance industry is being gradually modernised and digitally transformed.[3] [4] TradeTech puts a particular emphasis on the application of technology and software to modernise trade finance.[5]
TradeTech is the technology, software, and innovation that aims to enhance traditional financial methods in international trade and that is applied in making available trade finance and related services.[6]
TradeTech seeks to reduce transaction costs for businesses, lower compliance costs, and increase efficiency and transparency for firms, regulators and consumers.[7] [8] The application of TradeTech results in new business models, applications, processes or products with an associated material effect on trade finance markets and institutions.[9]
This is achieved in several ways, such as introducing automation, artificial intelligence (AI), or blockchain networks to existing processes.[10]
The term TradeTech was first officially established and recognised by the World Economic Forum in a 2018 white paper, highlighting the importance of technologies such as internet of things (IoT), blockchain,[11] and artificial intelligence to facilitate international trade and support trade finance.[12] Wolfgang Lehmacher co-authored the report.
In the private sector, the emergence of private companies that typically use the cloud through software as a service to provide applications is accelerating the availability of TradeTech applications.[13] Companies are often startups founded to modernise the traditionally conservative trade finance market.[14]
The emergence of TradeTech can be linked to a broader trend of making international trade more efficient by removing barriers.[15] [16] This ongoing modernisation of trade began with the invention of shipping containers in the mid-twentieth century, which largely solved the issue of reliability and safety in international trade and also greatly reduced the cost of loading and transportation.[17]
High transaction and financing costs can create a high barrier to cross border trade with high trade costs effectively nullifying comparative advantages as they render exports uncompetitive.[18]
As such, many TradeTech initiatives seek to reduce administrative and bureaucratic costs associated with financing the transporting of goods across a border.[19] This often includes applying technology to global supply chain finance, logistics, and to improve connectivity between trading partners.[20]
In the 1980s, some trade finance processes were digitised, such as with the introduction of the electronic bill of lading.[21] Meanwhile, supply chain finance initiatives emerged in the 1990s, but only began to impact the market after 2000.[22] Most recent developments have seen the rise of asset distribution providers, which seek to increase liquidity in the trade finance sector.[23] There is also a push to use blockchain in trade finance.[24]
According to a round table event hosted by trade financier Deutsche Bank and media company GTR, “Digitalisation of trade finance is something the entire trade finance industry agrees is vital for trade’s longevity”.[25] The rapid development of tradetech and fintech applications is cited to make reporting of environmental, social and corporate governance (ESG) factors a lot easier for the trade finance industry.[26]
TradeTech received an early start with providers that developed products for financial institutions to both digitise and automate their payable and receivable processes.[27] This made it possible to upload trade documentation such as invoices and purchase orders, and then enable their validation and processing.[28]
The latter half of the 2010s witnessed a significant expansion of blockchain technology, and it is also beginning to be applied to international trade.[29] Specifically, the traceability and security of information of a blockchain network have been noted for its potential for increasing transparency between trade partners and supply chains, as well as the subsequent reducing the potential of fraud.[30]
Marketing sellable trade finance assets is another application emerging within TradeTech.[31] The aim of this is to create new sources of liquidity within the market, thereby increasing the funding available to businesses to continue trading.[32] The Basel Accords limit the amount of funding banks can issue to businesses as they are now required to retain a certain volume of their liquidity.[33] Furthermore, there is a perceived risk associated with issuing trade finance to businesses without credit histories.[34] This culminates into a scenario wherein Small and medium-sized enterprises (SMEs) often struggle to access the finance they require.[35] As a result, asset distribution providers seek to alleviate the pressure from banks by distributing trade finance assets to alternative investors, such as a non-bank financial institution.[36]