By Dr Mohammed Khair Alshaleel, Essex Law School

Trade finance is one of the backbones of global trade. By its nature, it is a heavily paper-based industry as it relies on ownership of title documents. Processes that currently support the global trade finance ecosystem are extremely focused on documentation and checking. An end-to-end process can often take weeks to complete.

The spread of digitalization and digital services in the broader society has led to calls for similar applications in the trade finance sector. However, embracing digital innovations in the trade finance industry has been very slow, trailing behind the rapid digitalization advancements made by the financial services and banking sectors.

Many of the complexities in trade finance are driven by the fact that each trade finance transaction requires the input of a large number of entities in different locations worldwide, including, for example, buyers, sellers, banks, customs authorities, insurance companies and carriers. Each entity has a unique mix of internal and external requirements to comply with. Importantly, they are at very different levels on the technology adoption curve. These variations present one of the main challenges for the trade finance industry to digitalize.

The emergence and adoption of new technologies in trade finance and trade generally have made full digitalization possible. Digitalization here refers to the incorporation of digital technologies into traditional trade finance processes and practices.

Legal framework and ecosystem collaboration

Dr Alshaleel’s research raises novel questions about whether the current trade finance legal framework is sufficient for allowing the transition to a fully digital system and whether the legal obstacles concerning the developments in technological applications in the trade finance industry are reflected in the international standards and rules.

His new article ‘Digitalizing the End-to-End International Trade Finance Process and the Law: A Mission for the Entire Ecosystem’, which is by the European Business Law Review, identifies the key challenges and barriers that impede the successful digitalization of the end-to-end trade finance process, and the factors that contribute to, or hinder, the attainment of critical mass in the adoption of digitalization within the trade finance ecosystem.

The article argues that technical innovation is only one piece of the puzzle and effective legal frameworks as well as recognized standards are essential to accelerate the digitalization journey. It also posits that digitalizing an end-to-end trade finance process is a mission for the entire trade finance ecosystem: successfully digitalizing the full trade finance process requires cooperation and buy-in from all the players involved.

Finally, Dr. Alshaleel’s analysis also emphasizes that deeper coordination and collaboration between the parties in the trade finance ecosystem is crucial in helping digitalization reach critical mass.