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What role for fintech in international trade? Chris Southworth and Nick Davies interview

Chris Southworth (left) and Nick Davies | Images of the English port of Dover and international trade via Pixabay (Danny_Hawkwood; postcardtrip & Alexander Kliem) [Global Government Fintech montage]

The Centre for Digital Trade & Innovation is a UK government-backed initiative launched earlier this year to accelerate the digitalisation of trade. Global Government Fintech editor Ian Hall asks where fintech fits in

It has been a tough couple of years for global trade: geo-political tensions and trade wars; supply-chain difficulties in China and, more recently, related to the Ukraine conflict; Covid-19’s impact on logistics companies, for example, airline freight; the Suez Canal blockage; the list could go on.

In the UK context, evidence suggests that the country’s exit from the European Union (EU) has reduced both import and export ‘intensity’ (the UK’s Office for Budget Responsibility reported last year) and created plenty of more ‘local’ challenges: delays through major ports such as Dover; an apparent need for UK businesses to construct new warehouses inside EU territory; Northern Ireland’s post-Brexit trade arrangements; this list could also go on.

As the vicissitudes of politics and pandemics play out, the UK government is pushing forward on multiple fronts to accelerate the digitalisation and standardisation of trade systems.

One such initiative is its support for the Centre for Digital Trade and Innovation (C4DTI), which launched in April to help make trade ‘cheaper, faster, simpler, more secure and sustainable’.

With its operations co-ordinated by the UK branch of the International Chamber of Commerce, supported by central government departments including HM Revenue & Customs (HMRC), the Tees Valley Combined Authority and mayor (in north-east England), as well as industry, the new centre is to provide a focal point for initiatives and expertise (a boxout at the end of this article explains more about the centre).

Global Government Fintech spoke to the ICC UK’s secretary-general Chris Southworth and Nick Davies, who has been seconded from his day-job as HMRC’s technology lead to run the centre day-to-day, about the role that fintech can play.

‘Smart solutions to archaic systems’

The C4DTI’s specific aim is to tackle ‘fragmented, unconnected systems and billions of paper documents that result in an overly complex system and high trade costs’. Digitalisation has the potential – according to the centre’s launch press release – to cut trade costs by 80 per cent and generate £25bn (about $30bn) of growth for small- and medium-sized enterprises (SMEs) and an additional £1bn in SME trade finance in the UK.

Fintech is an important part of the picture – but is inevitably far from the only ‘tech’ that Southworth, Davies and colleagues are excited by.

“We’re finding smart solutions to pretty archaic systems across the whole trade ecosystem,” explains Southworth, setting out the C4DTI’s agenda. “It’s difficult to break things down as FinTech, RegTech, InsurTech and so on – it’s about finding smart ways using technology to solve the problems in front of us. But banking and finance is obviously a big part of that, with an awful lot of manual paper activity and many actors operating on processes and systems that don’t connect to each other.”

Davies adds ‘LawTech’ and ‘SmartTech’ to the mix, too. “What we’re doing at the C4DTI is combining those things,” he says, picking up Southworth’s thread. “The UK has got a brilliant fintech industry, as has been set out by the Kalifa Review and any number of Treasury reports. We’ve got a brilliant LawTech community, as evidenced by last year’s report from the Law Commission on smart contracts. And then we’ve got lots of SmartTech going on, in the trading context: ‘digital fences’, autonomous cranes, automated piloting capabilities, IoT [Internet of Things] devices. The magic is combining those together.”

‘Technology is not the barrier’

The ambitions are high. But it’s tricky to reconcile many of these tech-enabled possibilities with the on-the-ground gridlock we all hear so much about at, for example, ports and airports. What message would the C4DTI send out to, for example, companies employing a lorry driver who is stuck in tailbacks approaching a British port (whether apparently caused by Brexit or some other reason)?

“If we can enable all the decisions by all the actors in the driver’s supply chain to be made way before he actually hits the [loading] ramp in the port, by the time he gets to the port, we know exactly who he is; exactly what’s in his truck; exactly where it’s come from; that tariffs and import duty have been paid – and we can wave him in,” responds Davies.

“All of that is pretty much technically possible,” he continues. “The bit that stands in our way is that we’ve been doing things one way for three or four hundred years and people want a grubby bit of paper to say ‘this is what I’ve got in my truck’, then they do the ticking off and so on. There is digital capacity to [do] all that and – and this is the real magic – to combine the data, the money and the physical assurance, all in the same digital environment. That’s where you get the real transformation.”

“On an average trainload of goods crossing the continent there are 27 kilos of paper documents with all the bills of lading [cargo list] and all the other documents,” says Southworth.

“We have to accept borders,” he adds, in the context of Brexit. “But what we definitely can do is make that environment frictionless, so it’s a click of a button. Nick is right – the technology is there – technology is not the barrier.”

‘This is a shared problem’

Chris Southworth

Dispensing with paper in favour of digital solutions involves all sorts of challenges ranging from legal to the cultural.

Southworth and Davies highlight (in the UK context) the “game-changing” Electronic Trade Documents Bill, which was placed on the legislative agenda for coming year ahead in the Queen’s Speech in May. Similarly, the ‘roadmap to reform for electronic transferable records’ published during the UK’s presidency of the G7 (Group of 7 nations) last year was also important.

The C4DTI’s launch press release mentions ‘modern digital trade corridors being forged by [the UK] government such as with Australia, EU, Kenya, New Zealand and Singapore’. Given the proximity of the EU to Britain, let alone the importance of the UK’s trading relationships with its 27 member states, what’s the latest here?

“Obviously, the [EU’s] customs union and single market is the most sophisticated regional market – there’s no question about that,” says Southworth. “There’s been enormous investment in cross-border infrastructure on customs and trade facilitation. But the killer statistic right now that illustrates the point (and this is a European Commission statistic by the way) is that even today, despite all that investment, fewer than one per cent of documents are handled in digital form in the EU. So, this is this is a shared problem. It’s a problem we can work together on, and it’s a solution where we all win.”

How does Northern Ireland fit in? “We can’t solve the fact there’s a sea border, but we can solve some of the burden and red-tape by digitalising and interoperating the systems between the UK and Europe – and actually that could, I would argue, be a terrific model for the rest of the world,” says Southworth. “If we can solve it across that border interface, we can solve it anywhere else in the world. That’s the opportunity.”

‘The key is that platforms interoperate’

Encouraging interoperability between countries’ trading systems is among the C4DTI’s priorities.

“I always use the example of Apple and Microsoft,” explains Southworth. “Before they came up with an agreement to let documents and information flow between those systems, it was a nightmare. We all had to choose one or the other – VHS and Betamax is another good example. That’s basically how trade works. We can interoperate, we can allow information to flow, we can digitise the whole environment – that’s perfectly possible.

So, what would an ideal end-state look like? “The way forward is a sort of decentralised, interoperable system, where every government, every jurisdiction can choose the solution that works for them – the key is that platforms interoperate,” explains Southworth. “At present there are lots of platforms, lots of initiatives, but none of them interoperate. And that’s the problem. And that makes trade very expensive, very complex and very bureaucratic.”

He highlights the ‘Standards Toolkit for Cross-Border Paperless Trade’ published in March by the World Trade Organisation (WTO) and ICC to steer government agencies and companies. “It’s the first time that all the international standards bodies have sat down and agreed what standards should we adopt in what parts of the ecosystem, and that’s an absolute game-changer,” says Southworth. The focus now turns to driving take-up.

UK-Singapore DEA is ‘global gold standard’

Nick Davies

Singapore is pinpointed by Southworth and Davies as ahead of the pack when it comes to – in the former’s words – “driving digitalisation across the whole trade ecosystem”.

A UK-Singapore Digital Economy Agreement (DEA) covering digitised trade in services and goods was agreed earlier this year and the duo are excited by the ambition of making UK-Singapore the world’s first ‘truly digital’ trade corridor.

“There are still some issues to iron out but Singapore has basically got a platform-based system under development,” explains Davies. “Their legal system is very similar to ours; their position in the Pacific is very similar to ours in the Atlantic; they are a finance and trading hub; English law is pretty much the foundation of their jurisprudence system; and they are more than willing to work with us [the UK].”

The UK-Singapore progress is something that other governments should be looking to emulate, Southworth believes.

“The UK-Singapore DEA is the global gold standard for digital trade corridors,” he explains. “So, credit to the two governments, they have put in place a really modern framework that is giving industry everything that we’ve asked for.”

“In the context of digitalisation worldwide, there’s a lot of activity in the East. But none of those solutions have yet scaled into the West,” he continues. “This synergy between UK-Singapore, we think from an international perspective might just ‘unlock’ the Western economies. It might just create the model that will allow us then to replicate that in other trade corridors worldwide. If you can do it east-west, then you can pretty much do it in every other geography.”

‘Fintech is vital for trade finance’

So, how does fintech fit in? Southworth answers by first setting out the existence of a $1.7 trillion (about £1.4 trillion) global trade finance gap and £2 billion (about $2.4 billion) UK trade finance gap.

“The trade finance system is absolutely vital,” he says. “We’ve got to solve the digital challenges in the finance system to bring these worlds together, so it’s things such as atomic settlement [whereby the transfer of one asset occurs only if the transfer of the other asset occurs] on borders – that sort of radical step. That is within reach, it’s not far away from us.”

He describes fintech’s rise to prominence as ‘extraordinary’. “It wasn’t that long ago that the whole of the trade finance system was run by banks – that’s light years away from where we are now,” he says. “More than 30 per cent of trade finance is now delivered via fintechs, and that curve is going upwards at a terrific rate. So, the fintech community is absolutely vital for trade finance, particularly for SMEs when banks find it difficult to interface and make things simple. The fintech community is doing exactly that. Simple platforms and simple access to finance.”

Mention of atomic settlement triggers discussion of blockchain, which Davies describes as “just one tool in the box”. But blockchain is, he says, “very handy for managing” international trade and “establishing trust” in such an environment, where there are “different actors and different systems trying to interact”.

He revisits the point about fintech being part of a significantly larger tech-enabled trade digitalisation jigsaw. “In my view, if we can get the money going around at the same time as the data, and as the physical transaction is tracked through other technology (GPS, IoT and the like), you get the unification of physical, financial and data flows in the same digital environment. So when the goods come over the border, when the contract is settled, the money just goes ‘whoosh…’.”

Southworth makes a similar observation. “Just yesterday, Nick and I were being shown a simple digital solution to a transfer of money. Within one minute that money is just going straight into the banks. It’s ‘click, click, click, done’ – it’s that quick,” he says.

“The point is, it’s all happening in one place,” Southworth continues. “During Covid we saw that goods were leaving ports but documents are all on aeroplanes, which were grounded. So, goods were arriving but documents were all stuck at airports. That was a real problem – that payments and transactions couldn’t take place while there were delays. By going digital, it can all happen seamlessly at the same time through the use of smart technology – and fintech [solutions] are absolutely crucial to that.”

‘Technology neutrality at the heart’

Discussion moves on to the question about how ‘making trade digital’ can (in a fintech context) bring broader benefits to business and also government. 

“We can build up picture of an individual transactor’s compliant behaviour so that when a bank asks whether they should lend, the answer could be ‘yes, we’ve got a record of their compliant behaviour that casts their application for finance into a different light’,” explains Davies. “The whole point of a blockchain-based supply web, rather than supply chain, is that people gather around a single – very assured – piece of data and then they can make much better decisions about their bit of that transaction. It’s taking risk out of the system.”

“One further point here is that government is as much a part of that ecosystem as the commercial world,” he adds. “If we can generate for government the data and assurance that it needs to make its decisions on behalf of the state, then you’ve got a double benefit.”

He goes on to make an important point in terms of the C4DTI’s thinking when it comes to technology itself. “Technological neutrality is at the heart of it – we don’t care whether it’s blockchain, company X or company Y. It’s about saying ‘this is the architecture that will get you what you need…’, and it’s then up to the market to decide whether one solution is better than another. We’re not promoting one technology or indeed one proprietary solution against another, it’s open and collaborative,” he says.

‘We’ll see where the journey takes us’

The C4DTI is supported by Deloitte (as ‘delivery partner’) and Plexal (as ‘ecosystem partner’). The two companies have drafted what Southworth refers to as a ‘playbook’ of rules and running pilots related to digital trade. The playbook will be tested in pilots with Singapore due to take place this year.

“The idea is that it becomes a playbook that everybody can use in every country,” he says, adding that it should prove helpful because pilots typically involve “very complex systems in government and in the private sector”.

In terms of Singapore specifically, the aim is to test the movement of electronic bills of lading across the UK-Singapore supply-chain, as well as platform interoperability. Assuming the pilots’ success (“that we’ve proved the concept and we’ve proved that, importantly for SMEs, we can bring down their trade costs”), Southworth hopes for “going fully digital on day one as soon as the Electronic Trade Documents Bill comes into force”, with activity subsequently focused on “allowing the market to optimise this incredible agreement” (the DEA).

And then? “Obviously we’re not going to transform trade [globally] until we get the big high value, high volume trade corridors digitalised,” says Southworth. “Once we’ve got it working in Singapore, the idea is we then start to replicate it across all the other corridors and with that, bring in more companies – this is really important. We’re not just doing this for fun, we’re doing this to bring down trade costs, make life simpler, but most importantly allow more companies to trade at less costs, less red tape and bureaucracy – that’s the end game.”

The challenge ahead is sizeable, even stripping geo-politics from the equation. “We don’t know all the answers,” Davies reflects. “The conclusion we reached was that ‘we need to do something’ and we’ll see where the journey takes us. There’s quite a lot of constructive uncertainty about what we’re doing, and we will just learn as we go along. But we don’t think that anybody else is doing quite what we are trying to do.”


CENTRE FOR DIGITAL TRADE & INNOVATION

  • Operates a ‘hub and spoke’ model with Teesside University as ‘hub’ and the ICC as the London ‘spoke’ (covering central government and City of London); further spokes in ports and ‘innovation clusters’ are to be developed
  • Initial core team of two ICC employees plus Nick Davies (seconded from HMRC as director); the team will ‘scale up as necessary’

Core functions

  1. Identify and remove barriers to digitalising commercial trade documents, e-payments, e-invoices, legal entity identification and digital assets
  2. Run end-to-end pilots to test systems, identify and remove pain points and share learnings, such as through Free Trade Agreement corridors and across border systems
  3. Have the capability to drive adoption of standards and technology solutions at scale across the UK and internationally with a wide, inclusive supporter network of sector associations and business organisations

UK government partners include: HMRC, Department for International Trade (DIT) & Department for Digital, Culture, Media and Sport (DCMS)

Further partners: Deloitte (delivery partner); Plexal (ecosystem partner); ICC Digital Standards Initiative (global knowledge partner); British Chambers of Commerce (network partner); & Institute of Export & International Trade (training partner)

Source: C4DTI

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Ian is editor of Global Government Fintech and also writes for media including City AM and #DisruptionBanking. He is former UK director for the pan-European media network Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in Bulgaria at English-language weekly the Sofia Echo.