Drewry’s Philippe Salles says the role of supply chain finance platforms will be instrumental in the digital transformation of shipping.
Supply chain finance provider Tradeshift in May closed a series E funding round of $250 million, bringing the company’s total valuation to $1.1 billion, a major milestone not only for its three Danish founders but for the entire supply chain industry.
Launched in 2010, the San Francisco-based firm operates a global network platform that connects buyers and suppliers. Tradeshift processes billions of dollars per month in supply chain transactions and provides capabilities to help millions of companies to buy, pay and manage supplier risk.
Given that, according to the World Trade Organization, 80 percent to 90 percent of global trade relies on some form of financing or credit insurance, the role of supply chain finance platforms will be instrumental in the digital transformation of shipping.
Tradeshift is an example of a successful business model, based on transparency and the ability to build upon its platform. It is also an example of a cloud-based collaborative platform’s ability to serve large financial and logistics players such as HSBC and DHL, as well as small enterprises, and confirms the rise of — and need for — trusted networks powered by technology.
The Tradeshift platform aims at creating trust and transparency, the same principles behind the IBM-Maersk Global Trade Digitization Joint Venture, as well as other shipping portal initiatives and continuous efforts from forwarder organizations like WCA, which have been expanding their online services.
Similar digital infrastructure programs exist in air freight, such as the International Air Transport Association’s One Record or Ericsson’s Global Logistics Data backbone initiative.
A Costly Practice. The ability to bring trust and certainty is what trade finance needs. And supply chain financing will serve to promote — as well as benefit from — these industry digital platforms. It may even accelerate the overall digitization process, with shippers reaping the benefits.
Current difficulties in trade financing provide development opportunities for digitally driven players addressing the small to medium-sized beneficial cargo owner (BCO) market. Indeed, SMEs are facing a variety of challenges.
First among these challenges is a lack of access to credit.
According to the WTO, small and medium-sized shippers account for around 20 percent of U.S. exports and 40 percent of exports from the European Union. And ICC Banking figures show that in 2016, around 44 percent of trade finance applications were submitted by SMEs.
However, this sector represented 58 percent of the total number of trade finance applications rejected, with larger gaps in Africa and parts of Asia.
Innovative digital strategies from stakeholders in the maritime value chain, whether carriers, forwarders or e-marketplaces, have the potential to turn these SME challenges into commercial opportunities.
The term “cash against documents” refers to an arrangement in which the shipping line requires payment of origin charges before releasing the bill of lading and payment of destination charges before releasing the cargo.
In its research, Drewry estimates that shipping lines have on average around 25 days of trade receivables days outstanding, while large forwarders have 50 days or more, but long credit periods are given primarily to large companies and not SMEs.
These CAD payment arrangements cause extensive manual verification of “hard copy” payment and shipping documents and are responsible for a substantial part of the estimated $30 billion in shipping invoicing and payment transaction cost inefficiencies on an annual basis.
Invoice quality also remains a burden for many shippers. Recent studies have found small shippers who play the spot market can experience invoice error rates of up to 30 percent.
This disproportionately affects small shippers, as larger shippers working on annual contracts have a much lower rate of errors with respect to incorrect invoices — between 2 percent and 5 percent.
The demand for trade finance has been boosted by the rapid growth of cross-border e-commerce and less-than-containerload (LCL) services,
and SME shippers are getting more access to finance via electronic services.
With cross-border e-commerce growing roughly 30 percent per year, logistics providers and e-marketplaces are expected to develop digital trade finance as a standard service in an effort to help satisfy surging demand. Their ability to monitor cargo movements and mitigate the risk of nonpayment between counterparties is an important value proposition for SMEs. For example, UPS Capital and cross-border payments platform Payoneer partnered last year to provide cross-border secure payments using escrow services.
Technology Convergence. Although digital innovation has not “disrupted” the shipping industry per se, the convergence and acceptance of new technologies can accelerate the implementation of electronic trade finance solutions.
The Internet of Things, for example, makes inventory and compliance control more efficient with the use of smart devices like those applied on connected containers.
Document digitization allows platforms to combine physical flows with documentary and financial flows. And near-real-time traceability of shipments provides financial institutions with the ability to better control their risk and, as a result, offer an easier path to financing services for shippers.
Such shipment control capability also supports the trend toward open account trading initiatives being developed by various financial institutions to enable the delivery of goods before payment is due and without the support of letters of credit. Indeed, according to an ICC Banking survey, although commercial letters of credit still represent 38 percent of the trade finance product mix, their prevalence is declining.
Much also has been written about the potential of the as-yet-unproven blockchain technology in shipping and international trade. According to Tradeshift, investment in the distributed ledger technology, which is being considered more for its trust and traceability capabilities than for access to cryptocurrency payment services, will support innovation leadership.
In its simplest form, blockchain technology turns every transaction into a digital asset recorded on a permanent ledger. In theory, blockchain could tackle the $9 trillion problem of global capital stuck in accounts receivable due to long and complex payment practices. A solution such as “Tradeshift Pay,” for instance, opens financing options to small companies, giving them access to electronic payments and financing anywhere in the world, without the need for traditional banks and lenders.
The shipping and global trade industry’s mind-set is changing. Players are now more open to technology than ever, and carriers have begun introducing service guarantees and other value-added differentiators in order to remain competitive. CMA CGM subsidiary line APL’s Eagle GO services, for example, offer a money-back guarantee on space at a premium price.
New technology entrants such as the New York Shipping Exchange (NYSHEX) and 300Cubits also have introduced platforms that provide advance booking guarantees with the participation of ocean carriers. The ability to guarantee space is easier for large carriers and forwarders operating with large networks and substantial capacity, and bankruptcies of large companies such as the now-defunct Hanjin Shipping remain exceptional, but this is less the case for small operators.
This is where financial institutions can bundle payment and service guarantees similar to what travelers get when using their credit cards to buy airline tickets. One interesting move to watch in this space is MasterCard’s recent decision to enter global shipping. Access to the shipping market via digital platforms and connections to large customer and provider networks will be a fundamental component for the credit card company.
Selling services to shippers that go beyond freight also is part of this shifting mind-set. New electronic financial services, as well as cargo insurance, will be distributed via digital marketplaces and large forwarder and carrier partner networks. These big players should be able to create more business transactions among their large number of customers and providers using their own “collaborative and trusted” platforms.
However, there are some constraints.
Trade financing can be a costly service if not automated and integrated within the “order-to-pay” cycle. It requires transparency and access to data, from cargo traceability to rate information, as well as a certain level of streamlining, standardization and security of data. Operating such integrated financial and digital shipping at a global level may be difficult, but it is certainly achievable on strategic trade lanes, especially those with growing cross-border e-commerce activity.
As a result of all this, financial services are likely to act as an accelerator in the digitization of shipping data and documentation. The rise of new digital buy-and-pay platforms linked to collaborative shipping execution platforms seems a logical evolution for which digital-oriented players, whether forwarders or carriers, could gain traction.
Going digital does not mean creating one application for each and every problem, but finding better ways to service core BCO needs on a holistic level. Digital trade finance solutions, therefore, should not be seen as a disruption but as a clear evolution toward easier buying, shipping and payment functions for shippers of all sizes.
Philippe Salles is head of e-business, transport and supply chains at Drewry Supply Chain Advisors. He can be contacted via email at salles@drewry.co.uk.
