Perspectives 2019 2020 Public Sector

Citi Perspectives 69 At the same time, international trade remains in many cases a laborious, paper-based process. Heightened regulation as well as changes in global sanctions policies have increased the compliance burden on trade banks significantly. Citi processes 9 million trade transactions annually and has implemented optical character recognition to digitize 25 million trade- related pages of data, which traditionally have been manually inputted. While this may represent a small incremental speed increase for any single transaction, over the whole trade portfolio it represents a massive reduction in time, effort and manual processing errors. In the medium term, the largest trade banks are exploring options to remove paper entirely and create digital equivalents, which will solve the underlying problem. Disruptors such as komgo, Voltron, Marco Polo and we.trade have developed blockchain-based solutions, which harness the transparency and real- time transactional capability of distributed ledger technology to digitize trade flows. However, each of them suffers to a greater or lesser extent from the consensus problem. To truly digitize a trade flow, every party — buyers, sellers, banks, logistics partners, insurers, customs authorities and others — must also be digitized. It therefore seems likely that no single solution will become the new global trade infrastructure alone; instead, many different systems will interoperate with each other to create a new global trade ecosystem. Increasing digitization begs a further question; how to manage the data that results. Shifting immeasurable amounts of information from paper to digital will generate new possibilities for leveraging data to predict macro trends, identify new business opportunities, and drive additional efficiencies. Citi is already taking advantage of these opportunities. The bank’s Nextgen project in partnership with EY and SAS leverages artificial intelligence to develop an advanced risk analytics scoring engine to review large volumes of trade transactions for regulatory compliance while minimizing friction and delays. Sustainability and ESG in trade finance Sustainability and environmental, social and governance (ESG) concerns have reached a tipping point in recent years as the green bond and green loan markets have multiplied in size. Investors are increasingly demanding progress on ESG topics while consumer pressure is growing on B2C companies to engage in sustainable business practices. For now, investment decisions are largely being made on a ‘blacklist’ basis, i.e. avoiding certain sectors or companies. However, it is easy to imagine a future where a ‘whitelist’ of companies which meet certain ESG criteria are prioritized by funders, creating a subset of companies that will struggle for investment and funding. One of the major challenges relating to sustainability is the imprecision of ‘ESG’ and ‘green’ terminology. There are many governmental bodies and non-governmental organizations working to improve definitions relating to green financing. However, so far, these have been primarily applied to equities and the traditional bond and loan markets. Trade finance has yet to define its own green guidelines. While it seems likely that they will resemble the green loan guidelines published by the Loan Market Association there are complexities. A basic tenet of green lending is that funds should be used for green purposes. But how can this be applied to a guarantee facility, where the purpose of the instrument is that no funds should be paid out unless something has gone wrong? In addition, if a buyer has committed to purchasing only environmentally-friendly raw materials, can its supply chain finance program be designed to incentivize suppliers to comply? Will this financing be considered sustainable? More than 60% of Switzerland’s foreign trade in goods is within the EU, despite Switzerland being one of the last countries in Central and Western Europe to have a customs border. Consequently, efficient customs processes, which allow for swift and easy border crossing, are extremely important for companies involved in Swiss international trade. Citi provided financing via pre-funded letters of credits to implement the purchase and installation of digital learning devices in Kenya’s public primary schools to support the Kenya Government’s flagship DigiSchool project.