Many may think the phrase “trade finance” is really just a euphemism for financial complexity. Yet the historically paper- and manually-intensive processes are giving way to modernization and digitization.
Pay close attention to the changes. What this steady transformation means for banks and other financial institutions–as well as to the buyers and sellers they serve-is the future of doing business in this particular financial sector. Or, to restate, when it comes to trade finance, not to digitalise will mean not to compete.
So let’s look at the key technology innovations now transforming trade finance and what these might mean for its practitioners in the near future.
Digitisation technologies can be considered in two broad categories: those which operate outside the bank and those which operate inside the bank.
Outside the bank
Business-to-business platforms that facilitate digital collaboration between the parties of a trade are increasingly providing the digital channels for banks to plug into the digital workflow. These include the incumbents like essDocs and Bolero; however, blockchain technology draws the lion’s share of today’s tech savvy financier attention. Blockchains string together blocks of encrypted data in distributed ledger networks. Banking systems participating in such networks can operate with greater speed, resilience and security because they do not rely on a single, centralised source for transaction validation and control.
While much of early blockchain focus has been on the payments space, the technology offers plenty of value added opportunity for banks to become automatically (or near-automatically) integrated into the trade finance-related interactions of buyers and sellers. Such opportunities include the streamlining of traditional, paper-intensive transactions, like the generation of letters of credit and the prevention of costly errors, like the duplication of export invoice financing.
“It does not take too much future vision to see how the shipment of goods from point A to B could trigger a corresponding and totally automated trade finance related transaction”
Blockchain technology and distributed ledgers have the potential to disrupt numerous aspects of trade finance, and the “smart money,” whether spent by banks or FinTechs, will be going with the flow, not trying to resist it. Three groups in particular, the R3 Consortium, Hyperledger and Ethereum, are extending the boundaries of blockchain applicability within the banking and finance sector. A trade finance specific application is expected to be piloted on the R3 Consortium’s Corda platform in 2018. Joining such groups as a member or leveraging the proof of concept and pilot project investments of a technology solution provider with extensive expertise in the trade finance domain can shorten adoption timeframes and sharpen competitive advantage.
The Internet of Things (IOT) is another “outside the bank” technology worthy of note. While IoT examples often involve the ability of one intelligent device to “talk” to another, less attention is paid to how messaging from such physical devices, such as those that might be found in a multi-vendor supply chain, might be integrated into internal process flows, like those required to set up the necessary supply chain financing within a bank. It does not take too much future vision to see how the shipment of goods from point A to B could trigger a corresponding and totally automated trade finance related transaction—or how the IoT stands to bring sweeping changes to this business landscape.
Inside the bank
Intelligent process automation (IPA) are poised to make the most sweeping changes to the business–and deliver the largest efficiency gains in trade finance practice. Just as blockchain technology is bringing new levels of interconnectivity and interoperability to banks and trading partners, IPA technology, including intelligent data capture, robotic process automation and machine learning, artificial intelligence and data analytics will deliver new levels of workflow and process control to the data entering the enterprise from these sources.
The workflows and processes that can be fully automated will be; for those that cannot be completely automated, artificial intelligence applications will help smart workers make even smarter decisions. Typical trade finance applications ripe for IPA transformation will involve data extraction for compliance and document examination.
“For banks willing to rise to the occasion, digital transformation of the trade finance field offers bold new opportunities to make themselves invaluable to customers”
Predictive analytics are an equally powerful set of “inside the bank” capabilities with the potential to transform trade finance relationships. These tools will, for instance, help banks spot emerging trends in trade practice and identify small performance problems before they become big problems. As institutions gain the insights from data analytics needed to anticipate, predict and forecast events, they also will be able to provide their clients with the type of informed recommendations and tailored services that build trusted partnerships over the long term.
Blockchain, IPA and related technologies place trade finance at a significant crossroads. In the digital world, no yesteryear tradition can be counted on to trump current day performance, and the strength or resilience of even long-standing relationships in business or finance cannot be taken for granted. As history has proven to late movers and slow adopters in areas like credit card lending or payments processing, disintermediation is an all too real possibility.
Yet change never arrives empty-handed. “Trade finance” as currently practiced may be a euphemism for financial complexity, but for banks willing to rise to the occasion, digital transformation of the trade finance field offers bold new opportunities to make themselves invaluable to customers.