Regulation & ComplianceSibos 2017 preview: Digitising trade finance – an imperative, no longer an option

Sibos 2017 preview: Digitising trade finance – an imperative, no longer an option

In a world where connectivity is on the rise and transportation costs have been falling, it’s a paradox that over the last decade there’s been a decline in trade as a share of economic activity. At the same time, there has been a significant slowdown in technology investment across the trade finance industry – the only exception being the technology needed to support regulatory compliance and risk management.

In a world where connectivity is on the rise and transportation costs have been falling, it’s a paradox that over the last decade there’s been a decline in trade as a share of economic activity. At the same time, there has been a significant slowdown in technology investment across the trade finance industry – the only exception being the technology needed to support regulatory compliance and risk management.

Against such a backdrop, it’s exciting to reflect on the findings of the recent ICC Global Survey on Trade Finance and Supply Chain Finance and examine how the emphasis is now shifting to the positive potential of digital technologies. And there’s a growing recognition of the role digital can play in providing a strong platform for trade to re-establish its pre-eminent role in the global economy.

Growing support for digitisation

When asked about the most important areas of development and strategic focus for the trade finance industry over the next 12 months – close to 44% of respondents to the ICC survey identified technology as a key driver, with priorities linked to digitisation and fintech or platform development. The development of supply chain finance products also ranked highly. Together the results reflect an understanding by trade finance and SCF professionals, that trade must move to a digitised model.

Although trade finance is not straightforward to digitise given the number of participants and volume of documentation involved, the opportunity to achieve cost and efficiency savings is huge. Digitisation is also vital in the face of ever more complex corporate value chains. And it’s essential in bridging the fragmented technology landscape that persists across trade, supply chain finance and trade lending.

But digitisation is not about just adding a new layer on top of existing technology – it’s about rethinking and transforming processes and ways of working across the entire trade finance ecosystem. This article explores some key areas banks need to address when embarking on digitisation and the benefits to be gained.

Eradicating the paper trail

Trade finance remains heavily paper-based. But there’s now widespread recognition of the business benefits and cost efficiencies associated with digital documents and eventually the removal of paper processing altogether.

Our own research and work with banks to quantify the benefits of digitisation and the integration of paperless trade into the bank’s back office processing shows the potential for significant savings. Conservative estimates at one bank demonstrated that digitising trade finance processes had the potential to deliver cost savings of up to $50m USD per year. Other banks have estimated that they could save up to two hours on each transaction by not handling paper, with further savings achieved through automated compliance checks.

Removing the pain points associated with paper will significantly reduce the most common risks of delays and discrepancies as well as supporting the increased availability of structured data for business intelligence purposes.

Big data and predictive analytics

Data is the lifeblood of the new digital world. As banking in general becomes more commoditised, the mining of big data represents a huge opportunity for banks to stand out from the competition. It gives them the potential to better understand operational, market, industry and customer risks, opening up new opportunities for growth and enabling more efficient use of regulatory capital.

The evolving art of predictive analytics can also help banks better manage their relationships, revenues and risks. This includes giving customers greater access to data, allowing corporates to interface to their own ERP systems and run predictive data analytics to better manage their working capital needs.

AI and cognitive computing

The adoption of next generation technologies such as artificial intelligence and cognitive computing, provides opportunities to enhance both the efficiency and productivity of performing operationally-intensive tasks, such as document processing and compliance checking.

Machine learning and natural language processing techniques enable the automation of a complex web of cognitive processes associated with due diligence. The technology will eventually benefit multiple aspects of international trade, including the more efficient management of supply chains, contracts and regulatory compliance. This is crucial in opening up new opportunities for easier access to finance.

Blockchain and smart contracts

The potential of distributed ledger technology (DLT), or blockchain, cannot be ignored. While the full business benefits are yet to be validated, the technology has attracted widespread interest, resulting in a surge of proof of concept use cases.

Smart contracts are one of the most compelling use cases. These can contain pre-written logic that can be stored or replicated on a distributed ledger platform and executed by a network of computers connected to the blockchain. As well as reducing operational risk by automating workflows, smart contracts can be used, for example, to automatically upload purchase orders for financing and to translate data and prepare electronic documents for paperless trade.

Another area attracting interest is the evolution of track and trace devices that allow the location and condition of smart objects to be monitored while the goods are in transit. There’s even the potential to extend this back into the supply chain to guarantee the provenance of goods at source in support of sustainable trade.

Open architecture, rules and standards

The ability to industrialise blockchain solutions and bring them to market might remain constrained for some time by the continuing absence of a common set of rules and standards. In fact, the whole trade finance industry is still lacking a degree of certainty with regards to standards. This remains a barrier to interoperability and a constraint on connectivity.

Collaboration is key to overcoming the obstacles. To firmly place themselves at the centre of the trade ecosystem supporting corporate clients, banks must put in place an open ‘plug and play’ architecture that supports collaboration with technology platforms, system integrators, government agencies and other third-party service providers. Adopting an open architecture is crucial in allowing banks to engage with the digital world. API-based open banking creates huge flexibility in the ways in which customers can interact with their financial services providers. This is a transformational change enabling more efficient integration and better use of infrastructure.

So, what does the future look like?

A truly digital bank will support paperless processing and communication to and from its customers. It will use external services to establish the title of digital documents – from electronic bills of lading to digital certificates of origin, invoices and insurance certificates. It will be equipped to receive and act on data pinpointing the location and condition of goods in transit. And it will be able to turn data into intelligence surrounding operational, market, industry and customer risks, ensuring better use of the bank’s capital.

Digitisation will open up new market opportunities for the bank – not just with large corporates but also with SMEs since banks will be equipped to understand and manage risks much more effectively at all levels.

As we approach the next decade of digitisation, intelligent trade will not only rely on a combination of smart contracts and smart objects, artificial intelligence and business intelligence but also significantly draw upon the combined power of open architecture, big data and cognitive computing.

Most importantly, digitisation is essential in promoting the vision of an inclusive, prosperous and beneficial trade ecosystem, in advancing standards, governance and connectivity globally, and in securing long-term sustainable trade for the good of all.

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