Cash & Liquidity ManagementTrade FinanceThe data imperative for trade finance

The data imperative for trade finance

How can financial institutions retain their relevance to corporate clients, protecting their existing revenue streams while capitalizing on the opportunity that the SME financing gap and the shift to open account financing provides?

We know that growth in trade correlates with growth in GDP, which subsequently helps bring people out of poverty and improves financial inclusion. Demand for international trade from SMEs is evident in emerging economies where an explosion of growth is taking place. India’s GDP has grown by nearly 7%, and GDP has risen to above 4% in 30 countries across Africa. This is despite the fact that 190 million people in India and 66% of the Sub-Saharan African population do not have a bank account.

However, trade is changing, sounding a wake-up call for the global business community. The on-going rhetoric of tariffs and trade wars, the ambiguous role played by China through the Belt and Road Initiative, and the reduced influence of the World Trade Organization, mean that the balance of power is shifting both in terms of countries and governing bodies.

New compliance demands, rising capital costs and a demand for sustainability mean the cost of doing business is becoming more expensive. The impact of this is that banks will price a portion of the market out of traditional trade finance as they focus on transactions and clients they deem less risky to protect their trade finance revenues. An inability to apply KYC to all transaction parties, and a lack of correspondent banking networks and liquidity, are having a profound impact on trade finance for SMEs in developing Africa and Asia, which account for $820bn of the $1.6trn financing gap that exists worldwide. This will result in an acceleration of the market shift to open account and supply chain financing.

Adapting to change

The needs of businesses are also changing: while globally there may be a reported trade finance gap, transaction processing and the provision of suitable finance are only one aspect of the support that businesses need. Businesses increasingly need help with regulations, tariffs, and access to markets, supply chains, and people.

These factors mean that the growth in trade is under threat; this was the fourth successive year of declining trade finance revenues that will have an impact on the sustainability of trade as a driver of GDP growth in 2019.

There is also a broader strategic challenge, as the way in which trade finance is being provided is changing. The services that a bank provides in this space – and data and document management, risk mitigation, financing and liquidity, and secure cross border payments ­– are becoming increasingly commoditized or available outside of traditional financial institutions.

The services that a bank provides in this space  are becoming increasingly commoditized or available outside of traditional financial institutions

Banks are under threat, but it is not from the start-ups and fintechs. The latter group has realized that they need to collaborate with the banks, which have the trust, networks and balance to help smaller companies grow. Banks require the agile and innovative capabilities of the start-ups, to move at speed. It is the big tech and platform companies – Google, Amazon, Facebook, Apple, Microsoft, IBM and Alibaba (the GAFAMIAs) – that provide the biggest threat. Agile, with imposing balance sheets and burgeoning liquidity, the GAFAMIAs have built brands on trust and data security while offering a compelling user experience.

The GAFAMIAs now offer trade finance products, as do shipping, freight and logistics companies. Amazon has already lent over $3bn to SMEs. Tencent recently launched a supply chain finance platform supported by their We.Chat payments system, which already handles the highest volume of payments in China and has over 900 million monthly active users. Because the GAFAMIAs are not regulated in the same way as banks and have sophisticated digital technologies at their behest, the challenge for banks is how to remain relevant.

So how can financial institutions retain their relevance to corporate clients, protecting their existing revenue streams while capitalizing on the opportunity that the $1.6trn SME financing gap and the shift to open account financing provides? The answer lies in data.

To date, banks’ efforts to retain relevance to their corporate clients have largely focused on delivering improved user experiences through automation and digitalization. We have seen the re-emergence of technologies such as robotic process automation (RPA) and artificial intelligence (AI) deliver significant efficiencies and savings in existing processes, while emerging technologies such as distributed ledger are driving new business models, which threaten to change the traditional trade finance paradigm for good. The increased use of cloud computing, the availability of open APIs, and the rise of the platform economy means banks can innovate rapidly and offer new products faster to their end users.

Delivering added value

Without a data strategy to underpin the use of other technologies, banks are not taking full advantage of the tools available to them. Banks have significant expertise in trade finance that they need to utilize and monetize to allow them to better serve corporate clients. Banks need to become more than just transaction processing engines for their clients; they need to be trusted partners and advisors as well.

Financial institutions hold a significant amount of data about their clients, but much of it is unstructured, held in physical documents or fragmented legacy systems. Banks also tend to focus on the data that resides in their own systems to drive their growth strategies and those of their clients. They can only play the role of “trusted advisor” if they augment their own data with non-bank contextual data, such as economic and market research and risk analyses. This allows them to gain the insights they need to offer relevant products and timely advice as they help clients navigate the changing geopolitical environment, while applying tools for automation and digitalization to differentiate client service. To truly capitalize on the available technologies to keep themselves relevant, big trade data must be delivered as part of an ecosystem of value-adding services.

Banks need to become more than just transaction processing engines for their clients; they need to be trusted partners and advisors as well

The benefits to this approach are clear. Banks can achieve greater efficiencies and reduced costs with robotics and machine learning, where better data analysis through natural language processing (NLP) improves market and client information and eliminates KYC and AML risks. More granular data at a sector-level enables potential anomalies in a commercial proposition to be checked against contextual data and flagged accordingly. Dual goods data, commodity prices and vessel-tracking information can be compared automatically to transaction details to increase sanctions coverage. Automation of market intelligence supports decision making and opportunity identification, allowing banks to cross-sell services more effectively and capture a greater share of client business. Finally, by tracking wider market trends, banks can validate their current business and inform their own strategy.

In summary, banks need to augment, contextualize and interconnect data to advise businesses, applying automation and digitalization to deliver a differentiated client experience. A holistic view of trade data enables a financial institution to assess counterparty, operational and political risk, and be better partners to their clients while also informing their own trade finance strategy. Ultimately, no amount of process automation or distributed ledger technology is going to make up for the oversight, trust and experience that banks possess. But unless a bank looks at data sources from outside its own walls, it will be approaching the task of providing insights to clients with one eye closed.

About the author

Mike Walker is head of sales enablement, Corporate Banking and Payments, at Finastra. He is responsible for the go-to-market strategy and content across Cash Management, Trade and Supply Chain Finance, Complex Lending and Payments. Working with the Sales and Product Management organizations, Mike is accountable for defining target markets and ensuring roadmaps accurately reflect the needs of the customer. He is the Finastra Lead for the DigiTrade working group with the World Trade Board. Mike holds a Master’s degree in Systems Engineering from Loughborough University, and spent five years at Barclays in various roles across corporate banking prior to joining Finastra in 2016.

 

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