Banks have been unable to digitalize trade finance processes in a big way until now. Emerging global trends could turn this around shortly.
Trade finance processes are complex and still heavily rely on paper. Banks and technology firms have tried for a couple of decades to digitalize trade finance processes, with no major innovations so far. Increased pressure from emerging global trends and the evolution of technology are re-shaping the business. Is the next step of the industry underway?
Evolving transaction banking landscape
In recent years, transaction banking has been fundamentally changed. Not only has it proven to be a stable source of income for corporate banks even in times of crisis, the rapid pace of technological development has also led to massive improvements in customer satisfaction, automation and cost efficiency. There is, however, the niche of trade finance, where manual, paper-based processes are still the rule. While this may be due to customer reach being significantly less scalable than with payments or cash management businesses, there are other factors affecting the development of trade finance products and services.
Macro-economic developments
Corporate demand for trade finance instruments, whether guarantees and letters of credit to loans insured by export credit agencies (ECAs) or supply chain financing solutions based on receivables and payables, is dependent on demand for goods and services in major growth economies. Looming trade wars and infrastructure projects such as China's Belt and Road Initiative or the Trans Adriatic Pipeline (TAP), are shifting trade corridors. With limited growth potential in their home markets, exporters are required to enter ever newer and riskier markets. More and more small and medium-sized enterprises (SME) start to develop growing demand of liquidity and security solutions covering the associated higher risks of such ventures. At the same time, these companies are not willing or unable to pay the high commissions for current trade finance products imposed by banks. Unless banks are able to serve such clients by offering faster and cheaper services to their customers, these SMEs are being forced to perform trade on open account basis or look for alternative solution providers elsewhere.
Increased competition
The changing landscape of trade finance leads to more competition, but not just between banks with a large international presence. In recent years, several non-bank lenders have gained significant market share due to their digital footprint and customer-centric services. More players in this niche market means more competition for talent. It is becoming increasingly difficult for banks to hire younger employees who have the relevant expertise and are willing to carry out the strenuous document checks, complex guarantee texting and paper-intensive processing done by those leaving the workforce. Some banks have started the rationalization of the banking workforce in near- and offshoring centers. While more standardized processes can easily be outsourced to other countries, more complex and customer-oriented functions must be maintained in the client locations. This makes it more difficult to keep the value chain efficient.
Tightening regulation
Constantly changing regulation is a big issue for trade finance. While banks struggle with increasingly complex sanction regimes, they must also contend with new customer bases and market channels as well as additional legal and commercial frameworks (e.g. updated SWIFT messaging standards for the development of the ICC Uniform Rules for Digital Trade). This challenge can only be met in an economically viable manner if basic transaction-related due diligence processes such as AML, sanction screening and fraud detection can be fully automated.
Meeting the challenges
These challenges can mostly be encountered by the targeted adoption of newly available technology We would like to outline areas where banks can increase their digital game and improve their products and services.
Processing and workflow management
Even smaller banks are moving from basic MS Office-based solutions to standardized platforms. This supports them in the processing of various trade finance product offerings end-to-end. Ultimately, the technical infrastructure will shift from monolithic inhouse solutions to modular software as a service (SaaS) leading to lower long-term IT cost. Digital solutions also facilitate workflow management (e.g. local vs. regional processing or outsourcing vs. shoring) as well as collaboration between trade finance functions within the bank (client advisors, sales, transaction managers, FI desks, compliance and credit functions). Given such a high degree of cross functional and international collaboration, as in Trade Finance, tool-based workflow management can lead to efficiency gains, transparency and increased risk management.
Digital transaction life cycle and data analytics
Trade finance providers are considering how they can combine a digital transformation with data analytics to reap the full benefits of data driven business insights. Physical documentation, multiple systems, Excel sheets, financial filings or e-mail exchanges are all part of the untapped unstructured data pools. Compliance has also been a strong driver for machine learning and big data analytics. In areas like sanction screening, new analytics tools provide fast and reliable information. This speeds up the overall process durations. Where full data integration cannot be achieved (e.g., as physical documentation is required) robots can facilitate the processing times by automating manual steps. Robotic process automation (RPA) refers to tools that support the automation of routine and time-consuming tasks to free up workers for more valuable tasks. Examples of RPA are advanced document imaging, recognition and processing.
Digital channels for corporate clients
Amid wide-spread adoption of connectivity solutions for payments and cash management, corporate clients expect online access with a high degree of immediacy from their bank also for trade finance services. They expect this service to be integrated seamlessly across diverse banking channels. Multi-banking and digital signatures are examples of means that support lean digital processing and an enhanced client experience.
Trade ecosystems/open banking
The demand for digital channels is not limited to the interaction between corporate clients and their banks. With growing availability of open banking networks (e.g. The EU’s PSD2 directive for payments), one can expect that application programming interfaces (APIs) will play an important role in trade finance as well. Specifically, APIs could enhance such tasks as document checking, tracking the origin of goods, accessing secondary markets and assuring the interoperability of e-commerce ecosystems.
Distributed ledger technology
Such open banking infrastructure allows corporate banks to engage with blockchain based networks such as we.trade, MarcoPolo, Voltron or Komgo. These bank-led consortia tackle a key challenge for trade finance digitalization, namely the end-to-end process. Blockchain platforms provide participants a digital and traceable process that not only includes traders and banks, but other players along the value chain such as customs agencies, carriers and inspection services. To tap the full potential of blockchain, an agreement on network standards and rules remains necessary. The multitude of companies competing for a first-mover advantage not only promises greater security in international trade at a lower cost, but also could lead to unprecedented cooperation among banks.
Which step to take next?
The developments discussed here pose risks and opportunities to your bank’s business model, products and services. If your bank decides to tackle the digitalization of trade finance processes, our experts look forward to talking to you help you navigate this interesting but challenging environment.
