Skip to main content

The next generation of trade finance

(Image credit: Image Credit: Number1411 / Shutterstock)

Despite the digital world that we live in, Trade Finance processing hasn’t really advanced over the centuries. Surprisingly, current Trade Finance operations still rely on manual, paper-based processes that are duplicated across multiple parties. The net result is that these activities remain extremely costly, time intensive and inefficient. At long last, however, the Trade Finance process is now the target for massive disruption, and a shift into a new era of digitisation and efficiency. 

The need for change   

This problem is perfectly illustrated with the transfer of trade documents. A supplier will draw up the documents and send them to its bank, which will then send the documents to the buyer’s bank, which will then send them on to the buyer. All parties involved basically perform the same process, which is an enormous waste of time and resources - that can take many weeks to complete.   

This means that at every point of the Trade Finance process, there are major inefficiencies, as well as security and compliance risks – with heavy fines and an abundance of regulatory obligations, becoming increasingly commonplace.  Some firms have tried to digitise parts of the process with electronic Bills of Lading and other similar components to a transaction, but this isn’t solving the real issue – as checks still need to be performed - irrespective of the source being paper or electronic data.   

As Trade Finance processes have remained the same for decades, it’s hardly surprising there is a certain comfort factor associated with them, Furthermore, over the last ten years, financial organisations have been faced with huge regulatory pressures and increased capital costs yielding to a general culture where “change” is difficult to embrace.    

Thankfully, that period of inaction is now swiftly coming to pass, as we are seeing a new industry focus on efficiency and accuracy. This is largely driven by the increased attention on expense management - which is forcing organisations to be more receptive to change. Life after Brexit is also another key driver – especially when dealing with the inevitable changes in trading rules. Solutions are therefore being sought that enable operational processes to become leaner and fit for purpose – creating an endemic behavioural shift which bodes well for the future of the industry.   

Technology innovation 

To overhaul the Trade Finance industry and more specifically - the documentation process, senior management and business leaders in the banking and finance sector are embracing technology and championing it through their respective organisations. Digitalisation and leading-edge technology are now the key areas of strategic focus – driven by the promise of potential cost reductions, efficiency and compliance benefits. 

New technologies, such as robotics, are positively disrupting the Trade Finance sector, specifically with the automation of key processes such as moving documents and data, enacting document comparisons and performing due-diligence checks. Other technology innovations like artificial intelligence (AI) and behavioural learning can arm trading partners with transparency and predictability in global trade and provide a greater capacity to identify potential non-compliance and fraud risks. 

In practice   

New digital, cloud-based, platforms are emerging that enable banks and corporates to complete Trade Finance transactions swiftly - rather than in days. Through the use of best in class technologies, in a safe and secure manner, information can be shared, checks can be conducted and the entire process can be consummated quickly. These platforms work by scanning trade finance documents and extracting the data using advanced Optical Character Recognition (OCR) software which the platform can use downstream. Subsequently, the data is run through a very sophisticated AI and machine learning-based, algorithmic rules engine.

These platforms are able to come up with responses and decisions which humans currently take on a daily basis, enabling the entire process to become data-driven - as opposed to paper dependent - with an exceptionally high rate of accuracy and precision. These automated steps include document discrepancy-checks, due-diligence, and regulatory and compliance screening. This makes the role of the user more the exception rather than the rule in discovering errors, and removes the need for mundane, repetitive activities, allowing humans to take on more evolved decision making activities.   

The underpinning of any global system for banks and corporates needs to be in a very safe and secure environment, so platforms use state of the art measures to keep data partitioned and protected.  Very soon, blockchain technology will also be integrated to further enhance transaction processes and research is currently being conducted on live trades. Once incorporated, it will reduce the trade cycle time even more.   

Positive outcomes    

This new technology wave promises to reduce the costs and complexities of Trade Finance for banks and corporates, and even enhance working-capital management. The use of Smart contracts (i.e. digitised contracts), AI and Machine Learning to automate processes -  ensures a more streamlined operational process across the whole Trade ecosystem.  

The ability to access, examine and approve original documents remotely and separately from other parties—anywhere across the supply chain— will improve logistical efficiency at banks, ports and terminals. By enabling individuals in different countries to collaborate on drafting digital documents, it will also reduce errors, centralise processes, maintain data integrity and accelerate the completion of agreements from weeks - to minutes. 

Another key benefit of digitalisation is by increasing visibility, and by making processes more efficient and reliable, it becomes easier to comply with regulatory requirements. With the increased control and visibility over documents, and the capability to instantly transfer documents across the globe – this can help organisations reduce the risk of fraud too. Documents can be issued or endorsed only by authorised users and can be configured to prevent unwitting transfer to sanctioned parties. 

There are also wider economic benefits. As the cost of processing a letter of credit decreases, this reduces the entire cost of Trade Finance operations. The ease of process also facilitates customs-clearance procedures—allowing goods to move through supply chains more easily and reach consumers faster.   

Looking forward 

Change doesn’t occur overnight, but transformation around the world is well and truly under way. There’s clearly great potential for technology to create major efficiencies and opportunities in the Trade Finance sector and the wider global commercial ecosystem. Ultimately, as banks and corporates show an unprecedented interest in collaboration and supporting industry innovation, the benefits for all parties operating in Trade Finance are poised to be transformational.  

Sameer Sehgal, CEO of Traydstream (opens in new tab) 

Image Credit: Number1411 / Shutterstock

Sameer Sehgal is CEO at Traydstream and has been a banker for almost 22 years, working in Citi, Bank of America & ANZ in Asia, Middle East and Europe. He specializes in Transaction Banking, Credit and Commercial Banking.