The Future-proofing of trade finance
Over the last few years, new technologies and growing digitalisation epitomised by exciting fintech solutions and developments such as Blockchain have been recurring themes at numerous trade finance forums globally. Indeed, the $9 trillion trade finance industry has remained wedded to long-established processes and paper-based systems, opening it up to potential disruption by forward-thinking technologists unconstrained by legacy systems.
While this buzz is exciting and intellectually motivating, business heads such as myself need to have a clear and if possible simple view of the key drivers and technologies disrupting our enterprises. With banks operating in a budget constrained environment, allocating resources and capital must be done carefully with funding only provided to the most relevant projects. From a digitalisation perspective, three major trends are rapidly emerging in the trade finance universe, which Societe Generale is onboarding.
Creating operational efficiencies
Banks are increasingly shying away from physical documents
The dominance of document and paper-based communication channels and recordkeeping has frustrated progress across the entire trade finance ecosystem of buyers, suppliers, banks, customs officials, insurers and traders, although reform is afoot. Banks are increasingly shying away from physical documents, with 65% telling an International Chamber of Commerce (ICC1) study that paper had been removed from issuance/advising and settlement/financing of documentary transactions.
Initiatives to digitalise physical documents and records can help streamline business activities and reduce costs, cut errors, eliminate duplication and make it easier for companies and banks to achieve scalability. Innovation in the form of artificial intelligence (AI) and robotic process automation (RPA) is also conferring a number of advantages on once labour-intensive activities such as regulatory compliance, and many experts believe its benefits can be extended to AML and KYC checks.
AML and KYC regulations have been imposed on banks globally, while a handful of high-profile financial institutions were issued with punitive penalties for sanctions breaches, forcing organisations to become more diligent about validating that their customers are in no way connected to blacklisted companies/people or countries, criminal enterprises or terrorist financing or any other form of nefarious conduct.
AI and RPA tools are being used to comb through transaction data and flag anomalous findings for further investigation. Not only can this technology process information far more quickly than a human, but it can do so to a much higher degree of accuracy, which - when accepted by the regulators - will significantly improve KYC and AML checks.
Augmenting client experiences
Digitalisation strategies need to prioritise the requirements of clients and meet their growing expectations. Customers are increasingly demanding greater automation in end-to-end processing, supplemented with transparency (often in real-time/near-real time) throughout the entire transaction chain. Trade finance has been criticised for lacking proper workflow tools providing visibility and real-time reporting, but technology is gradually transforming that. One of the biggest enablers towards facilitating enhanced transparency and service delivery will be through the roll-out of APIs (application programming interfaces).
APIs, which are widely used by big tech companies such as Facebook, allow for data that is held across disparate systems to be consolidated onto a single portal. For clients, APIs can provide better transparency across the entire trade finance chain as it lets them use a single interface to monitor transactions instead of having to go through multiple platforms. Simultaneously, the connectivity benefits of APIs allow banks to cross-sell services to clients beyond just trade finance, such as cash management.
Initiating brand new offers:
Beyond using new technologies for streamlining existing processes, such innovations can help create new client products and experiences, which were hitherto impossible to develop using antiquated systems. Societe Generale, for example, is one of the nine founding banks behind We.trade, a Blockchain-enabled trade finance platform aimed primarily at small-to-medium sized (SME) enterprises conducting intra-European trade.
While traditional letters of credit provide security, the process is slow and expensive meaning that many SMEs are unable to properly secure their trade flows. The We.trade platform offers quick and easy access to trade services while utilising smart contracts to ensure automated payments are made once all of the contractual agreements are met.
Other emergent technologies like data analytics will also open up doors for new products, most notably customised supply chain financing.
The Future is bright for trade finance
Societe Generale is developing projects in all three of these areas. While each project can be monitored independently, we need to ensure they are compatible with the existing and future ecosystem of the bank and broader market. Ensuring interoperability, drawing up industry-wide standards, developing a proper legal framework and obtaining regulatory support will be critical to the success of disruptive technologies, but achieving all of these milestones is likely to be enormously challenging.
Trade finance is going through a period of technological enlightenment in what could net enormous benefits for counterparties across the transactional chain. Through the adoption of disruptive technologies, client experiences and operational processes will be much improved, generating widespread savings for market participants and new sources of revenues.
The question around how this newly created value will be shared across market participants within the entire trade finance eco-system still needs to be considered and will probably become the hot topic moving forward as soon as the various innovation projects being spearheaded by Societe Generale and others reach maturity.
1 ICC (May 25, 2018) New ICC survey shows the pace of trade finance digitalisation