Looking across the complexity of trade finance, the notion of a problem child comes to mind from another era. Today, however, the industry’s methodologies are starting to become agile. With the abundance of technology, we can link activities, end to end, across the parties involved in every trade. The arrival of standard application programming interfaces (API), used locally, can accelerate the trade process, country by country.
With these modern developments, the much-needed digitization of trade finance is starting to look like a real possibility. By taking a step-by-step approach, the industry can move from paper to a safe, secure and compliant digital trade world.
Step I: Data Extraction (moving information into a structured, machine-readable format)
The very first problem to overcome in trade finance is the sheer scale of paper documents. Many trade banks manually check every document, and the processes are based around the physicality of the written word. The documents need to be converted into an electronic format, including the entire wording across the paper flow. Once the paper and PDFs are left behind, the electronic layers that have been created can be analyzed anywhere.
Step 2: Data Verification (identifying the key aspects of the trade)
The documents then need to be validated, with all the important clauses, including the terms and conditions, highlighted and accounted for. The more data that’s moved into electronic format, the better, since artificial intelligence (AI) and machine learning (ML) expertise grows with volume. The greater the volume, the better the accuracy of the output from these systems. ML tests show that with greater data volumes, accuracy rises to and beyond human capabilities.
Robotic process automation (RPA) can streamline trade finance operations by automating mandated rules-based business processes. The automation of low-value tasks with very high accuracy rates, removing human error, enables businesses to move people into the role of improving standards of providing trade finance to customers. For example, some document checks can take up to 10 days – 10 days of extra financing added to the supply chain. According to Gartner, the RPA market will reach $2.4 billion by 2022, with 40% of large enterprises using RPA, up from less than 10% today. Trade finance is an ideal application area for RPA.
Step 3: Rules Adherence (comparing the requested trade details to standards and policy)
Electronic links to centers of expertise can help confirm the rules of engagement are being followed. For example, Commercial Codes of Conduct can be used to ensure best practices. Fintechs now exist that offer continually updated electronic libraries that can verify documents electronically.
Step 4: Compliance (revealing mismatches between what’s happening and what should be happening)
Each country has its own form of regulations on trade, as do individual banks. These rules are constantly and quickly changing. Just as the use of tariffs and sanctions has become part of the methodology for how countries deal with each other, banks may similarly support different trade flows over others. For example, Rabobank is strong in agriculture, using a guiding governance framework.
It’s key for banks to maintain links to companies or authorities maintaining current information. The ability to be constantly compliant is vital. Regulators increasingly expect a reporting structure that informs them quickly that the parties are in compliance.
Step 5: Fraud Detection (using automated AI used to pinpoint characteristics associated with corrupt behavior)
Any industry with a high volume of paper and manual processing also has a high potential for fraud. Having completed Steps 1 to 4, the algorithms used to detect fraud can be employed across the sea of information. The ensuing heat maps can then be investigated impartially.
Laying the Tech Foundation
Technology – including cloud, AI, machine learning, intelligent automation, platforms, RPA and APIs – makes the above come to life. Blockchain is also ideal for trade finance, as information in the blockchain environment cannot be altered, a full audit trail exists, and smart contract terms and conditions can be embedded. While blockchain could be the future, the volume of trade in blockchain schemes is tiny compared with the overall trade finance market. The incumbent technology and processes currently in use will need to change to accommodate blockchain.
Meanwhile, the regulators overseeing Open Banking and PSD2 have addressed the safety of the linked environment and are aiming for continuous improvement in the cybersecurity realm. The security of the connectivity must be equal to or better than what currently exists.
The route to success in digitizing trade finance is to mirror the existing trade flows electronically, and continuously check on where the trade and the finance is at any point of the journey. The ability to do this is here, with cloud adoption and cost becoming subscription-based. The newly formed blockchain-based trade networks (e.g., Voltron, Marco Polo, etc.) will, over time, become linked as the banks and corporates want to be serviced in the best possible way.
Collaboration: The Way Forward
A multi-banking digital portal will probably be created to link the many new trade networking groups being created to accelerate regional and international trade flows. Technically, the linkage would be an intelligent node in each network. The node, provided by a third party, will permit authorized messages to flow between the corporate and bank based on the rules of the parties and that particular network. The permission to access the node will be granted by a member, thus maintaining the integrity of that network. These nodes would be a combination of AI, ML and smart APIs, allowing automatic access to additional parties to a trade when required.
Trade finance is a global physical distribution mechanism involving many parties (often in the double digits) and continuous hand-offs (often in the triple digits) for a single shipment. By providing an electronic global counterpart made up of many interconnecting and intelligent collaborations, the $7 trillion market can become digital.