Transforming interoperability within trade finance: the need for modernization

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Trade finance is a valuable driver of economic growth that organizations rely upon for an estimated 80% - 90% of global trade1. However, a series of market shocks, including the pandemic and geopolitical events, has led to a related increase in rates of rejection of trade financing requests.

According to research from the Asian Development Bank (ADB)2, the global trade finance gap reached an estimated $2.5 trillion in 2022, or 10% of global merchandise trade, rising significantly from $1.7 trillion in 2020.

The ADB reports that: “Approximately 20% of banks surveyed stated that some trade finance applications, meaning requests from companies for financial support to back their import or export activities, were rejected. Reasons for rejection included factors such as perceptions of high country risk, lack of collateral, poorly presented documentation, and issues related to know-your-customer (KYC) compliance.”

One of the challenges driving the slowdown is that trade finance is such a well-established business for the banks that manage the processes involved, making it difficult to change and innovate.

“Trade finance has been around for a long time and has very well-established rules,” says Peter Hazou, Director, Business Development, Financial Services at Microsoft. “It’s been processed with static, paper-based documents.”

Another problem is that a skills / resource gap has also emerged as experts in dealing with these types of documents and processes are leaving the industry, adds Hazou. “It’s a very traditional operating model that’s been managed by highly skilled people to determine whether trades are in compliance, or if there’s evidence of fraud or money laundering – it’s expensive, and not operationally efficient.”

The trade finance stack

The reasons stated by the ADB for the ever-widening trade finance gap, which prevents small-to-medium sized enterprises (SMEs) in particular from growing their businesses, such as clear documentation and KYC compliance, could be vastly improved with interoperable digital processes.

Iain MacLennan, Head of Trade & Supply Chain Finance at Finastra, says that pressure for automated, standard processes is also coming from banks facing higher expectations from their corporate customers for better service level agreements (SLAs) when it comes to efficiency and turnaround time. “What’s really needed is a scalable, high-performance, interoperable, easily deployable, extensible and resilient platform,” he explains.

After all, it’s not that the necessary data is in short supply across the trade finance ecosystem, far from it, Hazou says. “It’s a core part of commerce in all banks and it’s really about time that it got more investment and modernization. That would enable more insights into the data as well as reasoning based on data.”

Hazou and MacLennan describe the trade finance stack as a platform that includes the whole suite of applications and business processes needed to run a trade finance business. By choosing the stack that Finastra and Microsoft provides, banks and other third parties involved in trade finance no longer need to spend time building their own trade finance systems.

Instead, they can access a stack with everything from underlying cloud-based infrastructure to business process outsourcing, depending on their IT strategy.

Another benefit of this approach is that it enables banks to bring other providers on board more quickly than is usually the case for banks via their internal procurement and onboarding processes. Open APIs mean that a modernized system for KYC or AML checks, for example, can be accessed almost immediately.

“We spend our time scanning the market and looking at different providers to see how we can interface with them directly or partner with them around other opportunities, such as outsourcing,” says MacLennan.

As a result, banks can adopt a more agile approach to trade finance that meets the changing expectations of their customers, Hazou adds. “It’s not just agility for the banks themselves, but it’s supporting the agile way of working expected by their clients,” he says. “We see this in many industries, such as how companies manufacture goods with a just-in-time approach. The banking element of the supply chain and trade finance process has to be managed in a similar way.”

Emerging technologies

As well as bringing more functionality on board more quickly, banks can start using more of the data from their trade finance systems to support faster decision making, and start to bring in emerging technologies as needed.

There are already examples of how blockchain has been used for applications such as document ownership, and how artificial intelligence (AI) can be applied to document compliance, MacLennan explains. “You’re going to see AI being used much more in terms of knowledge management and support, and we’re already working with suppliers and clients on that basis.”

As practical use cases emerge for new technologies, it will help to have a robust platform in place that can interact with applications and micro services with a set of interoperable standards, especially when considering the skills shortages outlined earlier.

“Technology will permit the interoperability between all players, whether they are logistics companies, manufacturers or retailers,” says Hazou. “This is a cross-industry issue, and should no longer be looked upon as just bank trade finance managed with paper documents.”

The Asian Development Bank found that advances in technology, linked to automation and digitalization in trade, were cited as one of the most significant contributing factors to the anticipated increase in both supply and demand for trade financing. “By implication,” it concludes. “This observation relates to effective implementation, including enhanced interoperability across solutions, which clients and developers alike are increasingly conscious of.”

Banks that want to take a leadership role in driving up volumes of trade finance, and thereby helping global communities and economies to grow and succeed, now have the opportunity to adopt the stack that provides a roadmap for the future.

1 WTO | Trade finance

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