RETHINKING TECHNOLOGY: CONNECTING THE WORLD OF TRADE FINANCE
The Changing World of Trade Finance
Innovation in trade finance goes back to the Phoenicians in around 1500 BCE who founded maritime transport on a commercial scale and re-established long distance trade between Egypt and Mesopotamia.
The history of invoice factoring goes way back to the times of King Hammurabi of Mesopotamia, over 4000 years ago. It has been playing an active role in business finance since then. From medieval businesspeople to English colonists — and from garment textile industries to transportation industries — invoice factoring has a long history.
In the 20th century, factoring was more popular around the world because of reduced credit checks.
But the world of trade finance is now different in the current context.
A Bridge to New Digital Life
We live in increasingly uncertain times, where regulatory changes and increased market competition are changing the rules of the game.
There is an urgent need to move the trade finance business from paper to digital processes to not only reduce the operational risk but also deliver superior operational efficiencies; addressing not only the symptoms but also the primary cause of fraud — paper.
International trade has tripled as a share of global GDP since 1945; there is an opportunity for banks to increase their revenue from trade finance to approximately $501 billion a year.
How will banks tap into this huge market potential?
The solution lies in going digital.
By going digital, banks will not only have increased efficiency but also reduced fraud. There is also an increased visibility over the end-to-end physical and financial supply chain. That would make it possible to intermediate in the chain at a much earlier stage than what happens today, giving them a greater role in the process — and profits.
But there are two sides to every coin.
On the downside, banks will also be required to invest in technology. While current volumes in the digital trade do not justify large technology investment, it will be necessary when volumes increase. Other impacts for banks include changes to legal documentation, operational processes, and staff training.
In the short run, this move may threaten banks and their customer relationships to become less sticky which could cannibalize current trade finance revenues. However, the long-term view on digitization not only reduces documentation errors but also increases the availability of financing liquidity, with quick disbursement and electronic presentation of the required trade finance documents, allowing for improvements in cash management.
As stated in a BCG report, banks have the opportunity to increase their revenues from trade finance by 10% and reduce operational and compliance costs by 15% to 25% if they embrace digital technology in trade finance. They cannot afford to take a back seat in this journey.
Innovation is changing the face of banking. Digital trade finance can be an enabler for entry into e-commerce.
The growing factoring market of $4.3 billion by 2020 presents an opportunity for banks and fintech to collaborate in this space and implement a next generation trade finance platform, compliant with relevant laws and regulations.
Trade finance customers seek the same things that other corporate banking customers want: process transparency, risk reduction, credit when needed, and the rapid, low-cost facilitation of transactions.
Banks should not underestimate the importance of high-quality digital front ends. 43% banks have reported in the ICC Global Trade Finance Survey 2016 that there is little advancement currently done on their existing trade finance platforms.
These interfaces do more than improving customer convenience. By acting as gateways for supplying customers with complementary services over and above mere transactions, they can strengthen relationships in a way that fintech struggle to achieve.
Getting the front end right allows banks to be seen as service partners rather than document processors, thus letting them sustain their fees in the increasingly competitive digital world.
Survival of the Well-Connected
There is a significant opportunity to digitize trade finance and thus change how it works. Banks that explore this and collaborate with technology partners and key customers will come out ahead rather than risk being left behind when adoption increases.
A BCG report states that banks seeking a long-term future in trade finance can benefit from digital technology for documentary trade and financing. With the growing importance of best-in-class operations, increased efforts in OCR, machine intelligence, and digital compliance to be rewarded with lower costs and increased agility and speed of service. Experiment to stay ahead of the technology curve. Banks can choose whether to push MT798, BPO, eB/Ls, or blockchain, as the impacts of such technologies, are yet to be proved.
There is a lot of changes currently happening the trade finance industry. Last year in 2016, International Chamber of Commerce (ICC) released cross-industry SCF standards which provides the much needed clarity to the complex ecosystem of providers, customers, accounting and legal professionals, regulatory authorities and others involved in international supply chains.
To succeed in this challenging and uncertain environment, banks need a trade finance platform for the visibility of the underlying trade flows by the finance provider(s). A necessary component of such financing arrangements can enable a technology platform — which if agile, low cost, and valued by customers to increase customer stickiness.
A Model for Technological Evolution
Banks are trying to solve tomorrow’s problems with yesterday’s technology.
In today’s world of uncertain times, technology can be a real game changer and revolutionize the world of trade finance.
Banks need to pull themselves out of the short-term time horizons that currently consume their attention and focus on the long-term forces that are reshaping the business landscape so that they can better anticipate, and then act upon, the changes that are ahead.
As highlighted in a groundbreaking essay The Question Concerning Technology in 1954 by philosopher Martin Heidegger, he describes technology not as something we build, but as something we uncover and enframe. In other words, we are not wholly responsible for human-made wonders, nor are we entirely in control.
Applying this theory to the world of trade finance, banks need to find new ways to adopt new technology to move forward in their game. However, time will tell how technology can uncover and revolutionize the world of trade finance.
The question then is whether the inevitable digitisation will create new competition for banks in the same way we have seen with the emergence of non-bank niche providers? Or will it prove to be another avenue for banks to ply their trade?
Only time will tell.