Trade finance has traditionally comprised a series of manual, lengthy and often error-prone processes, with frequent rejections and unpredictable timing. The World Trade Organisation (WTO) cites technology development as the factor that will have the greatest impact on trade between now and 20351, lifting GDP by 9% in western developed markets and up to 55% in China.
The question for banks, corporates and technology partners, is how to harness new technologies, such as artificial intelligence, to develop the solutions that will act as a catalyst for trade, reducing the cost and complexity of trade financing.
The trade digitisation challenge
As digitisation in both our professional and personal lives progresses, international trade has lagged resulting in greater demand for innovation in trade digitisation amongst buyers, sellers and the participants that make up the supply chain ecosystem. Although this has become a more compelling issue over the past two or three years, digitisation of trade is not a new idea, and companies and their banks have already made significant progress in reducing paper and automating processes through enhanced electronic banking. Today, however, the emphasis has extended from processes within an organisation to an end-to-end view, resolving friction between supply chain participants, improving traceability, and avoiding ‘digital islands’ ie, individual pockets of digitisation that remain surrounded by paper and complexity.
This is not easy to achieve in practice: after all, even a simple shipment involves multiple stakeholders and dozens or hundreds of interactions across a network of shippers, forwarders, ocean carriers, ports and customs authorities as well as the buyer, seller and banks that finance the transaction. Documentation, legal, risk and compliance issues are replicated at each stage, leading to a proliferation of cost, paper and manual processing, divergence in information between stakeholders, and significant difficulties in tracking transactions.
From technologies to solutions
New and developing technologies have significant potential to help overcome some of these issues where they power client-centred solutions that deliver automation, traceability and efficiency.
i) Artificial intelligence
Artificial intelligence (AI) and machine learning (ML) tools can help automate processes and improve predictability in both the physical and financial supply chain. In May 2019, Standard Chartered launched its Trade AI engine in partnership with IBM to digitise and leverage data held in manual documents. This solution enhances the client experience in trade document processing through increased operational efficiency and strengthened operational control. It converts paper documents into machine readable format using optical character recognition (OCR), continuous ML to reclassify or redefine data elements to further improve accuracy, and harnesses natural language processing (NLP) capabilities to read and capture context from data held in documents. With around four billion pages of documents circulating in documentary trade today2, the value proposition is immense. The Trade AI engine is already live in many parts of Asia, Africa and the Middle East with China to follow shortly.
Blockchain (distributed ledger technology) solutions also offer significant opportunity, particularly as they offer a ‘single source of truth’ across participants, which resonates strongly given the number and diversity of stakeholders in a typical supply chain. For example, Standard Chartered is collaborating with Siemens Financial Services and digital trade provider TradeIX, to co-create an industry-first pilot project of an end-to-end blockchain-based smart guarantee, from initiation of the bank guarantee to the claim handling. This will make trade processes smoother and faster to deliver efficiency gains to clients and transform the way trade is conducted.
Greater visibility offers benefits to small and medium-sized enterprises (SMEs) that typically find it more difficult to finance trade. Currently, for example, 74% of trade finance requests made by SMEs are rejected3, compared with 7% of multinational corporations4. Given that SMEs comprise 50% of global GDP and 66% of employment5, addressing this issue could assist in addressing the imbalance and foster growth.
Standard Chartered is working with a number of technology companies in China, and in February 2019 signed a memorandum of understanding with Linklogis6 to enhance its supply chain financing proposition and deepen client relationships in China. Linklogis’ digital blockchain-enabled supply chain financing platform provides large buyers with superior transparency on their entire chain of suppliers and offers small and medium-sized suppliers cheaper and privileged access to credit.
The bank’s ability to leverage new technology and digital platforms will enhance large buyers’ visibility over their entire chain of suppliers and offer small and medium-sized suppliers’ easier access to credit. At the same time, onboarding becomes quicker and manual processes digitised. While technology alone will not solve the trade financing issue for SMEs; it does provide a platform on which banks can build new solutions and credit models.
Given the number of stakeholders engaged in international trade transactions, collaboration is essential to digitisation initiatives to create industry-level impact. The Trade Information Network7, announced in October 2018, is the first global multi-bank, multi-corporate network in trade finance. Set up by seven leading trade finance banks, and in partnership with technology corporation CGI, it is designed to create a data exchange between all corporations and their banks for purchase orders (PO) and invoices. This addresses the demand for financing earlier in the supply chain by enabling corporates to easily and securely communicate trade information directly with banks of their choice to both obtain and provide trade finance, crucially including currently underserved market segments. The initial pilots are in Europe then the network will be extended to Asia, including China. The exchange of data through their regular banking communications channel, or directly through the platform, minimises disruption to processes and provides greater transparency and trust for banks and corporations alike. In addition to the founding banks, more than 20 additional banks globally are actively participating in developing the network and several corporates have already expressed an interest in participating in pilot projects.
Aligning regulation and innovation
While new technologies have the potential to transform the way that international trade is conducted and financed, technology development needs to be accompanied by harmonisation of legal frameworks and clarity over liability, information security and screening, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. Progress in these areas is already underway. For example, the WTO’s Trade Facilitation Agreement (TFA), which came into effect in 2017, is designed to simplify documentation, modernise trade procedures and harmonise customs requirements. This agreement is estimated to reduce global trade costs by an average of 14.3%, and boost world export growth by 2.7%, adding 0.5% of global GDP by 20308.
The International Chamber of Commerce (ICC) is also engaged on a range of projects to update rules and standards in line with digitisation, create a roadmap for digital trade and enhance connectivity between financial institutions and financial technology (fintech) providers. There are also new groups forming to develop and encourage adoption of data standards to enable platforms to be technically interoperable, such as the Digital Trade Standards Board and Universal Trade Network Organisation.
In China, buyers and sellers alike are keen, and in many cases ahead of their overseas peers, in their awareness and interest in digital trade solutions. While clients, like large fast-moving consumer goods (FMCG) corporates can access trade financing, their suppliers and broader ecosystem often lack the ability to do so, so digital trade innovations are a key to boosting the supply chain as a whole. Major strategic initiatives in the region, such as the Belt and Road Initiative, which are encouraging trade between mainland China and Hong Kong will also benefit from the digitisation of trade. Over the next two to three years, solutions based on new and developing technologies, such as blockchain, are likely to flourish. However, in China, a closely regulated market, the challenge will be to align innovation with regulation so that corporations can take advantage of emerging opportunities. Ultimately, these efforts could have a transformative effect on growth and prosperity both in China and beyond.
About the authors
Kathy Huang is Head of Trade, Transaction Banking, China, at Standard Chartered, in this role she covers sales, product, implementation and vendor management. She is responsible for managing the overall pan-China trade performance of the bank including the delivery of business targets, product innovation and business execution. She joined Standard Chartered in November 2005.
Eileen Jiang is Trade Product Head, Transaction Banking, China at Standard Chartered and has been with the Bank since September 2016. Eileen is responsible for the development for both documentary trade and open account related product suites with a rich experience in supply chain finance and trade digitisation.
1 World Trade Statistical Review 2017. World Trade Organisation.
2 Digital Innovation in Trade Finance. Boston Consulting Group (in association with SWIFT), October 2017
3 Asia Development Bank, ibid
4 Trade Finance & SMEs. 2016. World Trade Organisation.
5 World Trade Organisation, ibid
8 World Trade Organisation. https://www.wto.org/english/news_e/news18_e/fac_22feb18_e.htm
This article was also published by GTR.