The Road to Automation in Trade Finance – from Origination to Distribution

Key steps for trade finance to begin its digital pivot.

It’s time for trade finance to embrace new technologies, modernise processes and adapt to changing customer preferences.

The banking industry is undergoing a seismic digital transformation as calls from customers grow for a suite of automated products and functionality. The COVID-19 pandemic, in curtailing the physical movement of people and goods, has accelerated that process.

The vital function of trade finance, a key enabler of global commerce, is a prime candidate for embracing technology. This is especially so given its legacy structure and processes, which are substantial barriers to growth. But how does one go about digitising trade finance?

To answer this question and discuss the potential value of automation and chart a roadmap for the digitisation of trade finance, Standard Chartered brought together a panel of experts in a Virtual Conference on Digital Transformation in Financial Markets in December 2020.

Why trade finance needs to digitise

Trade finance is an expensive business at a time of shrinking margins, so the cost efficiencies that digitisation can bring are invaluable. Also, from origination to execution, trade finance remains heavily reliant on paper and manual processes in a world where transactions are increasingly conducted online. Modernisation of the industry is overdue.

“People and banking habits are moving fundamentally in a digital direction and trade finance must be no exception,” stressed Nicolas Langlois, Managing Director and Global Head of Trade Distribution at Standard Chartered and co-moderator of the session.

Technology has the potential to enhance the origination to distribution model: speed of execution and the resulting efficiencies, and the opportunity to enhance client experience are the most important reasons for the digital evolution of trade finance. Digitising can help connect a customer at the touch of a button with automated services from banks for financing, insurers for underwriting, and networks for downstream authentication functionality and distribution efficiencies.

That being said, tight margins also mean development budgets are under pressure, and so one challenge will be to prioritise digital development most effectively. This is where distributed ledger technology (DLT) comes in.

Digitising Trade Finance

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A DLT like blockchain provides fast and secure information movement, enables data-sharing and management, and creates opportunities to source new trade finance business flows by joining previously untapped automated channels. Critically, such technology stands to improve confidence throughout the distribution process that electronic documentation (such as titles and bills of lading) is genuine and valid.

One of the single biggest opportunities to be gained from digitisation, noted Aditya Mazumdar, Executive Director and Head of Trade Distribution Programme Management at Standard Chartered, is “document verification, singularity and therefore fraud prevention and elimination.”

The panel pointed out that trade finance stands to gain substantial regulatory and security benefits by automating crucial functions within the areas of anti-money laundering (AML), Know Your Customer (KYC) and compliance.

In order to move the dial on digitalisation - amid the persistence of long-term habits around and preferences for ‘wet’ signatures - there will need to be new laws and standards governing electronic contracts, liability and the sharing of data and information.

The future for digital collaboration

The unique impetus presented by the pandemic to digitise must not become a missed opportunity because the way in which customers are going to buy trade finance is going to change completely, the panel participants agreed.

The business opportunity is  substantial with industry estimates expecting trade finance to grow at a compound average growth rate (CAGR) of over 4% between 2020-24.1

Banks will need to invest in and deliver trade finance technology for the benefit of all players, the panel concluded. And as paper won’t disappear overnight, adopting technologies like Artificial Intelligence (AI), Optical Character Recognition (OCR), and Natural Language Processing (NLP) will improve workflows and reduce the reliance on manual labour.

Further, banks should continue to adopt a combination of technologies developed by in-house teams as well as third-party entities, and work with both platform providers and clients to accelerate the development of digital infrastructure for trade finance.

Network providers will need to work within the constraints of organisations’ existing systems, so as to optimise blockchain within imperfect technology architecture. This spirit of collaboration and flexibility is already very much in evidence, the panel noted, adding that blockchain while not perfect is consensus-driven by nature.

“Moving from cash to digital money at a retail level is now very much accentuated,” noted Langlois, rounding off. “So within trade finance, Standard Chartered is very excited about the digital space and the development road ahead.”

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