Since the pandemic, global banking has embraced digitalisation, with many banks updating their systems at speed and on an unprecedented scale. But how close are we to fully digital trade finance?


In a 2022 IDC survey, 40% of global financial institutions said, “responding to the pandemic forced us to quickly shift to a digital-first strategy, which we continue to extend”.

The assumption therefore is that banking functions such as trade finance are now happily moving from an archaic paper-based ecosystem to digitisation. But is digitalisation of banks a one-size-fits-all solution?

According to the same IDC research, only 15% of organisations have a long-term investment plan in place for digital transformation. Which means that while there are clear benefits to transformation, there are factors that are impacting bank-wide adoption of digital processes.


Who is driving digitalisation?

The push to digitisation in banks is coming from numerous directions. While primarily being driven by corporate clients, SMEs, governments and industry organisations such as the International Chamber of Commerce and the International Trade and Forfaiting Association (ITFA) are also pushing hard to get the necessary legal and processing frameworks in place.

Digitising trade finance should create benefits for all players and ultimately the global economy.

Some countries are moving quicker than others towards a digital trade infrastructure, with concrete dates for implementation. Singapore and the UK for example are already legislating along the lines of the Model Law on Electronic Transferable Records (MLETR) and ITFA’s digital negotiable instruments (DNI) initiative, and in February 2022 signed a ground-breaking digital trade deal that aims to cut costs, slash red tape and “pave the way for a new era of modern trade”.

In parallel, the move to measure the performance of financial organisations against the green and environmental, social and governance (ESG) agenda, is also a push to digitisation.

In a recent virtual event, we took a look at how these factors are impacting banks around the world and how close we are to fully digital trade finance.


Adoption of new technology for trade and working capital finance

The biggest challenge for many in trade finance lies in enabling operations to be agile against the backdrop of old legacy systems and internal processes.

You want to be able to create the most relevant and viable products and to launch them faster – making the most of opportunities as they present themselves. But in order to introduce a new product, there may be internal processes and compliance to deal with first, along with systems that may be easily adapted.

So, what technologies should form the basis of this digitisation of trade finance? A centralised ‘booking engine’ in banks could enable all transactions, including letters of credit, credit guarantees, supply chain finance and trade loans to be managed in one place, creating an embedded workflow across all products, and facilitate integration with other core bank systems such as general ledger (GL), customer accounts, treasury, etc.

Artificial intelligence (AI), which is also being used to reduce the cost and risk of ensuring compliance, could automate document checking and letters of credit and make them available in real-time to all those involved in trade finance. Technology can also help show proof of ownership, which is key throughout the lifecycle of the document.


Can technology and multi-bank platforms help?

Creating a clear strategy on what you want to offer and how you want to implement the right technology solutions to achieve it is key. It may involve using different platforms, and it may well be based on what your customers are asking for.

A head of trade finance at a Swedish bank explains: “The demanding part is actually the bigger clients – usually large corporates – who are demanding a different kind of platform offering.

“A regional bank can’t join all of these multi-bank platforms; we have to see where demand is and then look at the pros and cons. It’s a lot of R&D into what kind of flavour you want to have in your offering.”

The CEO of a global service provider, and subsidiary of a bank, agrees: “You have large corporates saying ‘I’m banking with 50-plus banks. I don’t want a portal with every bank, I want a multi-bank portal.’

“Technology is an enabler, but you need to put it in the right place.”

So, can banks afford to let their large corporate clients push them into use of particular banking platforms that may only work for their own specific needs?

The head of trade operations at a large UAE-based bank thinks that it is the smaller business customers who are more likely to influence banks’ decisions.

They explain: “5% to 10% of the top customers may be able to influence you, but down the line it is the SMEs and MSMEs that will rule the world in terms of revenues – today they are the largest size of returns and revenues. If I have one common system that links 100 SME traders, I would like to do that because my margin is better.”

Banks need to consider how to strategise for real change with a digital end-to-end ecosystem and whether digitisation will provide what their customers need.


Trade-as-a-service solutions

Trade-as-a-service is another way to help grow trade finance. It enables banks to innovate new software and digital-at-source solutions much more quickly (weeks, not months), and do so at a lower cost-to-serve.

To be successful, these offerings need to provide a better end-customer digital experience and an enhanced product offering. Organisations currently building these offerings include large banks, a coalition of smaller banks banding together, non-bank market makers and fintechs.


Is the ESG agenda interacting with these opportunities?

Sustainability and ESG are now firmly on the radars of both banks and customers. Banks have an important role to play in supporting customers and businesses with their ESG objectives.

But an increasing demand for new sustainable products and growing pressure from regulatory bodies and governments to reduce transportation and paper usage, etc, sees a new type of risk – ESG risk – emerging in the trade finance market.

For trade finance, the ESG agenda can provide access to new clients and trading partners.

A new service that banks are increasingly being asked to provide – particularly by large corporate clients – is ESG screening. This can help to mitigate risk and align funds with clients’ objectives and ethical standpoints. Banks are also being asked if they can issue green or eco currencies – money that has an element of environmentally friendly endeavours.


Future trade finance solutions

So, will digitisation lead to a consolidation of trade finance only for the larger banks? Or will these new technologies lead to a democratisation for the smaller and regional banks and open up new opportunities for them?

And what will this democratisation look like? Will it be solutions and services, maybe on the cloud where the bank doesn’t need to understand and manage the underlying technologies, and where a solution can provide an easy and reliable integration to the new fintechs and multi-bank platforms?

If so, this could take away the fear of new technology and allow even the smaller banks to focus on new digital opportunities.

Or could we see a two-tier trade system – with a faster, more technology-based service provided by the larger trade banks, and local banks providing slower, manual-based services.


Importance of collaboration

“We are seeing more collaboration between fintechs and banks, but also banks and other banks, which is really important to create solutions together,” says Brian Edmondson, Global Solutions Lead of Trade and Working Capital Finance at Finastra.

“There is optimism within industry going forward – a sea change from a few years ago. Opportunities are also there, although daunting, but we see ways to make progress, make money, reduce costs, and expand trade finance business.”

While for many banks, full digitisation of trade finance functions may still seem a long way off, the potential for scalability and more cost-efficient use of platforms could see huge benefits for many, and less reliance on traditional IT infrastructure as services move into the cloud.