The trade finance industry came together during the pandemic, accelerating digitalisation efforts to facilitate a business-as-usual environment for clients. But while we may have embarked on a trade finance digital journey, much work remains. This roundtable discussion examines the next phase of digitalisation in trade finance, including priorities for innovation, the challenges that must be addressed and how the industry can deliver an optimised client experience – now, and as we transition to a digital future.
Roundtable participants:
- Shekhar Bhandari, president, global transaction banking, Kotak Mahindra Bank
- Carlos Ferreira de Araújo, head of correspondent banking, Brazil, Itaú Unibanco
- Sandy Marrone, senior vice-president, product & innovation group, enterprise payments & analytics, KeyBank
- Joon Kim, global head of trade finance, SCF product & portfolio management, treasury services, BNY Mellon
GTR: What do you think the lasting impact of the previous two years will be on trade finance and digitalisation?
Bhandari: The world is moving towards a contactless, integrated and minimalist ecosystem. To provide this, having a strong core application supported by data and new-age tech like artificial intelligence (AI) and machine learning (ML) is key. This is where we have seen developments speed up in the past two years, with significant focus within the industry on reducing operational efficiencies through automation and the use of robotics. Trade is also expected to become increasingly paperless, which requires systems that create a high level of trust between parties. A seamless supply chain financing platform is another critical area that has been an increased focus among FIs and fintechs.
Kim: Being predominantly paper based, the trade finance industry had to accelerate its adoption of digital solutions to ensure business continuity during the global lockdowns. But as Covid-19 restrictions ease, this doesn’t mean we can afford to take our foot off the digitalisation pedal – especially as disruption to trade is unpredictable and very much continues today. For instance, in Shanghai, offices are only just beginning to open again following a new bout of restrictions; in Ukraine, the conflict means that businesses are not open. These challenging, ongoing circumstances reinforce the importance of having a suite of end-to-end digital capabilities in place to ensure global trade can remain robust throughout the complex, uncertain landscape we face today – and those that we may need to navigate in the future. For example, in Ukraine, the fact that BNY Mellon has been able to settle transactions despite the conflict by using digital documents instead of paper – such as converting a letter of credit (LC) transaction to digital – is testament to the importance of having agile capabilities and a comprehensive digital toolkit.
Ferreira de Araújo: While banks in Asia have been engaged in the digitisation of shipping documents in recent years, this trend has been much more incipient in Latin America. I believe this digitisation movement should consolidate in Asia and begin to spread to other regions of the world. Another trend is the consolidation of trade finance platforms in the market. I think more banks – and companies involved in international trade – should adhere to market-leading platforms.
GTR: What progress have banks been able to make so far in digitalising trade finance and how has the client experience improved?
Bhandari: Banks have undertaken API integration with certifying authorities for executing e-signatures on documents, collecting pre-sanction documents through publicly available sources, thereby helping to reduce credit appraisal processes and digitising the entire transactional workflow. All of this is helping to improve the client experience. In terms of digital penetration in supply chain finance, I would say banks in India have increased this by 20-35% in the last two years.
Ferreira de Araújo: I believe that banks have followed the demand of their customers. If the customer demands that trade finance flows be more agile and this requires digitalisation, banks have invested in this – either with their own internal developments or by joining digital platforms that develop trade finance solutions.
Marrone: There are different levels of knowledge and sophistication regarding the digitisation of trade. Some smaller companies are not ready to embrace these digitisation efforts; they are ‘stuck’ in the world of paper-based processes. Multinationals are really the driving force here and this is the client segment that I believe wants to see as much digitisation as possible. That being said, those banks that are moving forward with this effort should be able to improve the client experience, perhaps marginally at first but then by a greater degree as more and more components of the process are moved to digital.
Bhandari: Paper-based trade finance has been reducing considerably. The Government of India has implemented wonderful initiatives like the goods and services taxpayer identification number, e-way bill issuance and verification, and mandatory e-invoicing. These are helping banks establish and verify underlying trade information and bring efficiencies to plug their own supply chain workflows. Banks are also implementing host-to-host integration with buyers to get their payables data and financing their suppliers without any paper documents.
GTR: Data sits at the heart of nearly all business processes, not least trade finance. How do you see data being leveraged in the shorter and longer term? Is data analytics a tool you are already leveraging?
Marrone: The trade finance area has been slow in leveraging data – certainly slower than other parts of the organisation to undertake data mining to learn more about potential customers. As you say, data is key to all business processes, so we have started to use data analytics to review our book of trade finance customers. An entire group has recently been organised to focus efforts here, not only around trade finance data but particularly around all payments data.
Bhandari: The future of finance is data. Big data and the internet of things enable the interconnectivity of devices and information, thus providing targeted customer services. Coupled with AI and ML, these capabilities will also help with fraud detection and improving industry efficiency. Through further coupling with APIs/open banking, data can be captured from all users’ touchpoints. Bundling together a multitude of services by utilising the internet of (banking) things, would result in the digitisation of processes, including digital onboarding and transaction processing, and operational and procedural efficiencies – thereby creating customer value add.
Kim: It has been fascinating to see how data analytics can play a role in streamlining transactions. For example, data analytics can identify discrepancy trends in clients’ delayed transactions.By flagging and communicating recurring issues, the client can adjust these elements of the transaction data, meaning the recurring delays – and associated fees – can be eradicated. Moreover, while the bank may lose out on the discrepancy fee, there is in fact the potential to make more money by speeding up and streamlining the transaction process.
Ferreira de Araújo: Itaú Unibanco has invested massively in data analysis and how to use it to provide the best solutions for the demands of its customers.
Digital solutions, without forgetting the face-to-face customer service, are already a reality and tend to evolve in the medium and long-term.
Bhandari: In India there are many data points that can be aggregated to build risk rule engines, helping banks to further their financial inclusion journey. With consent of the counterparty, you can create logical rule engines to help enable better credit decisions. You can also verify transactional data in terms of volume of business, name of buyers, and distribution of sales and purchases. We are also exploring multiple analytic use cases using data and graph science technology.
Kim: Increasingly, data analytics is being applied to help measure and evaluate environmental, social and governance (ESG) initiatives. Establishing effective ways to do this is a priority for the finance industry. Using data analysis to assess ESG metrics is particularly interesting within trade finance due to the vast quantity of databases that are used.
This, of course, translates to vast amounts of data, which can be tapped into to provide valuable insights. For instance, not only can we leverage the client information that we already had, but we are also analysing the counterparties that we work with and their ESG credentials. Organisations such as Baft and the ICC are leading industry efforts in this respect.
GTR: Sustainability has fast become an important consideration for businesses globally. How are you currently approaching sustainability, and do you think there is anything that can be done to improve this approach, either through new innovations or improved data analytics?
Ferreira de Araújo: Itaú Unibanco has been involved for years in several sustainability projects. In my opinion, international correspondent banks lack sustainable lending targets to encourage ESG initiatives and allow foreign currency borrowing banks to increasingly seek sustainable exports and imports from their clients that can serve as underlying transactions for funded operations.
Kim: Sustainability can mean different things to different banks. BNY Mellon views ESG as an important component within trade finance. As such, we are actively engaged in initiatives such as the ESG Workshop with Baft and the ICC. As more and more banks create and implement their ESG strategies, the trade finance landscape is changing, with conversations progressing from understanding the importance of ESG in trade finance, to identifying which exciting initiatives banks want to be part of.
Marrone: We are reviewing how we can improve our approach to sustainability. There are various objectives here so it’s critical to prioritise them.
GTR: Multiple use cases for blockchain in trade finance have been proposed – and some have even been implemented. How important is blockchain for the future of trade finance?
Ferreira de Araújo: This is the future of foreign trade. The involvement of trade finance platforms and the adherence of more and more banks to these platforms will be the future of digital interaction between banks, exporters, importers and international freight transport companies.
Marrone: If the industry is going to move to an end-to-end, completely digital process – including collaboration amongst the various parties to a transaction – blockchain will be critically important. The challenge is to get the entire community behind this effort.
It is somewhat similar to the adoption of Swift in the early 1970s – global banks and North American banks were somewhat faster to become Swift members and leverage the network than most of the other countries and banks around the world.
Bhandari: Blockchain has been drawing the attention of major banks across the globe when it comes to trade finance. It makes transactions more secure and sure, while creating a transparent and tamper-proof history, thus reducing the need for physical documents. We have been exploring its multiple use cases, particularly in trade and remittances, and we are also a leading member of the Indian Banks’ Blockchain Infrastructure Co (IBBIC), a consortium of Indian banks exploring and implementing blockchain in domestic trade finance.
Kim: Our involvement with the blockchain-powered Marco Polo Network is enabling us to provide clients with the seamless, secure and fast exchange of trade data assets. What’s more, the Network leverages the capabilities of EcoVadis to provide users with an independent ESG rating for each company, thereby helping participants to determine whether a counterparty meets their ESG values. While this is still at an early stage, with various use cases underway, as the trade finance industry transforms from being paper intensive to digital, the importance of leveraging of blockchain and its value add – with respect to ESG, efficiency, risk mitigation and transparency – cannot be overstated.
Ferreira de Araújo: This initiative is very important. I think what is needed for it to develop even more is greater demand from companies for document digitisation, and the awareness of customs authorities that we have to have more agile and developed international trade.
GTR: How important do you think collaboration is for the future of trade? What is currently impeding the full industry move away from paper towards seamless, digitalised trade finance processes? How can these challenges be addressed?
Kim: Digitising trade finance is difficult because of the complex, widespread nature of the industry. A transaction involves multiple parties located in different jurisdictions. For trade to be truly optimised, all of them – from exporters to financial institutions (FIs), credit insurers, shipping companies, customs and other service parties – need to adopt digital solutions. This is why coordination and collaboration are so important.
Bhandari: Fintechs have been embraced by banks as enablers for enhanced coverage capabilities and deepening the supply chain book. They have created wonderful tech stacks and have outpaced banks in terms of innovation. Banks and fintechs can co-create a thriving ecosystem that helps clients have the best of technology and financing opportunities.
Marrone: Collaboration between banks and fintechs is important to the future of trade and moving the industry towards end-to-end digitisation.
As with corporates, there are varying levels of sophistication and knowledge globally amongst banks around how to digitise and whether or not investing in the appropriate technologies is worth it. Banks in some countries may feel compelled to extend paper-based processing so that they can meet other objectives. All these challenges are impeding the full move towards seamless processes. Education and time are going to be required to meet these challenges. In my view we have only just begun the move to digitisation.
GTR: What does the industry need to do to ensure the digital momentum continues and that solutions can become scalable?
Ferreira de Araújo: Listen to customers more, understand what they expect from the industry in terms of modernisation and foster agility in the critical processes, including the shipment of goods, clearance and document handling as well as the financing of goods.
Marrone: The next step is educating the various participants in the industry about what is possible and which technologies assist in digitising trade. There needs to be a real focus on the true value of digital processes and why the investment – both dollars and time – is necessary.
Kim: Pre-pandemic, digitalisation was important, but it was difficult to get the momentum needed to drive forward the industry as a whole. The past two years have seen a new sense of urgency in the drive for digitalisation in trade finance and, together, we must build on this. Meeting today’s digital needs on a global scale requires a coordinated, industry-wide approach. But the first component has to be establishing comprehensive industry rules and standards to ensure that the solutions being worked on are scalable.
Bhandari: Banks’ ability to enforce their rights on digitally signed documents or instructions is paramount to ensuring digital momentum. The legal framework has to be aligned with new technologies. Some laws that can help enable greater digital penetration could be amended and aligned. The industry also needs to be agile and listen to the needs of its users.
GTR: How do you see the future of trade finance unfolding? Are there any other initiatives and technologies that you think are particularly promising and exciting?
Bhandari: The pace at which digitalisation is happening is quite overwhelming. The Indian regulator is hugely supportive and ready to join banks and FIs in implementing digitisation initiatives. The most promising initiatives for me are the IBBIC, which relates to blockchain-based trade finance, and the account aggregator-based risk rule engines, which help build efficiencies and speed up financing to supply chains.
Ferreira de Araújo: I see more agile and more digital international trade in the future. I believe that banks need to pay more attention to digitisation initiatives, such as those being developed by Swift. Undoubtedly, they will be crucial for the better functioning of foreign trade between banks and companies, and will allow for more efficient service offerings throughout the chain.
Marrone: I think the future is promising as more and more participants in the industry adopt digital processes and move towards a blockchain framework. It’s going to be a long process, but the pandemic really helped to push the beginning forward.
Kim: The next few years will see open account trade continuing to grow, and large corporates will play a significant role in this space. Importantly, we also need to provide effective tools and channels for SMEs to better access financing – especially as it is these businesses that stand to benefit the most from supply chain financing programmes for working capital support. As banks, we need to create a flowing downstream route to support SMEs and enable greater financial inclusion.
If we can make that happen, it will inject liquidity into the supply chain and further stimulate global trade.
