Digital solutions have proven to be the way forward in the trade finance industry, but given the plethora of networks, platforms and consortia, the market has become increasingly fragmented. GTR and Barclays gathered financial technology experts to discuss the benefits of shared infrastructure and a community-driven approach, the need for enhanced connectivity and interoperability, and what the future of fintech and bank collaboration might look like.
- James Binns, global head of trade and working capital, Barclays
- André Casterman, founder and managing director, Casterman Advisory, and chair of fintech committee, International Trade & Forfaiting Association (ITFA)
- Patrick DeVilbiss, director and senior offering manager, trade and supply chain solutions, CGI
- Shannon Manders, editorial director, GTR (moderator)
GTR: With the pandemic having accelerated the take up of digitised financing solutions, where are we now as we move through the third year dealing with Covid-19? How is the situation today impacting on banks’ digital strategies, and where are they looking to create value?
Binns: If you think back to before the pandemic, four or five years ago, there were many new technologies and new players coming to the market. Trade finance banks were getting involved in different proofs of concepts and more innovative solutions from a digital perspective.
Then, when Covid hit and everyone began working remotely, we began to see the benefits banks could achieve by fixing some of their basic processes, like using DocuSign instead of wet signatures, for example.
There’s been a change in the way that the market approaches digitisation, with a shift in focus to the strength of banks’ core technology capabilities in the first instance, and then how well those more robust systems can connect to the market and start joining up with multiple different solutions. It’s no longer about harnessing new market solutions to plug into legacy systems.
Casterman: Since the start of the pandemic, digitisation has become one of the top priorities for the C-suite as company leaders work to ensure business continuity.
There had been some progress made on digitisation efforts before the pandemic, and what we’re seeing now is an alignment of various dynamics, both in terms of policy and technology.
On the policy front, there is one major market development that several countries – including the UK – are focused on, which is the alignment of national legislation with the Model Law on Electronic Transferable Records (MLETR). Work on that, through the United Nations Commission on International Trade Law (UNCITRAL) has been ongoing for more than a decade. The Model Law was published in 2017, but it had not yet had much of an impact until the pandemic exposed the real need to give electronic trade documents the same legal standing as their paper-based counterparts.
In terms of technology, systems that existed before the pandemic, such as distributed ledger technology (DLT), have evolved and are starting to demonstrate their value. Combining technologies like digital signatures, which is essentially an authentication mechanism, with DLT, which tracks ownership, means we’re able to create a digital asset around trade documents, which will support the implementation of MLETR and the digitisation of additional documents and instruments.
We’ve always known that it’s much more challenging to digitise trade than, say, payments and cash management, for example, but now we have this greater alignment of policy and technology that will enable us to do much more.
DeVilbiss: In the first six to 12 months after the pandemic hit, it was a real challenge for some institutions. Thankfully, those that were connected to end-to-end digital platforms were able to transition quickly. But generally we saw banks take measures to allow activities to run a lot more quickly and seamlessly.
More recently, we’ve observed banks getting back to business as usual in a hybrid working environment. As they do so, they’re looking to integrate some of the basic processes, like digital signatures, into standard operating procedures.
I agree with James’ point; there is a shift among banks to focus on internal efficiency as opposed to investing time and resources to join a new consortium. There’s a definite emphasis on what kind of user experience banks want for their customers and what kind of solutions they are deploying internally to provide efficiency for processing those needs. Something like Intelligent Process Automation is an example of what that might be.
I personally had hopes that we would see a much broader adoption of end-to-end digitisation as we got into the pandemic, out of sheer need. There’s still a lot of market opportunity from that perspective.
Nevertheless, there is a greater awareness of the need for more end-to-end digitisation. It is entirely dependent on modernisation efforts, and banks that continue to use legacy technologies are really going to struggle. We’ve seen the emergence of a number of initiatives to modernise both front-office and back-office platforms to get up to the mark. There is a growing chasm opening up between those who are keeping up from a tech perspective and those who are not, because the reality of trade and banking in general is that it is underpinned by technology. If you’re not addressing your technology solutions, then you are going to fall woefully behind.
Binns: We’re also starting to see the rise of software as a service (SaaS)-based services, which are critical to the trade finance sector.
As banks start approaching their technology needs in a more similar manner, it makes sense to share the use of the same platforms in a SaaS-based environment, as provided by a few experienced players, like CGI. That way we can share the cost of the future development of those platforms.
The other benefit of that approach is as banks start using the same underlying platform, albeit on a white label basis, we’ll also be using the same Application Programming Interface (API) gateways off the back of it. This enables even greater interoperability, which then starts to break down that big problem of digitising trade from end to end. It won’t solve it entirely, but it’s one element that will help to move us in the right direction.
GTR: How are tools such as APIs driving efficiency and interoperability and removing friction points within the trade finance ecosystem? What are the benefits of this approach?
Casterman: The next challenge for banks, as they continue on their digitisation journey, will be to ensure that they keep costs down. Over time, rising costs could be the weakness of some of the incumbents.
As we know, trade is a complex process; it involves a number of internal systems and external counterparties. Manual operation of these processes creates friction, introduces weaknesses, and drives up costs. To remove those frictions, we need to automate as much as possible. It’s important that the primary objective is to automate – not necessarily to digitise, which often still involves many manual processes.
Full automation can only really be achieved if all those different systems support the end to end process. This is where APIs are critical. New technologies use API systems to connect to, and talk with, one another. They enable technical interoperability within a bank’s own system, as well as with external systems.
The treasury world, which deals with higher volumes and is far more digital than trade, is very advanced when it comes to the use of APIs – so we know it works.
At present, there is little in the way of standardisation of those APIs, but that’s something that might change as a result of the emergence of more SaaS platforms.
DeVilbiss: At CGI we believe strongly in the role and future of APIs within the world of trade. That reality of system-to-system communication becoming much more important in order to remove the friction that André has described is really bearing out. APIs allow for far easier integration along those lines, particularly when compared to things like bulk file transfers, or messages being passed back and forth.
The other angle of this, from a friction perspective, is the real time nature of how APIs operate. There’s an expectation amongst customers and banks that processing needs to happen as quickly as possible as and when the transaction occurs, which also makes sense in terms of operational efficiency.
All of this comes together in a way that presents APIs as a real opportunity. The future of trade is not only digital but multi-channel. CGI Trade360, as an SaaS platform, has the capability to create an environment in which standardised APIs can be developed and accessed by external parties, allowing for a much quicker and more seamless integration between networks.
One thing we do need to be aware of as various banks and fintechs push out with the development of APIs is the need for common API standards, as André touched on. The work that the likes of the ICC’s Digital Standards Initiative and others are doing in this space will be critical to the viability of integration between systems and the long-term success of APIs in trade.
It’s not to say that industry players should slow down what they’re doing with meeting the needs of their customers, but rather to also take a step back to recognise what’s happening within the industry from an API standpoint, to make sure we’re all building that into our long-term roadmap. It will be critical that we have some commonality so as not to generate more friction, ultimately, with our corporate customers.
Binns: Automation is not only about saving immediate costs, it’s also about improving the efficiency of processes and the speed of transaction times, which will benefit clients in the longer term. Moreover, automation significantly cuts down on the amount of working capital companies need, and also reduces the costs required to fund supply chains.
All of these savings filter down to the end consumer, which is particularly critical today given the current inflation surge.
Another important angle to the use of APIs is their ability to extract value out of the vast amounts of data that exists within the global trade ecosystem and which is often integral to banks’ decision-making processes. More data allows us to make better, quicker decisions, which not only makes for safer portfolios, but also enables banks to fund deeper into supply chains. If more and more banks harness this kind of technology, we’re talking about moving closer to closing the much-referenced US$1.7tn trade finance gap.
Finally, there’s the compliance angle. As evidenced in last year’s ‘Dear CEO’ letter from the Prudential Regulation Authority and the Financial Conduct Authority, regulators are becoming more focused on financial crime controls within trade finance. There is an expectation that financial crime risk frameworks become more holistic. Part of that means continually learning from what you’re seeing, and subsequently adapting controls. This is where we need APIs to be able to integrate some of the data that’s out there in supply chains on an ongoing basis. That can better help banks meet the expectations of the regulators, while also protecting ourselves and our clients.
GTR: How are fintechs like CGI exploring and commercialising innovations in partnership with their clients, as well as with other fintechs, and working together to shape the next generation of trade finance?
DeVilbiss: As we’ve discussed, CGI Trade360 operates as a SaaS-based model, and we maintain that community perspective with everything we do, working very closely with our customers.
At the CGI Trade Innovation Lab we explore the leading technologies, both on our own as well as in collaboration with banks, corporates and fintechs, with a view to meeting their business needs, creating more opportunities for straight-through processing, and generating efficiency within our market.
In the years leading up to the pandemic, there was a surge in industry interest in proofs of concepts, and discovering what’s out there, whereas now the focus is very much on how to work with a fintech to build a sound business case, to produce something that is truly market ready and will meet a customer need. The community focus has been really critical to ensure that’s what we continue to deliver.
Collaboration at a wider industry level is also important, and we’re a member of ITFA’s fintech committee, which champions cooperation amongst fintechs outside of the context of their own platforms. It’s crucial that players work together to move forward on digitisation initiatives to ensure that what the industry is producing will ultimately deliver value back to the customer.
It’s worth adding that working within fintech communities also allows established fintechs with advanced standards of operating to create a bit of a buffer between our banking partners and some of the more cutting-edge fintech companies in the market. This allows banks to push the boundaries of what they want to do, in terms of augmenting their capabilities and adding new value streams, without necessarily denigrating their existing process and software development lifecycle, and how they engage with their corporate customers.
Casterman: This kind of collaboration amongst fintechs is at the core of ITFA’s Digital Negotiable Instruments (DNI) initiative, which we set up in 2019, and which aims to fully digitise bills of exchange and promissory notes. We’re doing this by combining advanced document technology with electronic signatures and DLT. We have since published our dDoc specifications, which is a framework to digitise guarantees and negotiable instruments in a way that ensures their compliance with MLETR. One of our members, Enigio, has created a product that is a blockchain-based solution that enables users to create digital documents, prove and transfer ownership, and validate that they are the functional equivalent of paper documents.
That’s one way for technology companies to work together – and it benefits everyone. It demonstrates to banks how an end-to-end process is supported by multiple vendors, by aligning around APIs and around data specifications. This is also the most pragmatic way to create new standards in the industry.
GTR: What does the next frontier of trade finance bank and fintech collaboration look like? Where do we want to get to?
Binns: We want to get to a place where more banks are updating their core operating systems and, when doing so, adopting SaaS-based solutions. That way there will be more of us using the same platforms, which will promote what we’ve been talking about today in terms of connectivity, interoperability and so forth. That would be the first phase.
The second phase would be the standardisation of APIs, as outlined by Patrick, which would enable more effective collaboration with fintechs.
In parallel with these efforts, we need a mindset shift amongst banks, so that they become more open and willing to promote that end-to-end collaboration with fintechs.
All of this needs to then be underpinned by the standardisation of legal environments, including the alignment with MLETR.
Casterman: We’re already seeing some of the SaaS platforms expanding their reach and building communities of different players, including corporates, banks and institutional investors, which is a step in the right direction.
But we can definitely do more. The next step to consider, which would bring more value to the industry and to banks in particular, would be adding a layer of governance. Many technology companies would like to expand their offering beyond technology but are limited in their ability to do so unless they become fully blown financial institutions, which they simply don’t want to do. I think there’s scope for SaaS players to power new financial market infrastructures – owned by banks – that exist in that layer between the two offerings. That’s what banks did in the 1970s with Swift. From the very start, they created the governance and the technology, and they all benefited from that bank-owned and bank-governed infrastructure.
There are many areas of innovation we can explore, but we need even stronger partnerships with multiple banks to be able to add this layer of governance on top of the communities being initiated by some of the fintechs.
DeVilbiss: The future is bright. CGI and BAFT recently conducted a survey, which, among other things, evaluated opinions on collaboration between banks and fintechs.
The response from banks was that it is a largely positive relationship, but that there is still room to grow. Not one of the bank respondents scored the relationship with the fintechs they’re working with as a perfect five out of five. This tells us that we’re not quite there yet from a collaboration standpoint.
In terms of expectations for the future, in the near term the focus needs to be more customer-centric, and fintechs can help run or connect with platforms to provide services to customers. At the end of the day, if you’re solving real customer needs, you’re going to be successful no matter what.
Looking longer term, I’m hopeful that as an industry we’re going to be pushing the boundaries of what we can do, and achieving things that we haven’t been able to do up to this point because of the limitations we’ve had in terms of data and understanding. This could including exploring new areas such as deep-tier financing, or eventually realising fully digital end-to-end trade processes and getting rid of physical paper documents once and for all. I’m optimistic that this will happen.
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