Much has been made of “Industry 4.0” and its potential to revolutionise the way manufacturing firms operate. Yet this same technology has far-reaching implications for many other fields – not least trade finance, where it brings opportunities for greater connectivity, better-informed strategy and improved process efficiency and risk mitigation, says Sebastian Hölker, head of structuring and implementation of SCF products at UniCredit.
The benefits of Industry 4.0 to manufacturing and industry have been championed by governments and companies around the world. In comparison, the uses for similar technology in other industries appear to be underdeveloped or poorly understood. Now, innovators across a number of industries are starting to explore how similar technology can benefit their own business models.
One such field is trade finance. By integrating expanding datasets with new ways of analysing data, “Trade Finance 4.0” technology stands to usher in a new wave of efficiency and connectivity, right across the supply chain. To a certain extent, banks must see the implementation of such innovations as a necessity. Certainly, they must move quickly to keep pace with fast-changing technology and the demands of their corporate clients.
Yet Trade Finance 4.0 is best seen in terms of its opportunities for both banks and corporates. Among other things, they can look forward to improvements in risk mitigation, security and efficiency – but it all starts with connectivity.
Connecting the dots
Banking relationships are often simplistically described in terms of one-to-one scenarios. Yet there are many more parties involved. A better idea of the scale of supply chains – and therefore the implications of a bank-client relationship – can be created by imagining supply chains as a vast, interconnected web. Each firm plays double duty here – at times acting as a buyer, and at others, as a supplier. These relationships expand to create a complex supply chain web covering almost the entire globe.
The complexity inherent in supply chains has the consequence of making it difficult to reach certain parts of the network. This is where Trade Finance 4.0 technology can make a big difference – providing a connecting infrastructure that can strengthen communication and data sharing across complex supply chains.
By working together to establish and share access to inter-connected data hubs, banks, businesses and other firms – such as insurers – can store and retrieve relevant data instantly. This enables firms to re-allocate time spent establishing contact with partners – devoting it to value-adding activities instead.
Furthermore, with greater connectivity comes the chance to interact with more members of the supply network. For banks, this offers the opportunity to create more and better tailor-made solutions – meaning corporates will benefit from improved risk mitigation and better financing options.
A better knowledge and a deeper understanding
Yet access to data itself is only one piece of the puzzle. While technology can help to connect different parts of the supply chain, it does not mean the data they find will be useful – especially when they operate in different regions and cultures, or they are governed by regulations limiting the types of data they can use.
The solution is found in the other key element of Trade Finance 4.0 technology – increased processing power, which allows more complex data analysis. For example, a new application from UniCredit, known as “Babel”, uses a machine-learning algorithm to crunch vast amounts of data. This enables it to interpret diverse sources of information and distil them into their essential meaning – taking unstructured data and translating it into actionable information in the user’s preferred format.
Refining risk assessment
Indeed, taking advantage of existing data is one of the major themes of Trade Finance 4.0. The practice is commonplace in the insurance industry, where firms insuring a rocket launch, for instance, will collect data on weather patterns, positions of solar objects and many other factors in order to determine the risk of something going wrong.
As capacity for data storage and data processing continues to grow, banks are beginning to imagine the potential of this kind of information in refining their own risk assessments and pricing. However, even when this data is rendered useful by complex data analysis techniques, regulations confine banks to traditional methods of risk assessment – which can leave huge quantities of valuable data by the wayside.
That said, there are ways for banks to factor this data into their pricing indirectly. We have already noted that insurers are free to make use of much more varied sources of data. As such, one option for banks is to take out an insurance policy with a firm, integrating this into their own pricing and financing. This is yet another example of how expanding datasets can be rendered useful by innovative thinking.
It’s in our blood
Of course, another of the major concerns with expanding datasets is security. As data becomes increasingly valuable as a commodity, it becomes more important to protect sensitive material from external threats, such as hackers and imposters.
Banks, in contrast to most of the fintechs who currently are trying to make a mark in the SCF market, are strongly regulated, and are obliged to meet the highest data protection standards. In this context, the “regulatory burden” banks have to bear these days becomes a competitive edge.
This – along with greater connectivity and big data solutions – is just another way in which new technology is solving complex problems in the financial world. Indeed, complexity no longer represents a great challenge for banks and their corporate clients.
Indeed, if you had to cite just one limiting factor for the progress of “Trade Finance 4.0”, it would have to be the willingness of banks themselves to adapt. As traditional institutions, banks have long-held cultures and established infrastructure, which cannot easily be cast aside.
Education will therefore play a key role in cultivating the right conditions for innovation. And while it is difficult to predict the precise rewards banks and corporates can expect from “Trade Finance 4.0”, what we can say with some confidence is that they will be on a grand scale. Banks must take a leap of faith in this respect – trusting the logic underpinning this wave of innovation. Greater connectivity, efficiency and security beckon for those prepared to embrace the future. It is time for
banks to take the leap.