Digitising trade benefits corporates, banks and even regulators tremendously. Top banks are taking the lead in exploring cutting edge technologies to augment how trade finance is conducted and facilitate value creation for all participants in the ecosystem, writes Lim Him Chuan, Managing Director and Group Head of Product Management at DBS’ Global Transaction Services.
The imperative for trade digitisation
Shifting external landscape and changing customer expectations are forcing trade banks to re-think their existing business models and processes. Many are faced with compressed margins from labour-intensive paper-based processes and increasing cost of due diligence given more stringent compliance and regulatory requirements. At the same time, customers are consistently looking for shorter processing turnaround time, risk mitigation and attractive pricing to optimise their set-up.
An increasingly compelling answer to these challenges is digitisation for both banks and corporates. Through digitisation, manual and error-prone processes can be reduced, risk can be detected ahead of time and ultimately greater visibility and collaboration are created amongst all trade players regardless of industry or geography.
The business impact of digitisation is tremendous. Deloitte’s recent Economic Growth and Development in Asia report, for instance, showed that Indian SMEs with higher digital engagement achieve 27% higher revenue growth and are 65% more likely to access international markets. As well, Indonesian SMEs with advanced online capabilities have up to 80% higher revenue growth.
The benefits for banks are also huge.Conservative industry estimates at one bank showed that digitisation of trade finance could save up to US$50mn per year and two hours per transaction, according to research by the International Chamber of Commerce (ICC). Meanwhile, research by Ernst & Young (EY) showed that using software robotics to enhance processes in the back office can reduce costs and handling time by 25-40%. At DBS, the introduction of fully online applications for bankers’ guarantees has reduced the time for application approval by 70%. Along with these quantitative improvements in cost and processing efficiency, there are also qualitative benefits in risk mitigation and regulatory compliance.
Digitisation in trade lags innovation in consumer banking
Despite the many benefits, trade digitisation is not happening at nearly the same speed as digitisation for retail consumers such as e-commerce payments. Indeed, the 2017 ICC Global Survey on Trade Finance showed that just over 7% of respondents at national, regional and global banks with trade finance functions see digitisation as being widespread in trade, with 20% saying that there is no evident digitisation at all.
A key reason for the lack of digitisation is that digitising trade is complex as it requires changes in legacy processes, documentation and management practices. In particular, SMEs lack the skills and scale to make the change. Moreover, siloed digitisation within a single organisation has limited benefits. A classic example is the delivery of shipping documents. Information may come in the form of digital data from their ERP systems, however, this has to be translated into hardcopy documents as it tends to change hands in paper form in most parts of the world. In addition, the lack of a common and widely accepted legal framework has impeded the adoption of digital exchange in title documents.
Various attempts to promote digital solutions in the trade industry have not been widely adopted either, resulting in trade documentation and settlement remaining heavily paper-based. Existing industry solutions have yet to gain critical mass despite the potential of delivering a fully digital end-to-end process for trade transactions. Much of these can be attributed to the cross-border nature of trade finance and a lack of interoperability of the different solutions.
Innovation is driving change
Increasingly, innovation is also starting to deliver broader advancements and benefits of digitisation.
One key innovation is blockchain. Its distributed and immutable nature allows real-time tracking of transaction statuses or title ownership transfers and engenders trust in the authenticity of information without an independent central party. Banks can utilise solutions such as smart contracts to automate transaction checking and financing where rule-based processes are executed upon the fulfilment of contract conditions. This will eliminate the need for manual and paper-based checking of documents, thus cutting down cost and man-hours. The rule-based execution of contract conditions also lowers execution risk and allows corporates quicker access to cash.
Another compelling innovation is big data analytics. One way is to harness the large vault of information available internally within one’s organisation as well as industry data from external ecosystems. This allows banks to identify trends in customer behaviour to develop business insights, detect anomalies in transactional activities and refine decision making.
While these and other digital solutions are being developed by the bigger banks and multinationals, digitisation will have cascading benefits across the entire trade ecosystem. Large buyers will be able to offer better support for small suppliers, while banks will be able to deliver more secure solutions that make it easier for SMEs to become digital.
How should banks lead the change to make trade digitisation successful?
1. Customer centricity
The biggest strides in trade digitisation so far are happening in banks, mainly in automating processes to increase productivity, leveraging data analytics for risk management as well as promoting business growth. However, for these efforts to truly bear fruit, the answer lies in the banks’ ability to embed banking services in the corporate customer’s journey exactly at point of need.
Much of banks’ past successes were product focused. However, this may no longer be sufficient to meet customers’ changing expectations. Banks have to return to the drawing board and ask: “What does my corporate customer truly need? How does this improve their business and banking experience?” Only through thorough examination and understanding of the corporate customers’ day-to-day workings can real pain points be identified and addressed.
For example, corporates may be able to provide information such as invoices in digital form. However, as downstream parties such as banks require paper documents for processing or due diligence checks, this digital data is printed or faxed before being physically delivered. Banks may be able to meet a corporate’s financing requirements, but have failed to consider and improve the customer experience.
With customer-centric digital solutions that address the full end-to-end trade settlement process from point of engagement to automated processing
and post-processing engagement, banks will be able to extend trade services that make customers’ banking experience joyful whilst making a positive difference to their business. This can be achieved through creating intuitive customer interfaces and enhancing system connectivity, as examples.
This in turn increases customer satisfaction and loyalty thereby yielding greater cross-sell opportunities for the banks as well. Thus, to harness the full potential of digitisation, customer centricity is key to enhance product value propositions and promote digital adoption across the trade network.
2. Building the digital trade ecosystem through collaboration
Although banks and corporates may develop leading-edge digital capabilities themselves, they cannot work in siloes. The nature of the trade ecosystem requires that market players collaborate to create a network effect that boosts trade digitisation among multiple parties across the entire supply chain.
Along with digitising data at its source, there must be system interoperability so that the various trade parties can share transactional data across different industries and geographic locations to create value-adding and scalable solutions. The key enablers to such interoperability are common industry data standards such as ISO20022 and a legal framework that is recognised across different jurisdictions.
With interoperability and data standardisation, banks, corporates and other trade parties will be able to communicate and transact seamlessly through any platform or ecosystem. This will also enable mapping of data into the back-end systems for straight-through processing.
It may not be realistic to expect immediate change, as the upheaval of numerous trade counterparties’ systems and processes and mind-sets cannot happen overnight. That said, it is important to have alignment in the vision of digitisation amongst banks, corporates, governments and trade-related organisations to create a network effect so that digitisation moves along faster.
DBS digitises trade
One financial institution at the forefront of developing digital solutions is DBS, which is embedding itself in the customer journey so that it can understand customers’ pain points and work to transform trade practices. The bank is using its learnings to develop customer-centric solutions both internally and for clients so that they can take full advantage of digitisation across all facets of trade.
Internally, for instance, DBS has developed capabilities to promote digital business acquisition such as online bank guarantees and letters of credit, and integration with accounting packages such as Xero. Automation of internal processes with robotic process automation, chatbots, automated trade alerts and more is delivering benefits such as shorter turnaround times and lower costs.
DBS has also piloted a trade analytics solution, named Trade Alerts, to screen for red flags on trade finance transactions and detect anomalies in transaction behaviour. Leveraging data analytics and artificial intelligence, the solution will reduce the time taken to screen transactions for AML and fraud risks during processing.
Recognising that it is important to collaborate across the trade ecosystem, DBS is also actively involved in local, regional and global industry initiatives to promote trade digitisation. DBS is a leading member of the taskforce established by the Monetary Authority of Singapore (MAS) for its National Trade Platform (NTP) initiative. NTP is a joint collaboration with various Singapore government agencies business organisations, financial institutions and logistics providers. The vision of NTP is to develop a national info-ecosystem that provides the foundation for Singapore to be the world’s leading trade, supply chain and financing hub through the digitisation of trade.
The time to digitise is now
While smaller businesses in particular and even some larger ones may find digitisation as too complex or costly, the trade ecosystem is moving rapidly toward digitisation. Corporates and banks alike will be left behind if they do not keep up. Rather than losing out on opportunities to grow revenue and increase efficiency, banks and corporates should collaborate so that they achieve the many benefits that trade digitisation can bring. Indeed, banks have come to realise that digitisation is a very compelling approach towards future-proofing their trade business.