Speakers and delegates at the GTR US Trade and Working Capital Conference couldn’t agree on a timeframe for widespread adoption of fintech solutions in trade finance, but one thing is for sure: it’s only a matter of time before mainstream usage becomes a reality. Melodie Michel reports.
The first audience poll of GTR’s Chicago conference this June was telling: asked whether they saw the growth of fintech as a threat, 36% of bankers admitted they were concerned about being replaced, while 50% said fintech companies had forced them to up their game.
All speakers strongly believed in fintech, insurtech and regtech’s potential for disruption, despite the fact that the biggest impact of these innovations has so far been fairly confined to the SME world. And even there, there are obstacles to innovative processes.
David Gustin, founder of Trade Financing Matters, founder and president of Global Business Intelligence, and chair of the conference used the example of Amazon to illustrate this issue: while the online retailer’s credit management arm presents some disruption potential, it faces the same problems as everyone else in the sector in collecting data from midsized companies.
In general, though, the fact that fintech companies can work nimbly was hailed as their biggest strength. “Our differentiator over the banks is that fintechs are technology organisations, they exist to deliver new releases, etc, whereas banks are not particularly good at implementing new technologies: it takes them a long time as they have to go through very extended processes. Fintechs are able to reach into sectors on a much more agile basis,” Ian Kerr, CEO of Bolero, told GTR on the sidelines of the event.
“Ultimately though, it’s about working together as partners: the banks absolutely have a role to play in terms of leveraging their balance sheet, their level of trust and their reputation in the market, and bringing together the concept of a network of networks: working with different fintechs to reach into different sectors with different types of trade and supply chain finance transactions,” Kerr added.
New stumbling blocks
The advent of financial technology is creating not only opportunities, but also a number of challenges for banks and corporates. For example, sanction screening processes can result in up to 3% of false positives, which Henry Balani, global head of strategic affairs at Accuity, called “a big problem”. Then again, technology, particularly artificial intelligence and machine learning, could help improve these processes, he added.
Still on the banking side, while recognising the favourable prospects presented by the fintech world and increasingly investing in it, banks are concerned about the third-party risks of partnering with such providers.
“We have some challenges across all of the banks about information security and where we have to comply with regulatory requirements, and the fintechs at this point do not really have that kind of compliance. We have to really be sure that our solutions are tight – we have to also manage risk with fintech viability, if they get bought, sold or if their business fails,” said Ann McCormick, director of trade and supply chain product management at Bank of America Merrill Lynch (BofAML).
She added that fintechs need to get better at listening to their clients’ needs, as opposed to “pitching a whole bunch of solutions”.
Fintech companies’ aggressive sales strategy was also noted by corporates at the event. “We’re being pressured by fintech providers; banks are not yet knocking on our door to talk about blockchain,” said Jennifer Davidson, senior trade finance co-ordinator at Cargill.
“Fintechs are pitching to us to sell us solutions, but they are also pitching to our corporates, and then requiring us to integrate, and if you have 100 corporates coming to us asking to integrate with 100 different fintechs, that can be a challenge, as they all require scrutiny which comes with a lot of overhead,” added BofAML’s McCormick.
There are ways technology companies could help with this process, for example by making their platforms interoperable. “We’ve got a responsibility to work closely together as well on an interoperable basis,” Kerr said. “Of course, there’s fair competition, but where there are adjacent spaces between financial technology providers, we’ve got to make that more seamless for both the corporates and the banks.”
In order for trade digitisation to become mainstream, banks and corporates need to streamline the implementation process of such technologies. Cargill’s Davidson explained: “It’s a struggle in big organisations to get through the different protocols and security issues we have in trying to adopt new fintech solutions. It’s a slow process – much slower than we would like at the business level. It is something you have to make time for and dedicate resources to. At the end of the day, we’re just trying to transact our day-to-day business and this is something new on top of that. It’s exciting and we want to be able to support that but it takes time so you have to have people dedicated to the mission of implementing the solutions.”
At Bolero, Kerr admitted that fintechs were still educating corporates along the supply chain, in particular reassuring them on the fact that digitisation is “more secure than using paper documents to complete transactions”. “With the corporates, a lot of the challenge is about not just bringing them on board as sellers, but also bringing on board their buyers and the importers particularly in countries where they may not be as technologically advanced. Again, that’s a joint responsibility,” he added.
Aside from the security and IT processes aspect, collaboration is needed for activities from marketing to lobbying regulatory bodies. According to Davidson, joint marketing is the best way to convince importers, banks and carriers to move to digital. “We need to work together as partners throughout the industry to help change legacy paper systems to digitising international trade,” she insisted.
On the regulatory side, she pointed out that collective efforts to educate legislators on the benefits of digitisation are the most effective. The agricultural industry, for one, is very document-intensive, and has a lot of regulatory bodies (such as the US department of agriculture; USDA) requiring a lot of documentation, but lobbying by industry associations has yielded results.
The International Plant Protection Convention announced in May this year that it plans to complete a proof-of-concept pilot project to test a global digital exchange for electronic phytosanitary certificates, aiming to replace the current paper-based system. Participating countries include Australia, Chile, China, Ecuador, Egypt, Ghana, Guatemala, Kenya, South Korea, The Netherlands, New Zealand, Samoa, Sri Lanka and the US.
“The ePhyto Hub will transform international agricultural trade,” said Christian Dellis, export services director for USDA’s plant protection and quarantine programme, upon the launch of the pilot. “Each country’s computerised trade system will share a common technical vocabulary and a set of established trade rules. That will let them all interconnect seamlessly through the global ePhyto Hub, where they can exchange fraud-resistant electronic phytosanitary certificates quickly, accurately, and at very low cost. That means lower costs to exporters and fewer shipments detained at foreign ports of entry.”
Davidson told GTR at the conference that Cargill was “very excited” about the pilot.
It seems the big fintech push is paying off: 70% of delegates at the event believed blockchain applications in trade would one day become mainstream, though they estimated that it would take at least five years. For Christopher Khan, project lead at blockchain consortium R3 CEV, it will only take two. The race is on.