As trade digitalisation has progressed, so too have efforts to drive greater collaboration between banks and fintech companies as they work to harness new technology and ensure sustained development. GTR hosted a roundtable in New York at the end of 2022, bringing together influential experts from both camps, to discuss the evolution of bank-fintech partnerships and where the barriers to innovation and adoption still lie.
Roundtable participants:
- Ben Arber, global head of commercialisation and managing director, US and Canada, MonetaGo
- Geoff Brady, head of global trade and supply chain, global transaction services, Bank of America
- Alisa DiCaprio, chief economist, R3
- Merlin Dowse, executive director, global trade finance product management, JP Morgan
- Andrew Holmes, head of origination, North America, Demica
- Ravesh Lala, VP, hybrid cloud strategy and solutioning, IBM
- Carl Wegner, chief executive officer, Contour
- Shannon Manders, editorial director, GTR (moderator)
From left to right: Merlin Dowse, Carl Wegner, Alisa DiCaprio, Andrew Holmes, Ravesh Lala, Geoff Brady, Shannon Manders, Ben Arber
GTR: What’s your take on the current state of bank-fintech collaboration in the trade finance space, and how has this evolved over the last few years?
DiCaprio: At R3, we started as a consortium of 42 banks, so the bank-fintech relationship has always been part of our DNA. Over the past two years, there has been a bit of a difference in two respects. The first is, a lot of our projects with the banks have matured, like Contour, for example. Secondly, we’ve also seen a lot more activity from financial market infrastructures and less from banks. This is because banks are much more experienced in the space now and know that there are products they can purchase as opposed to building themselves.
Wegner: There has been a significant shift in how this relationship has evolved. Today, the industry is using solutions that have been developed by fintechs over the years, whether they’re on the blockchain or not.
I think there’s also been a realisation that collaboration between fintechs and financial institutions is crucial to build these utility platforms. If one bank builds it alone, it will be difficult bringing in the rest of the banks on the same platform. Collaboration is key to building a system that everyone can join.
GTR: Fintech culture is still very different from bank culture. Do you think we’ve reached a point where there’s some cohesion in the way that banks and fintechs work together? Does there need to be some sort of meeting in the middle?
Brady: I don’t know that we need a perfect middle ground between the two of us. Part of what makes fintechs useful is their approach of ‘failing fast’ and being able to test and learn quickly. Banks, being regulated, have more constraints. I think it’s important that the fintech community bring an innovative vibe – they are the cool kids wearing high-top sneakers. But conversely, many investors are reassured when there are also people wearing suits whose job it is to consider worst case scenarios. Perhaps there is a conflict there but it’s likely never going to go away and I’m not sure it needs to. The key thing is to figure out how to make the two parties work together.
Dowse: That’s where I’ve seen change. Before, fintechs would come in and say, ‘this is what I have, this is what it does, you can take it or leave it’. But now it’s a lot more, ‘how can I fit it to accommodate you and your needs?’ There’s a lot more conversation, collaboration and willingness to tweak an existing product set because you need to evolve with the trends in the industry.
Lala: The culture at fintechs has changed as well. If you go back five years, there was a lot of talk about disintermediation and how the banks can’t do this or that. But I think fintechs have realised the need for collaborating with banks. Especially in our industry, banks are at the centre of it all – they own the customer relationships, they own the capital. Fintechs have become very open to suggestions from banks and are realising that they can get value from banks as well. This gives them new ideas which, when incorporated, create value for both.
Arber: As an ex-trade banker now in fintech, one of the things that has changed dramatically is that many of the critical value-added activities which required human intelligence are suddenly being made possible via artificial intelligence and cloud computing. This includes really challenging areas like automating document checking and anti-money laundering red flags – which traditionally have taken trade operations folks years of training to perfect. That’s empowering a greater level of digitisation to show that you can take a process of receiving paper documents at one end, and then delivering an appropriate decision at the other end. The most difficult parts of that process can be automated.
GTR: What have been some of the standout bank-fintech partnership successes?
Brady: ‘Standout’ might be a strong phrase. Successes don’t necessarily need to be great leaps forward. They can be smaller steps. Even the way we work together today versus five years ago is a success. One of the things that we’ve had to figure out and agree on as an industry was what each of us brings to the table. The banks bring the established relationships; the fintechs typically bring new ways of thinking. Our progress as an industry recently has been a result of leveraging those strengths – knowing when to engage each other and when to get out of the way.
Dowse: We’ve seen successful fintech partnerships when there is a great collaboration and where the goals are clearly defined and attainable. In other words, we have been able to digitise those processes that are within our own control. In terms of partnerships, alliances, etc, we’ve had success with a few ventures and a couple of learning moments, which will help us navigate what’s yet to come. I think that’s key: we’ve tried various bits and pieces, and we take those learnings and apply them as we move forward.
Arber: That willingness to experiment is relatively recent. It’s gone from doing everything in-house, to working only with the best partners, to now actually experimenting and trying things. For example, the innovation team operating a sandbox environment at a global bank saying, ‘we’re looking at API options for a supply chain solution’. Rather than evaluate vendors through a long procurement process, they just plug in three or four and see which works best via multiple proofs of concept, using dummy or proprietary data. That willingness to experiment with innovation and with partnerships is very positive for the overall ecosystem.
GTR: Where has bank-fintech collaboration not worked as well?
DiCaprio: One example in the trade space is what happened with we.trade, although the issue was not that there was anything wrong with the project, the banks or that relationship. The problem was that it was taking an operational process that didn’t make money, and just putting it on a different technology and wondering why it still wasn’t making money. There is often an assumption that there will be a dramatic improvement just because you’re engaging with a fintech and you’re using a new technology. But those things only give you more room to create a new operational flow; they don’t require it. If the process isn’t valuable or isn’t getting the results in the first place, then using a fintech doesn’t help that.
GTR: 2022 was quite a year for announcements of failures in this space. Does that have a knock-on effect on how things progress?
Wegner: There are good and bad aspects to these failures. We’re seeing consolidation in the market, and people are saying that we’ve become a market leader by being the one that’s still here continuing to grow and build. For us, this is a good learning experience. We looked at how we.trade built their platform and found that they had set it up in a friendly way for the banks but not the corporates, and if corporates aren’t adopting it, it’s not going to work.
However, the failures also make it harder. The question that many have raised for a while has been about the technology and whether blockchain works for trade. Well, that’s not the point. The point is, what is the value proposition? What is the business plan? When I was at R3, we said blockchain will succeed when no one talks about blockchain. Technology is just an enabler. It’s the product on top of it that matters.
Holmes: I think that blockchain has a lot of use cases across financial services and that it will really take off when, say, there’s an enterprise resource planning (ERP) that’s on blockchain. That’s like science fiction at the moment; you can’t do anything like that right now. For now, the banks creating blockchain solutions and making a sandbox out of it for the sake of doing it – that’s the tail wagging the dog.
GTR: What are the top technology investments and types of fintech engagement that banks are prioritising in the trade finance space?
Brady: New technologies could have an impact across the spectrum of trade, in credit scoring or sustainability, or by creating digital identifiers to establish corporate hierarchies. These could all benefit from innovation – whether collaborating with fintechs or other banks. There are some obvious non-competitive fields that every industry participant has an interest in improving and most banks would be willing to pool their resources to advance operations that make things simpler for our clients.
Dowse: I agree, but I think it’s also worthwhile appreciating the environment we operate in right now. Speculation is that there may be some form of a recession coming and that is going to have an immediate impact on how much innovation budget companies are going to be able to leverage. Then the next question is where do they look to allocate that budget? Is it on the internal efficiencies that are going to enhance the processing and the decision-making, or the execution, delivering the ultimate client experience? Or will they play in the sandbox to create something that doesn’t exist? Given the environment, it’s shifting a bit.
Arber: The regulators are starting to enable information sharing. The US Anti-Money Laundering Act of 2020 empowers banks to share suspicious activity report information with their sister legal entities across borders. It has a long way to go, but you’re starting to see many regulators moving in that direction. Creating invoice registries and databases of ultimate beneficial owners are also common examples. I think technology is driving that as well, in terms of banks wanting to compare potentially fraudulent transactions on an anonymous, secure, confidential basis, or to compare grey lists. Counterparty risk is a critical component of managing transactional risk and trade. If you can share on a completely confidential, secure, private basis, which transactions and customers you are concerned about in a given market with one or two peer banks, the results can be very valuable.
Elsewhere, I think there’s going to be a lot more activity in trade finance from a Big Tech perspective. For example, Amazon’s ambitions in helping suppliers globally. Plus, the cloud providers are clearly entering the KYC/AML, cross-border trade space with a real emphasis on vast amounts of data to transform the way that things are done.
Brady: We in trade finance are keenly aware of the US$1.7tn financing gap. In many ways, it’s at the heart of why and where we put our time and resources – to make a positive impact. To be successful, we need to be very tactical, which in my view centres on bringing together the buyers and sellers, the payables and receivables. When we can facilitate that connection digitally, we can layer in additional value through financing, discounting, risk mitigation among others. This is not just a technology story. It’s about connecting our clients to the broader ecosystem.
Wegner: From a fintech perspective, we have seen many banks prioritise digitisation efforts, especially in trade finance workflows, as they seek to bring more value to their corporate clients. Another area we’re seeing a lot of excitement in is in digital assets, and that’s an area we are focusing on as it provides an opportunity for the industry to increase the flow of capital and improve access to trade finance, especially for smaller players like SMEs.
GTR: What barriers do banks still face when it comes to embracing innovation, and how can these be overcome? How are banks ensuring that their internal processes enable innovation and adaptation?
Holmes: Fintech initiatives can get bogged down in a bank’s internal approval process, which can be really tough to get through. While it’s not entirely within the gift of the bank to streamline those, there are structural and educational changes that can be made to make the bank feel more comfortable. I think all of us fintechs would love the banks to move faster on those things, but we have to realise that there are reasons why the banks are where they are.
Lala: IBM has a rich legacy of working with banks and their existing processes. We do see sometimes that people try to think of what worked in the analogue world and try to recreate that in the digital world – that’s where some level of process improvements can be made.
Arber: Those onboarding questions exist to safeguard banks and depositors and rightly so. But procurement is also coming to the table in terms of being able to manage vendor onboarding in a much more streamlined way than in the past, and the industry across the board is trying to improve that without cutting corners.
Wegner: Life is very different now than it was five years ago and the banks have departments that oversee innovation. As a vendor, we now speak to dedicated innovation teams within banks – not just the person who’s been doing trade finance for decades and doesn’t necessarily want to change. Whole departments and divisions are looking at innovation. People are now more enabled than they were before to help move things forward.
GTR: How does the financing and tech community ensure that clients are on the same digitisation journey – especially with some companies moving more quickly to digitisation than others, for example, SMEs?
DiCaprio: Every entity has a risk management process that needs to adjust for digital documents. This may make some clients move more slowly than we’d expect. When we were writing a digitisation update for the International Chamber of Commerce during the Covid-19 pandemic, one question we asked was whether banks were having trouble switching to electronic documentation. One Nordic bank said they were having a lot of trouble getting clients to use eUCP even though most of the documents were already digital. The reason for the clients’ reluctance was that they preferred to use the process they were already familiar with. Even when the bank points out that nothing would really change, the clients say ‘no thanks’. Admittedly, this was a couple of years ago, but I think we’re making this big assumption that everybody wants digital documentation and maybe that is not the case.
Wegner: Fintechs have a unique opportunity to help make trade services cheaper and accessible for SMEs. How quickly companies adopt digitisation is going to come down to the educational process through working with the banks. The cost to serve for banks can be reduced dramatically.
GTR: What barriers do banks still face when it comes to embracing innovation, and how can these be overcome?
Lala: Security, compliance and controls are the biggest barriers that we see, along with answering the question of how can we help set up and elevate the fintechs so that they can move faster and can get the adoption with the banks.
Holmes: Even if we manage to get through the vendor onboarding process, being a small company, as most fintechs are, the banks are always thinking about the risk of entrusting a major function to us. Occasionally smaller fintechs can partner with larger consultancies or tech infrastructure partners to help the banks get over this reluctance. Having the big players in the room helps with these projects and helps to get people at the banks comfortable with the fact that there is sound oversight.
Brady: I’ve always believed the largest barrier to be what I call ‘mechanical friction’. We operate in a complex global structure with various and different regulations and business models. Within that world, we need to find ways of connecting more efficiently. We’re constantly bumping into things that are either slightly or a lot different in Asia versus South America or the Middle East. If we can make those connections with as little friction as possible, we’ll be able to accelerate innovation.
DiCaprio: Time to market, which is slowed by two barriers. The first is something that we didn’t expect when we were doing our earliest deployments, which is that most banks still wanted to deploy software on-premises. Of course, nobody is going to put their core systems fully in the cloud but certainly there are some areas where that can be expanded. Secondly, we’re seeing that banks are waiting for their big clients to say they want to do something with a fintech. But when that happens, banks can’t just spring into action without understanding the risks and the compliance implications, which takes time – especially as more regulation continues to enter the space. This is being mitigated somewhat as many banks today have done internal projects, which maps out these issues in advance.
Wegner: The biggest barrier we see is the expectation from corporates that embracing a new technology is like turning on a switch: it’s going to be new and perfect right away and have every bank in the world on it. The adoption of any new technology is a journey. There needs to be an understanding that we’re all going to be learning in this process and corporates will need to make decisions on how to use the technology. That’s one of the biggest challenges we have.
Dowse: It’s lack of standards. If you’re looking to digitise, you must speak a common language. Things such as API standards and the Key Trade Data Sets the ICC Digital Standards Initiative is set to publish early 2023 for eight of the most commonly used documents, including the commercial invoice, certificate of origin and the like. A common language enables interoperability, which is the other, bigger challenge.
GTR: What does the next frontier of trade finance bank and fintech collaboration look like? Where do we want to get to?
Dowse: Continue what we’re doing, playing in the sandbox, trying out all these different tools that are out there. Not everything’s going to be a fit for every bank. Banks should look to talk with each other more, especially when assessing fintech opportunities before they decide what’s best for them and focus on it. It’s a journey.
Wegner: I think the utopia is where we can find a customer nexus and a service that they need by collaborating with different companies. No one system, or one bank, is going to solve the world’s problems.
DiCaprio: I agree, I feel like the lack of standards is often an excuse for inaction. They’re important, obviously, but there is great value in exploration. What I want to see in the future is a set of trade finance products that work for everyone. Right now, we’re making existing products incrementally better, which is important, but we don’t have the right products for everybody. That’s where I want to see it go.
Arber: The return of globalisation has been written off repeatedly in the last few years with the post-financial crisis advance of protectionism and the rise of populism. But there is an opportunity for utilities to become embedded within a process from a trade finance perspective to help facilitate trade in spite of tariff barriers. This can be powered by information sharing, data sharing and regulation, plus the added advantage of cloud computing and the ability to process vast amounts of information for the benefit of managing risk and financing flows.
Brady: I think we’ll see fewer, not more, products in trade finance. Some of the more traditional products may not even need to exist. Stripped down to its most basic form, there is a receivable and a payable and we can start there. Wouldn’t it seem simpler to digitise the process by stripping trade finance down to its most basic form and then layering back in the risk and financing elements rather than trying to take the entire catalogue of trade products and find a digital version for each one of them?
Holmes: I think instead of a proliferation of products, you’ll see a proliferation of channels. As companies go digital, there are more and more ways to collect data that can lead to financing a physical flow, or inventory, where you previously didn’t have an easy way to do so. Banks and fintechs can then work together to provide financing opportunities using that data. Embedded finance is already here but these trends will continue to impact our industry.
Lala: For us, it’s the ecosystem; forming the ecosystem and that common platform or utility that the fintechs can ride on top of and that’s consumable both by the banks and corporate clients.