As with so many elements of business, COVID-19 served to accelerate the adoption of digital processes in trade finance across the world. With many banks closed and staff working from home, the exchange of physical documents associated with trade finance was simply not possible in the same way.
The pandemic threatened to put the brakes on a system that had been operating successfully for thousands of years. The notion of trade finance developed because global transactions between buyers and sellers come complete with a range of risks. How do I know I will be paid for goods that I’m dispatching across multiple borders? How can I be sure I’m dealing with a reputable supplier?
Banks stand surety for trades and provide supporting documents such as letters of credit (LCs). They effectively provide short-term finance with the underlying products or services being imported/exported acting as security and collateral.
Trade finance is big business for banks, totaling around $48B globally in 2018. But the growth of digital cross-border payment systems and online exchanges has put pressure on trade finance, and volumes of trade finance deals managed by banks had already started falling before the pandemic.
The value of trust
The ‘discipline of repeat transactions’ between parties over many years removes the requirement to pay banks for the privilege of trade finance, and so-called open accounts, where no guarantees other than mutual trust are in place, are increasingly popular.
While the value of international trade is valued as high as $3TN, its inefficiencies were severely exposed when COVID-19 struck. Unlike many banking processes, especially in retail finance, trade finance depends on unstructured data and documents that are shared between multiple parties.
One trade can involve more than 30 parties and up to 100 pages of documents, some of which can still be hand-written or annotated. Banks taking on the risk of providing trade finance need to be sure that parties are who they say they are and that the trades are completed legally.
Paper documents need to be checked and verified manually, which leads to significant delays and inaccuracies. Yet banks must also ensure that they comply strictly with regulations around sanctions screening in order to prevent criminal activities such as terrorism, drug trafficking, and prostitution.
They must exclude individuals or companies listed by governments and international bodies, as they are likely to be in breach of the law and seeking to launder money through their criminal activities.
Lists are published and updated regularly and failure to comply has led lead to billion-dollar fines and imprisonment for bank officials. With an expected rise in money laundering, in part because of the global pandemic, the need to act swiftly is clear.
Pressure for change
Corporates that see the benefits of digitalization of other banking processes are increasingly pressing their financial institutions to bring the same efficiencies to trade finance. Yet according to a recent ICC Global Trade Finance Survey, only 13% of banks said they had mature digital operations in place.
Digitalization would benefit banks as well as their customers. BCG estimates that an integrated digital solution incorporating intelligent automation, collaborative digitization, and future technology solutions would save global trade banks between US$2.5 billion and US$6.0 billion through operational efficiencies.
The barriers to adoption include lack of standardization of documentation, different regional regulatory requirements and reduced IT budgets. Yet while there is no shortage of technology that could be applied to digitalizing trade finance, a global ‘big bang’ approach to a system with so many moving parts would be challenging, to say the least.
Instead, there will be a slow and steady march towards full digitalization, with banks across the world forming consortia and investing in trade finance networks. The hope within the industry is that banks leading the charge and proving concepts as they move forwards will pave the way for standardization and regulation in the near future.
Innovation at work
One such pioneer is Mashreq Bank, which has been recognized by Gartner as one of the UAE’s most innovative financial institutions. It has applied intelligent automation to trade finance, investing in four optical character recognition (OCR) engines that can process and index thousands of documents a day.
The OCR engines are trained to digitize paper documents such as bills of lading, packing lists and invoices, classify them and include their images in a single summary sheet that can be shared with customers.
Mashreq has also used intelligent automation to significantly speed up KYC and sanction checks, says Shilpa Rodrigo, Head of Trade Services at the bank. “Dealing with so many physical documents used to require a lot of manual work. Today we provide a faster turnaround, more accurate data and sanction checks, and faster cash cycles for our customers.”
Overall, using intelligent automation has improved productivity at the bank by 60%, introduced automated extraction of 500 data points, a 90% reduction in customer wait time and a reduction of processing time from 48 to three hours.
As Mashreq demonstrates, it is possible to take action today to improve the efficiencies and accuracy of trade finance without waiting for the perfect world of a fully regulated, global framework to arrive. A fully digitalized international trade finance system may not be here today, but intelligent automation brings it one step closer.