Trade Finance: A step-by-step approach to digitalisation

Looking across the complexity of Trade Finance the notion of a problem child description comes to mind from another era. Today our methodologies are starting to become agile.  With the abundance of technology we can link activities, end to end, across the parties involved in every trade. The arrival of standard APIs, used locally, can accelerate the trade process country by country. These modern developments, gives the much needed digitalisation of Trade Finance a real possibility. A step-by -step approach is needed to move from paper to a safe, secure and compliant digital trade world.

Step I Data Extraction (moving information into a structured, machine readable format)

The very first problem to overcome in Trade is the sheer scale of paper documents. Many Trade Banks manually check every document and the processes are based around the physicality of the written word. The documents need to be moved to an electronically format. The conversion has to include the entire wording across the paper-flow. The paper and PDfs are left behind leaving electronic layers that can be analysed anywhere.

Step 2 Date Verification (showing the key aspects of the trade)

The documents have to be validated. All the important clauses, including the terms and conditions, are highlighted and accounted so nothing in missed. The more data that is moved into electronic format the better as AI and ML expertise grows with volume. The greater the volume, the better the accuracy of the output from these systems. Early ML tests show the accuracy rising to that of a human far quicker with greater data volume.

Step 3 Rules (comparing the requested trade details to the standards and policy requested)

Electronic links to centres of expertise is needed to confirm the rules of engagement are being followed. For example, Commercial Codes of Conduct are being used ensuring best practises. There are now Fintechs with electronic libraries, which are continually being updated, that can verify the documents electronically.

Step 4 Compliance (showing the mismatches in what is happening to what should be happening)

Each country has its own form of regulations on trade as do the individual banks. These rules are constantly and quickly changing. The use of tariffs has become a key driver with the US President tweeting ‘I am Tariff Man’. Sanctions, likewise, are part of the methodology of how one country deals with certain other countries. Similarly, banks may support different trade flows over others, e.g. Rabobank is strong in agriculture using a guiding governance framework.

Links to companies or authorities maintaining current information is key. The ability to be constantly compliant is vital.  Regulators are increasingly expecting a reporting structure that informs them quickly that the parties are in compliance.

Step 5 Fraud Detection

Any time an industry has so much paper and manual processing the potential for fraud is high. Having completed steps 1 to 4 the algorithms used to detect fraud can be employed across the sea of information. The ensuing heat maps can be then investigated impartially.

Technology makes the above come to life. Blockchain is ideal for trade as in the Blockchain environment information cannot be altered, a full audit trail exists and with smart contracts terms and conditions can be embedded. Blockchain could well be the future but volume of trade in the blockchain schemes are tiny compared to the Trade Finance Market. The incumbent technology and processes current in use also has to change to accommodate Blockchain.

The regulators overseeing Open Banking and PSD2 have addressed the safety of the linked environment. The security of the connectivity has to be as good as or better than what currently exists. Cyber security continuous improvement is the aim of banks and regulators.

The route to success in digitalising Trade Finance is to mirror the existing trade flows electronically and constantly checking where the trade and the finance is at any point of the journey. Taking steps 1 to 5 is a route to success.

The ability to do is here with cloud adaption and cost becomes more click-based. The newly formed Trade Networks, e.g. Voltron, Marco Polo, etc. will, over time, become linked as the banks and corporates want to be serviced in the best possible way.

Trade Finance is a global physical distribution. By providing an electronic global counterpart made up of many interconnecting and intelligent collaborations the $7 trillion market can become digital.