Global Trade Finance move to digital

Trade Finance is possibly the last cottage industry in financial services. Trade finance originally started out as a specialist area, often known as the International Department. There are similarities to international payments, with banks forming SWIFT in the 1970’s to help facilitate the movement of payments across different standards and channels. SWIFT messaging is part of the payments for banks and covers trade transactions.

Trade finance, given the skills needed to process trade activities, is often isolated from the main corporate banking activities such as cash management and working capital. Given the inability to create an inexpensive operation, trade transactions are focused almost exclusively on the larger corporate clients and financial institutions. This inability to utilize economies of scale has meant the bulk of commerce sits outside of trade finance activity.

Trade transactions are still dominated by paper, up to 75%, and are manually processed. These processes are expensive and error prone with Machine Learning, IoT, AI and robotic automation processing benefits yet to be fully realized. The ICC noted: “banks have started to transform to digital but it is early days”. It is still common for Trade transactions to be measured in days and weeks rather than minutes.

As recent events have clearly demonstrated, Trade is not exempt from the macro-economic impact, the increasing speed of the world economy and politics. The trade war between China and the US has shown tariffs and sanctions must now be applied in weeks rather than months. These timeframes make it very difficult for banks to comply as they are not setup to make such changes rapidly, creating the potential of heavy fines from regulators and harmful negative publicity.

Trade is profitable with banks generating over $50 billion per year in revenue but the status quo needs to change

How do the parties in the trade ecosystem feel about the level of service, the view of the various regulators and the urgency to improve the situation? Taking international payments, as a close similarity to trade, banks’ trade capabilities need to catch up on transparency, speed, agility and compliance to ensure trade and payments work together.

Corporates like and want speedy transactions. OVUM research in 2018 showed over 74% would switch to a bank or third party provider that can provide real time offerings and visibility. Corporates want to know where their cash and assets are at any time. Unfortunately in trade operations few of the trade systems suppliers have moved from next day batch to real time.

The demand for supply trade finance is extensively measured. Today there is more trade finance required than is in circulation. Most analysts believe there is a $1,300 billion finance shortage. At a 2% net interest margin that is an extra $26 billion, adding 50% to the current income.

On the cost side, many of the top analysts believe trade costs of service can be reduced by 33%. While everyone can see where the improvements need to be, is there a better way than each bank making improvements in a standalone manner?

These changes are reminiscent of the arrival of the production line to manufacturing at the beginning of the car industry. Manufacturing today is completely different with the exception of a few die-hard car companies, e.g. Morgan, who chose to stay with the status quo. A bit like trade today, a few cars in one style for those who can afford them. Cloud for financial services is the arrival of mass change for trade finance in a controlled, secure and cost effective way.

What can really help accelerate change is moving to a cloud-first strategy with many senior executives declaring this is the way forward. For the leading cloud providers, this is now a multibillion business growing at up to 80% per annum yet the business is barely 10 years old.  What cloud is doing is giving unlimited volume that can be increased or decreased without capital expenditure and at a ‘pay as you go’ tariff. Ideal for trade.

Fintech is using the cloud as its success with the consumer market pushed the usage into millions. Cloud gives the scale and security. Many of these apps can be used across financial services enabling superior customer interaction and providing what the client is requiring. 

As way of explanation, the traditional methods of implementing IT within an organisation have been superseded.

The time to market has also shortened as cloud offerings are starting to resemble Lego bricks ready to be arranged for any business. For example, offerings now include AI and Machine Learning, with the ability to analyse and react to trends and performance at any time. Also, the potential for utilising data analytics is enormous.

The regulatory requirement of having all the bank’s assets in one place, often termed the data lake, can, with cloud capabilities, become an asset. The old constraints of the ‘cheap and cheerful’ data lake format can be redefined, creating valuable insight for bank and regulator.

Best to start where the rewards are the highest.