Trade Finance updates for 2021, no more delays please

I shared my thoughts this time last year about the upcoming SWIFT Releases originally scheduled for 2020 and the importance of early preparation. Earlier this year, the planned SWIFT changes for Trade Finance Category 7 for Guarantees and Standby Letters of Credit were pushed back to November 2021. This delay comes on top of an earlier postponement from 2019. Effectively banks have been given an additional two years to prepare. But has this time been used wisely?

For some banks the extra time is welcome as they still have much to do. For others, the delays can be a source of frustration. It’s difficult for banks to embark on other big trade finance projects while this update remains outstanding. Discussion about the required changes implemented in SWIFT Release 2018 and now in SWIFT Release 2021 actually began many years ago. At some point the industry just needs to move on.

That’s not to say these changes are easy to implement. The SWIFT Message Reference Guides for the new Guarantee and Standby Letters of Credit messages run to hundreds of pages. The general move away from the existing unstructured messages to a more structured, detailed and complex format requires considerable analysis and development if they are to be implemented in a way that streamlines and automates banks’ processes. Moreover, whilst the removal of Standby LCs from key Documentary Credit SWIFT messages might appear like a small change on the surface, the consequences can be huge and I expect it to fundamentally transform the processing of Standby LCs in many banks.

The impact goes much deeper than the actual interbank SWIFT messages. In fact, the changes affect large parts of the whole trade finance ecosystem and value chain. For example, adjustments will also need to be made to customer front-end systems, APIs towards other systems in the bank as well as message flows to corporates (such as MT798) to reflect the new standards.

Questions remain about whether such enormous changes can be handled by the banks’ legacy trade finance systems. How much time and resources will be needed to upgrade and test these systems. For some banks it will be a huge challenge to be ready by November 2021.

My recommendation is that banks start testing systems from their vendors from Q1 of 2021 to allow sufficient testing and for refinements to be made in advance of the live cutover date. Starting early will also allow time for banks to fine-tune their customer front end systems and the relevant APIs towards other systems in the bank. This will ensure that these complex industry changes are implemented in a user-friendly way with minimal disruption to the banks’ customers.

Banks with modern trade finance systems in place, that are able to handle, store and process the new structured data message formats will be able to benefit from increased automation and STP in processing trade finance transactions and to realise significant cost reductions. There’s also scope to leverage the data using AI and machine learning to improve and automate risk management, reporting, KYC and AML processes. In other words, even though these changes are forced on banks, banks should still be looking to embrace them and exploit any opportunities they could bring.

Lessons learned

I do worry that some banks have not learnt from the difficulties experienced in 2018. Some trade finance development and implementation projects for SWIFT Release 2018 took 18-24 months and cost a staggering EUR 2-5 million per bank. Even then, many struggled to update their systems in time and had to implement manual workarounds. Unless they have upgraded their legacy systems, they will be back to grappling with updating non-standard source code. This is a time-consuming and costly process for banks and the legacy vendors alike. If not started already, one might face many headaches in November 2021, including the need to fall back on costly manual operations.

I look forward to all these changes being made, as it will allow trade finance to move on and speed up the digital transformation process. Discussions around capturing the paperwork in a digital format have been ongoing now for 20 odd years. There’s been progress in some areas, but many physical documents are still sent by post. It is also demanding to transform long term culture and working practises. The industry can’t automate on the basis of more structured SWIFT messages alone, although that’s certainly a step in the right direction. Let’s just hope there are no more delays ahead.