This piece was co-authored by Manish Patni, lead product manager at Infosys Finacle. 

The global trade engine has been sputtering. Last year, the World Trade Organisation (WTO) downgraded its growth forecast for world merchandise trade to a meagre 0.8%, down from a prior estimate of 1.7%. This dramatic slowdown can be attributed to a confluence of headwinds: high interest rates and inflation, the rising U.S. dollar, and ongoing geopolitical tensions. While not new, these factors intensified, squeezing corporate trade finance and pushing the financing gap to unprecedented levels in 2022.

There may be some hope: the WTO predicts that in 2024, the annual growth rate of world merchandise trade is expected to normalise to 3.3%.

Yet beyond the immediate challenges and future recovery prospects, traditional corporate banks face a new wave of disruption—small but growing fintechs entering the trade and supply chain finance market. With innovative, technology-led offerings, these newcomers are forcing established banks to adapt.

Additionally, the evolving environmental, social, and governance (ESG) norms are pressuring corporate banks to not only prioritise internal sustainability but also curate a greener customer portfolio. As the trade finance landscape shifts, traditional players must grapple with increasing regulation, heightened customer expectations, and constantly evolving products and services.

Turbocharging the engine with tech

In response to addressable issues, corporate banks are targeting action on multiple fronts, including strategy, policy, people, and process. A key enabler of this agenda is digital technology. Traditionally seen as technology laggards, corporate banks are investing significantly in acquiring digital solutions and transforming their trade and supply chain finance business.

One such example is the integration of e-invoicing with corporate banking portals. Manual, paper-based invoices are slowly becoming relics, with technologies such as artificial intelligence (AI) and optical character recognition (OCR) automating invoice creation.

E-invoicing, a facility to manage invoices from end-to-end online from a single location, is now mandatory in many countries. With e-invoicing, sellers can create digital invoices, while buyers can also approve and pay them digitally. This streamlines the invoicing process, including reconciliation, to save time, minimise errors, and improve efficiency.

Like a conveyor belt, e-invoicing streamlines the process; automating tasks and speeding up transactions.

Banks are integrating e-invoicing within their portals to create advantages for their customers and organisations. By offering e-invoicing as a service, banks can earn additional revenues and use the visibility into customers’ payment flows and revenue streams to personalise their services and differentiate themselves from the competition.

Another example is providing the technology platform for dynamic discounting. Sometimes, sellers may request buyers to pay their invoices before the due date at a discounted value, which is calculated dynamically based on how early the payment is being made. In this scenario, the buyers make the payment using their own funds. Acting like a stock exchange for invoices dynamic discounting platforms can allow buyers and sellers to efficiently trade early payments.

While banks have no role in dynamic discounting, they can provide the technology platform that is used to request the early payment and calculate the discounted value; banks may also employ AI tools to anticipate their customers’ (sellers) need for cash flow and facilitate the payments from the buyers at the appropriate time.

This digital push represents a critical step for corporate banks.

Not quite ready: The burden of legacy systems

Unfortunately, corporate banking’s past is slowing its march into the future. Take supplier onboarding, for example, which involves tedious activities such as anti-money laundering (AML) and know-your-customer (KYC) checks.

Digital supplier onboarding makes supply chain financing faster, cheaper and more accurate. However, many corporate banks cannot implement digital onboarding solutions because they cannot be easily integrated with their legacy systems. In a world dominated by sleek smartphones, legacy systems are the clunky mainframe computers of the early seventies and eighties, trying to compete in a digital-first world.

Thus far, corporate banks have implemented digital solutions ad-hoc, mainly to comply with regulatory requirements, but are now looking to revamp their IT landscape, starting with modernising their core.

Banks have been similarly lax in responding to digital disruption. Not quite ready for disruptive technologies, they are forced to partner with fintech firms, which have capitalised on the opportunity. As things stand, traditional banks are trying to catch up with the digital leaders, typically fintech firms and a few progressive banks.

Instead of working independently, they should consider partnering with these entities and other players in their ecosystems and adopting emerging business models.

Take BNY Mellon, for example. The bank offers comprehensive trade outsourcing services, attracting financial institutions seeking cost-effective solutions without sacrificing their customer base. To reduce compliance expenses, many institutions limit Swift RMA exchanges. BNY Mellon's RMA service facilitates Swift MT 700 letter of credit messages routing, optimising cash for corporate buyers and supporting suppliers' working capital through a multibank supply chain finance program in collaboration with fintechs.

The digital tipping point: Adapt with new business models or risk losing out

The evolution of digital business ecosystems is reshaping the value chains of corporate banking. As trade and services migrate to platforms, businesses must seamlessly incorporate real-time payments and financing into their daily operations and intertwine financial processes with their customers' experiences. Commercial banks need to adopt new business models to succeed in a digital business ecosystem.

Banks and fintechs are embedding trade finance solutions into e-commerce platforms and enterprise resource planning (ERP) systems to allow businesses seamless, intermediary-free access to trade finance products and services. Banks can also see something like e-invoicing can as an opportunity to embed trade finance solutions into corporates' primary portals.

Fintechs and progressive banks also provide marketplace platforms where SMEs can connect with buyers, suppliers, and financial institutions to easily and cost effectively access trade finance products and services.

Some examples include Santander's trade finance advancements, which feature a cutting-edge multibank platform renowned for its scalability and superior user experience. The platform offers a fully digitalised journey for suppliers and diverse connectivity options for buyers, including enterprise resource planning integration. It is a single-entry point for supply chain finance, cash management, and foreign exchange solutions. Additionally, in collaboration with an insurer and fintech, Santander offers a business-to-business buy-now-pay-later solution. This innovative offering covers the entire supply chain process, from purchase order financing with a new pre-confirming option to invoice reconciliation.

The Indian Banks' Blockchain Infrastructure Co (IBBIC), a consortium of Indian banks, employs blockchain technology to streamline trade finance operations across various banks. This initiative aims to decrease cycle time, operational expenses, and trade fraud while fostering market expansion. The processing time for a letter of credit (LC) cycle has been notably reduced from 9 to 10 days to just 2 to 3 days.

In Europe, Société Générale offers an application programming interface (API) that allows corporate clients to integrate trade finance functionalities directly into their own systems, enabling seamless data exchange and automation. This integration improves straight-through processing (STP), reduces manual intervention, and enhances visibility and control over trade transactions for corporates.

Trade finance is the circulatory system of global trade. It keeps the global trade engine running smoothly, and there is a pressing need for digital transformation. Traditional corporate banks still operating on conventional business models must make efforts to join digital business ecosystems to stay relevant in the fast-evolving world of trade finance.