Leveraging technology to fuel global trade

Feature | 20 September 2017

Dominic Broom and Joon Kim discuss how banks' unrivalled reach and industry experience means they must be at the forefront of utilising technology in trade

The transformative power of fintech is proven. Fuelled initially by disruption within the retail sector, global fintech investment has soared, reaching US$23.3bn in 2016 (nearly double the US$12bn invested in 20141).

The question now is how we, as a financial community, can harness the digital capabilities available in order to realise maximum efficiency, harmonisation and capital. Crucially, one area that has the most to gain is international trade.

The current state of trade

Trade growth has slowed. At the end of 2016, the World Trade Organisation (WTO) predicted that, for the first time in 15 years, world trade would grow slower than global GDP2.

Reasons for the slowdown have become evident: since the economic crash, facilitating trade has become more expensive - largely because regulations have tightened. Know Your Customer (KYC) and Anti-Money Laundering (AML) have made on-boarding clients costlier and more complex, which has - unintentionally - encouraged de-risking and inhibited the healthy expansion of trade, especially for SMEs in emerging economies.

Indeed, increased regulatory requirements and a subsequent US$1.6trn trade finance gap are resulting in 56% of SME trade finance requests being rejected globally3. If the industry is to realise renewed and robust levels of growth, SME trade finance must be supported4.

However, a rise in economic activity and a strong Q1 start to 2017 is fuelling optimism, with global trade predicted to grow at 4% in 2017 (up from 2.5% in 20165).

Although a return to pre-2009 growth levels (which were bolstered by the beneficial effects of new trade rounds and the integration of China into the world economy) is unlikely, the outlook is positive. So while the mammoth task of bridging the trade finance gap remains, it is hoped that an era of low growth may have passed.

However, if the growth expectations for the next few years are to be realised, collaboration and innovation are vital.

Digitise, then digitalise

Trade is notoriously paper-based and labour-intensive, with complex supply chains typically involving multiple counterparties across many jurisdictions. This can result in inefficiency and manual error. Fortune 500 companies incur US$81bn of unnecessary supply chain and working capital costs each year, due to inefficiencies and lack of visibility6. To effect meaningful change, therefore, the industry must act incrementally and work to improve all elements of the trade ecosystem.

This has begun through digitisation - offerings that signify a shift from analogue to digital. For instance, electronic letters of credit and SWIFT's TSU, BPO and MT789 - which now comprise the essential modern trade framework. The pace of automation in trade is expected to increase, with 50% of respondents to the 2017 ICC Global Survey on Trade Finance predicting that within 10 years, 60% or more of all trade flow processes will be digitised7.

However, banks are increasingly required to offer solutions that not only digitise, but also provide real value-added capabilities to clients: namely, to digitalise. Going further than digitisation, digitalisation is the leveraging of digital information for the increased efficiency and overall optimisation of processes.

Focused on using technology to improve efficiency, security, transparency and risk mitigation - which in turn will provide new revenue and value-added opportunities - trade digitalisation could prove truly transformative. As such, these initiatives are attracting increasing investor interest8.

The next step

Among the innovations gaining real traction, artificial intelligence (AI), blockchain and application programming interfaces (APIs) are particularly promising. All three aim to improve operational efficiency, thereby advancing the working capital cycle, and integrating parties in the supply chain.

A labour-intensive supply-chain process is at risk of fraud, negligence and manual error, to which AI offers a noteworthy resolution. By recognising patterns of character behaviour within documents, AI is able to verify documents used in trade transactions, circumventing the need for manual verification.

Furthermore, rich data sets can be harnessed through analytics to improve understanding of behavioural patterns throughout the supply chain - such as determining persistent reasons for delays - and to subsequently enhance efficiency.

These data-led initiatives are providing tangible, value-added capabilities: speed, proficiency, and accuracy. While AI is still somewhat limited to the transactional elements of trade, blockchain is a platform for interconnectivity on all fronts. Cryptographically secure, blockchain is inviolable and transparent. Crucially, by helping to mitigate security concerns, it could potentially counteract de-risking and motivate trade finance investment in emerging economies and SMEs. Indeed, storing information on open, collaborative databases can support the integrity of data, thereby helping to reduce costly, time consuming KYC processes.

While blockchain applications are still largely developmental, they have drawn significant interest, stemming from real recognition that, if fully commercialised, blockchain could be transformative.

Like blockchain, APIs can contribute to changes in trade infrastructure and add real value to underlying operations. APIs act as seamless, interoperable interfaces. By joining the back-end of client systems with offerings from banks and fintechs, APIs are the technological facilitators of collaboration. Through APIs, clients can be intrinsic contributors to the creation and refinement of products, ensuring solutions are specifically tailored to their needs.

Noting the acute importance of client-centric operations, BNY Mellon has developed NEXENSM - an API platform which currently hosts over 100 APIs, and for which trade modules are in active development.

These technological offerings hold remarkable potential. Yet, they require not only the full application of concept, but also the full collaboration of all parties engaged in supply chain management if they are to deliver their full potential.

Mobilising the industry

Although fintechs invent innovative concepts, they often lack the means to commercialise them. To enact real change, technology requires capital, reach and influence: it needs bank involvement.

Banks - as trusted establishments with unrivalled global reach and industry experience - are essential to the digitalisation of trade networks.

Unsurprisingly then, the number of bank-fintech collaborations has rapidly increased, materialising primarily as venture capital projects or incubator/accelerator schemes.

A number of enterprises have potentially revolutionary potential in this space. For example, TradeIX is the world's first shared platform for trade finance, built using distributed ledger technology and driven using APIs. Similarly, TrustBills is an innovative electronic marketplace for trade receivables.

Furthermore, in terms of combatting regulatory concerns, bank-bank collaboration is becoming increasingly widespread. Undertaking KYC due diligence for every new transaction is costly and inefficient. To help address this issue, banks are exploring KYC passporting - the singular action of KYC for one company, able to be viewed and verified by a network of banks and counterparties.

The drive for KYC passporting exemplifies how neither creating singularly efficient supply chains, nor updating technology in one geographical region is sufficient. These result in suspended pockets of competency, unable to operate efficiently together because of digital discrepancies.

Instead, a critical mass is required. Industry collaboration is crucial and banks have a key role to play if new concepts and solutions are to succeed. Indeed, all elements must come together to provide accessibility and transparency, while working cross-jurisdiction for regulatory standardisation and operational consensus.

By leading from the front and investing in technology, banks are initiating an industry-wide push for digitalisation and a chain reaction of optimal efficiency, security, and transparency provisions.

Dominic Broom is global head of trade business development, treasury services, BNY Mellon, and Joon Kim is head of global trade product, treasury services, BNY Mellon

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

  1. See Reuters and Accenture: http://reut.rs/2wPqkFP, https://accntu.re/2wPyb6o

  2. Economist article, 'Why is trade growth slowing': http://econ.st/2wGamh7

  3. ADB August 2016 report: http://bit.ly/2cTyRL8

  4. See reference note 3

  5. The World Bank June 2017 forecast: http://bit.ly/2rKGehl

  6. JP Morgan article, 'A new digital era for trade': http://bit.ly/2voma7N

  7. ICC 2017 Global Survey: http://bit.ly/2tI9t5M

  8. See reference note 1

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