As the fintech innovation momentum builds, BNY Mellon's Joon Kim
and Lucille Mayer discuss developments such as the blockchain and APIs,
and how collaboration holds the key to driving transformative change
Technology innovation is driving change across the financial industry, with huge potential for enhancements to the client experience. While the majority of fintech innovation was initially focused on the payments industry, the spotlight on trade finance has intensified, with a growing number of vendors developing new propositions to enhance the trade process.
These include the application of distributed ledgers through a series of smart contracts to digitise documents, with respect to both traditional trade and open account financing. Certainly, the trade landscape is both labour and document intensive, and therefore changes utilising technology innovation are gaining a lot of attention. Further fuelling the need for enhancements is the fact that trade finance instruments can be used for fraud (such as multiple financing), crime and as a means to initiate money laundering activities.
The trade finance sector has been somewhat slow to adapt to technology, yet developments in SWIFT's bank payment obligation (BPO) and Trade Services Utility (TSU), and adoption of the Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) begin to address efficiency in processing. We have seen some degree of success, but the BPO has not reached the level of commercialisation initially expected, and whether these standards will be adopted across the industry remains unclear.
The complexity of trade
Trade services and finance are often regarded as slower to adopt new solutions than other sectors in the finance industry. One of the primary reasons is that there are so many parties involved in the trade value chain, especially regarding international trade. A simple trade cycle can involve a number of different parties, including the buyer's and seller's banks, carriers, agents, logistics, inspection agencies and insurers.
Cross-border trade often also has the added complexity of having different types of regulations to navigate. For instance, how many US$ importers actually have a thorough grasp of the requirements of monetary authorities such as the Monetary Authority of Singapore (MAS), for example, when exporters are based in these locations? It is therefore challenging to achieve cohesive buy-in, where all parties agree on levels of standardisation and networks.
Without doubt, the trade landscape is complex, and many are reluctant to change trusted and ingrained processes. Yet there are also those that understand the value of technology and the enhancements it could bring to trade through efficiency, access to data and, most importantly, security; helping them to improve their processes and grow their business. Indeed, if it is possible to introduce an infrastructure where buyers and sellers can transact effectively, efficiently and securely, who would not welcome such change?
And change is afoot, as the trade sector increasingly captures the attention of new technology initiatives, with the industry looking at fintech solutions that could enhance the efficiency, speed, security and network of trade transactions. Indeed, regulators are not only focusing on the payments sector to see how technology can be leveraged more effectively in anti-money laundering (AML) applications, for example, but how it can support effective risk mitigation methods in trade and help guarantee that transactions are genuine.
The transparency of the blockchain - and visibility of all information and transactions that pass across it - is being closely looked at, and it is becoming increasingly clear that such technology could hold a great deal of promise with regard to trade. Proof of concept (POC) projects exploring solutions that utilise the blockchain are gaining traction; although a key challenge will be ensuring that all parties involved in a trade value chain have an alignment of standardisation and network - providing reassurance of ownership throughout the end-to-end transaction.
The value of collaboration
Without doubt, fintech innovation could provide the opportunity to execute transactions more effectively, adding considerable value to the trade space. Yet, while fintechs have the skills to design new high-tech concepts, they are less experienced than banks at navigating the regulatory environment, and understanding the implications of security requirements in particular. Without such knowledge and expertise it can be challenging to get new concepts off the ground and make traction in the transaction space.
Bank-fintech collaboration is strategically important in this respect, sharing expertise to help maximise the opportunities technology can bring. Both parties have invaluable strengths to offer, and partnerships between banks and fintechs are now being used extensively to develop new payment-enhancing concepts - and this strategy is becoming increasingly commonplace in the trade sector.
A great deal of investment is currently going into exploring the benefits that distributed ledger technology could bring to the table, and interest in its potential for the trade sector is gaining momentum. The R3 consortium, which is comprised of over 40 banks (as at August 2016), aims to bring such blockchain technology to the mainstream finance industry, and is developing common standards, practices, and use cases, including in trade finance.
The transformative power of APIs
Collaboration and interoperability between solutions is becoming increasingly important to client-centric innovation and, with many banks offering an extensive suite of products and services, being able to integrate these services is a key means by which banks can significantly enhance their client experience.
APIs or "Application Programme Interfaces", are opening the door to a new world of possibilities; functional building blocks that not only create applications, but link them together. That is the foundation of BNY Mellon's new, industry-leading digital ecosystem, NEXEN. NEXEN integrates solutions and data from BNY Mellon, select third-parties and clients, which clients can access through NEXEN's digital portal or electronically via APIs, extending their own technology investments. Currently, 55 APIs of various BNY Mellon functions are available in the API store, which are being consumed both internally and by clients directly. The API inventory will evolve according to changing client needs, making the possibilities presented by APIs robust, scalable and designed for the inevitable changes in the future.
Such a system can transform the client experience, providing cohesion, flexibility, security, and end-to-end analytic insights - as well as driving industry collaboration, interconnectivity and efficiency. Indeed, clients can customise their online experience according to their job function or specific access requirements, yet receive a consistent service experience, regardless of BNY Mellon product.
APIs can change the way in which banks operate - not only with respect to the agility of providing new, scalable solutions, but in terms of the way in which they interact and collaborate with clients to develop innovative solutions. This approach can help to drive forward change, particularly in the trade space, which has a reputation of being less receptive to change than other financial sectors. With clients involved in new developments - ideally from inception - they will not only be able to understand the changes, they will be helping to steer the direction of the digital trade journey according to their needs. It is this that can create the profound difference in mind-set and secure client buy-in.
Without doubt, technology developments are altering the outlook for the trade landscape; the tools are available to create solutions that can enhance processes and transform the way in which transactions are made. But it is up to banks to commit to leveraging these methodologies, creating solutions that will be of most benefit to clients, and therefore most likely to receive widespread adoption. This requires collaboration across the industry. Indeed, technology is transforming the role banks play in the evolving financial world, and it is only by combining the strengths and expertise of banks, clients and fintechs, that the true value of digitisation - and a new era of trade - can be realised.
Joon Kim is head of global trade processing products, treasury services, and Lucille Mayer is managing director and CIO, client experience delivery
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.