Cliff Evans looks at the digital and robotic disruptors threatening to turn trade finance on its head but have so
far only threatened to do so
No modern industry is impervious to technology disruption. Across the globe its impact is felt by industries as diverse as energy, healthcare, manufacturing, media and retail. Developing nations, where there is the least technology legacy impediment, have been quick to adopt disruptive methods, products and services.
The result? Boundaries between traditional industries are breaking down, with intermediaries replaced by digital platforms and self-service.
Within this dynamic global context, when you explore the disruptive impact on trading and trade finance services, you find trade mechanisms to be in flux as a result of growth in mobile devices and e-commerce services. And that means both opportunity and threat for trade finance.
The global trading environment
Trade finance relates to the process of financing activities (lending, issuing letters of credit, factoring, export credit and insurance) associated with commerce and international trade. Companies
involved include banks and financial organisations, importers, exporters, and insurers. That much
International trade is being affected by a number of current manufacturing trends, such as the move to smaller batches and faster turnaround of orders. In the extreme, 3D printing enables personalised manufacturing wherein the asset is no longer physical goods, but the data file for the product to be printed.
Similarly, changes in supply chain management systems are being driven by the availability of 3G and 4G networks, low-cost beacons, RFID and internet of things (IoT) devices. This enables manufacturers and shipping companies to track goods across the global supply chain. The availability of this real-time data offers an alternative to documentation exchanges at ports or other borders that feed into trade finance services.
B2B marketplaces and the API economy
We are all familiar with the rapid-growth consumer e-commerce platforms such as Amazon, eBay and Alibaba. The same trend is apparent in B2B with the rapid growth of sector and region-specific marketplaces. Alibaba is leading the way, being the world's largest e-commerce platform for small and medium sized businesses, serving 18 million users in 240 countries and regions, across 40 industrial categories. Other notable B2B platforms include IndiaMART, ThomasNet.com and EC2.
These digital marketplaces address the end-to-end process that links small and medium-sized business allowing them to trade electronically and then track their flow of goods. It is then a small step for these marketplaces to offer finance for the trade process, as they have all of the necessary data. This digital growth is increasing as large goods manufacturers create their own portals to make the link between professionals, wholesalers and their manufacturing capabilities.
Within this dynamic environment, a trade finance organisation will need to offer its products in a form that can be accessed from the marketplace as part of the customer journey. In the same way that eBay offers a choice of distribution service, a B2B marketplace could offer a choice of trade finance service. Trade finance organisations will then need to offer simple, easy-to-use propositions delivered through an application programming interface (API). This will require such organisations to have new technical and product management capabilities to operate in this new API economy.
Riding the mobile wave
Mobile devices have proliferated globally as both feature phones and smartphones. This, in turn, is spawning a rapid growth in fintechs trying to seize the opportunity to provide new consumer services, where the API economy acts as a key enabler. Organisations wishing to receive data electronically can publish APIs and allow the market to build the mobile app or platform necessary to collect and distribute the data.
Another consequence of electronic trading is the increasing importance of digitally managed and controlled identity. We are seeing a move by individuals to maintaining their own validated identity, to the levels of security required. This is manifesting itself as mobile app-based wallets that enable the inclusion of biometrics, as well as key facts. Approved identity service providers can also enable individual and corporate identities to be referenced, as required by new rules and regulations such as PSD2.
This moves a bank from a model where it validates an identity (through all the relevant know your customer (KYC) and fraud checks) to a federated model where it accepts a validated identity from a trusted source, dramatically reducing on-boarding requirements.
Robotic process automation
to back office machine learning
Currently, trade finance processes deal with large volumes of input documentation that is converted digitally for use in IT systems. Teams of back office staff reconcile discrepancies, but robotic process automation (RPA) platforms are now providing workflow tools that sit on top of disparate existing systems to automate processes. However, given the complexity of the issues, RPA platform effectiveness may be limited until it is supplemented by text analysis and classification tools, from which issues can be classified and further automation developed over time.
Ultimately, artificial intelligence and machine learning may be applied so improvements are generated automatically and incrementally. Machine learning sophistication and effectiveness are increasing dramatically as computing power grows. Machine learning does, however, require a reasonable volume of repeatable issues and patterns to be effective, so one needs to look
at the balance between investing in these tools
and focusing on improving the quality of the
Drawing inferences from new data sources
The availability of data from numerous sources such as social media, phone networks and, ultimately, IoT devices, is common. Often, this data may be purchased as sanitised information in order to track usage and behavior patterns. Analysis of use and behavior patterns shed light into how trade moves across networks, who is discussing what opportunities, and how individuals are responding to market trends.
For trade finance specialists, there are new opportunities to understand what is going on
at a global level in marketing and sales at one end, or for fraud prevention at the other.
The impact of blockchain
Originating as the enabling technology for bitcoin, blockchain operates globally and is often accessed via mobile wallets. At its core it is a distributed ledger with a range of security and management measures that enable copies of the ledger to be accessed and data to be kept secure, without data centre involvement. Blockchain also supports creation of smart contracts, which could facilitate automatic processing of trade finance agreements.
There are now a number of technology variants in play such as Ethereum and R3's Corda. However, it must be remembered that blockchain is not simply a technology. It also encourages fundamental change to the traditional trade finance operating model as ledgers are shared.
All parties involved thus need to sign up to the shared model, rather than maintaining their
There has been a lot of noise about blockchain and its applicability to trade finance.
It is a complex subject, but its value proposition is evident. It is no surprise, therefore, that a number of organisations are investing in proofs of concept (PoC) and trials. However, the blockchain model requires accurate electronic input data; which suggests that successful expansion of these PoCs will be dependent upon some of the technology developments mentioned above, such as mobile platforms for data entry.
Opportunities to transform current back office processes by leveraging robotic process automation and text-based machine learning are now available. An even bigger opportunity exists with the move to electronic trading and API or phone-based interactions - a global, consumer-led transformation. This consumer driven transformation also creates new external data sets that support a rethinking of various trade finance products or services.
No doubt, the emergence of these digital interfaces will enable the next generation of trade finance platforms, potentially built upon emerging distributed ledger and blockchain technologies.
Cliff Evans is head of digital for banking
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