By Michael Boguslavsky, Head of AI at Tradeteq
Artificial intelligence (AI) is becoming increasingly entrenched in our daily lives, but it’s a technology that’s still surrounded by misconceptions and skepticism. Ask the public and they may jump to dystopian, doomsday scenarios where robots have taken over the world.
While this makes for a good plot for a Hollywood sci-fi blockbuster, the reality is rather different, and much more benign. Those new products that Amazon suggested you add to your shopping cart? Artificial intelligence. That gripping TV series you watched on Netflix via an automated recommendation? Artificial intelligence. That self-driving Tesla car you crave to take for a spin (or rather, takes you for a spin)? Yes, you guessed correctly – its artificial intelligence!
Today, there is not a single industry that is not being re-shaped by technology in one form or another. Until recently, however, there was one noteworthy exception to this: global trade. Fortunately, that is slowly changing.
The financial mechanism that underpins global trade – trade finance – is a centuries-old industry that remains largely paper-based and reliant on manual processes. This USD15 trillion a year industry is now being influenced by a new wave of technological innovation, such as Artificial Intelligence (AI).
Exploring the potential of AI in Trade Finance
Artificial intelligence (AI) generally refers to the use of computers and computer-aided systems to help people make decisions or make decisions for them. It usually relies on large volumes of data or sophisticated models to help understand the best ways to make sense of all the information and draw intelligence.
In trade finance, AI is particularly helpful in analysing quantitative data, as there are usually a large number of repetitive small transactions. The repetitive nature of trade finance means that there is a lot of non-traditional data at our disposal.
This means that when banks and other trade finance providers need to assess the risks of funding a transaction between an SME and its counterparty, AI-driven models can be a very efficient tool for data analysis and reveal intelligence and risks relating to small companies.
Crucially, this goes far beyond the traditional credit scoring process, which is often outdated and remains reliant on a small number of historical accounting entries. This is a major barrier and prevents many small companies from accessing trade finance, and has resulted in a USD1.5 trillion shortfall globally.
Overcoming the barriers
AI can help to tackle this shortfall by creating more accurate credit scoring models that offer deeper levels of analysis. This can include a company’s payment history, measure the risks of funding a specific transaction when dealing with different counterparties, identify supply chain risks and benchmark them against their peer group.
Trade finance providers can use this information to communicate more effectively with their SME clients. This creates more trust between them and establishes better business relationships.
For SMEs, this opens up trade finance access for companies that would otherwise not have that access and helps to reduce the trade finance gap.
Towards a technological utopia?
The adoption of AI has the potential to do a lot of good in the industry, and it’s just one of a series of technological advancements that will transform the global trade ecosystem over the next decade. From blockchain-based systems to real-time anti- money laundering and fraud alerts, this industry is in the early stages of a radical transformation.
The timing is not coincidental; these advances are largely driven by a new generation of fintechs, as well as an industry that’s more willing to change processes that were once seen as set in stone. For example, we have seen the industry work together to create a new infrastructure to help banks distribute trade finance assets to other investors in a transparent and standardised format.
The creation of the infrastructure is only possible due to improvements in modern technology and integrated across the trade ecosystem in co-operation with banks, insurers and other long-standing industry participants.
That is industry-wide collaboration at its best. Together, they are using technology to re-shape global trade as we know it.