By David Hennah, Head of Trade and Supply Chain Finance, Finastra

David Hennah, Head of Trade and Supply Chain Finance, Finastra

In recent years the trade agenda has seemingly been dominated by endless debates on compliance and regulation. There can be little doubt, however, that the 2010s will ultimately go down in history as the decade of digitisation. The digital universe has finally descended upon us, bringing with it brontobytes of big data and billions of distributed devices. But what does it mean to banks and what does it mean for the business of trade finance?

In light of the cosmic developments in new technology, many banks have come to recognise the competitive constraints of existing infrastructure and are ready to respond to the compelling case for business transformation. Many leading institutions have legacy applications that are both monolithic and siloed, resulting in unacceptably low levels of interoperability. Such technologies are not only expensive to enhance and maintain but are also inevitably approaching end of life.

Whilst it is acknowledged that trade is a particularly difficult business to digitise due to the number of participants and documents across the supply chain, the opportunity to translate documents to data and to transform business processing from analogue to digital is huge. With digitisation comes the ability to extend connectivity across the trade ecosystem. This is of vital importance in the face of ever more complex corporate value chains and the fragmented technology landscape that persists across trade, supply chain finance and trade lending.

Banks today need to deploy market leading technologies on a modern architecture so as to adapt to digital disruption and respond effectively to changing customer needs with increased agility.

Some key areas banks will need to focus on include:

Paperless trade

For generations the business of trade finance has been dominated by paper-based processing, from bills of lading to warehouse warrants; from bills of exchange to promissory notes. Today, there is a widespread recognition of the business benefits and cost efficiencies associated not only with digitised document preparation but eventually the removal of paper processing altogether.

Removing the paper pain points will significantly reduce the most common risks of delays and discrepancies as well as supporting the increased availability of structured data for business intelligence purposes. Empirical evidence has suggested that banks can save more than two hours per transaction by not handling paper, with further savings achieved through automated compliance checks.

The transition to electronic trade documents further supports the continuing move to open account and the increasing demand for supply chain finance (SCF).  By its very nature, SCF must be digitised to make the business viable at any scale and underpin the common desire among corporates to optimise working capital by accelerating the cash conversion cycle.

Open architecture

To firmly place themselves at the centre of the trade ecosystem supporting corporate clients, banks must put in place an open ‘plug and play’ architecture that supports collaboration with technology platforms, system integrators, government agencies and other third partyservice providers.By adopting an open architecture, banks will obtain access to a new channel through which they can engage with the digital world. API-based open banking creates huge flexibility in the ways in which customers can interact with their financial services providers. This is a transformational change enabling more efficient integration and better use of infrastructure.

Business intelligence and predictive analytics

In the digital world, data is the new collateral. Banks need to leverage big data in order to better understand operational, market, industry and customer risks,opening up new opportunities for growth and enabling more efficient use of regulatory capital.

As banking in general becomes more and more commoditised, the mining of big data represents a huge opportunity for banks to stand out from the competition. Big data may be seen as a pot of gold and every transaction that lies within is a golden nugget of information that can be dissected and analysed in order to enhance almost every aspect of service levels.

The evolving art of predictive analytics will enable banks ultimately to better manage their relationships, revenues and risks.The bank will also be able to improve customer self-help through greater access to data whereby corporates can interface to their own ERP systems and run predictive data analytics across their working capital needs.

Artificial intelligence, machine learning and natural language processing

These days, the use of standard optical character recognition (OCR) to read text from trade documents has become commonplace.

As we move forward with the adoption of next generation technologies such as artificial intelligenceand cognitive computing,so too will opportunities to enhance both the efficiency and productivity of performing operationally intensive tasks, such as document processing and compliance checking.

The adoption of machine learning and natural language processing techniques enables the automation of a complex web of cognitive processes associated with due diligence. Its application will eventually benefit multiple aspects of international trade, including the more efficient management of supply chains, contracts and regulatory compliance, ultimately opening up new opportunities for easier access to finance.

Smart contracts and smart objects

No article on the subject of digitisation would be complete without some reference to the potential impact of Distributed Ledger Technology (DLT), more popularly known as ‘blockchain’. While the full business benefits of blockchain are yet to be validated, blockchain theory has attracted widespread interest, resulting in a tidal wave of laboratory-based proof of concept use cases. The ability to industrialise such solutions and bring them to market might remain constrained for some time by the continuing absence of a common set of rules and standards.

Arguably the most compelling use cases associated with blockchain are those that promote the use of smart contracts to generate instructions for downstream processes, such as payments or the transfer of collateral, provided the reference conditions have been met.

Smart contracts contain pre-written logic that can be stored or replicated on a distributed ledger platform and executed by a network of computers connected to the blockchain. Smart contracts reduce operational risk by the automation of workflow. They can be used to help with e.g. automatic uploads of purchase orders for financing and the translation of data for document preparation or paperless trade. They can also potentially be extended into artificial intelligence.

Beyond smart contracts, there is much interest now in the evolution of track and trace devices that enable us to monitor the location and condition of smart objects in transit, hence reducing the operational risks commonly associated with the transportation of goods.The ability to extend this technology further still – e.g. back into the supply chain – in order to guarantee the provenance of goods at source in support of sustainable trade, has further captured the imagination of thought leaders.

Rules and standards

It is true that, as an industry, we still lack a degree of certainty around common rules and standards. The absence of clear definitions is a barrier to interoperability and a constraint on connectivity. Collaboration is key to overcoming the obstacles.

Most recently, the International Chamber of Commerce (ICC) Banking Commission announced the creation of a working group on digitisation. Among its aims will be the evaluation of ICC rules such as the eUCP to ensure that these are both practical and e-compliant, enabling banks to accept data in place of documents.

A+B+C = D

Smart trade demands smart trade finance.

As we approach the next decade of digitisation, intelligent trade will not only rely on a combination of smart contracts and smart objects, artificial intelligence and business intelligence but also significantly draw upon the combined powers of:

• API-based open architecture;
• Big data; and
• Cognitive computing

This A+B+C approach will ultimately come to represent the true fabric of (d) – the Digital Trade Bank of the 21^st century.