Digitising trade finance: the next frontier for financial services innovation

The implementation of practical and necessary automation measures, such as electronic invoicing, are much needed

The adoption of digitisation in trade finance has been something of a “slow burn” as practices have historically relied on the transfer of paper documents between involved parties and largely manual processes. This vitally important area of financial services has trailed behind the digitisation progress that has been made, especially in the last decade, in consumer and retail banking.

The adoption of new technologies in trade finance has become increasingly important in the past year, as the pandemic has put a huge amount of strain on the supply chain. Given the added economic pressure, suppliers are looking to utilise efficient systems to help them manage their cash flows across the supply chain.

Current regulations in place – for example, the payment prompt code – don’t fully resolve the cash flow issues businesses face. This is why the implementation of practical and necessary automation measures, such as electronic invoicing, are much needed.

Now more than ever, businesses need to understand how these practicalities will improve the working capital management process and benefit all parties involved in the transaction.

Paper vs digital data flow

One of the critical problems in trade finance is the sheer volume of paper-based documents on which the information flow is based. Service providers, financial institutions and many companies within the supply chain are seeking to streamline processes and reduce transaction time and cost.

The digitisation of supporting documents can continue to drive down the cost of trade finance transactions while increasing the transparency for all parties involved. This can result in reduced credit risk, enhanced cash flow forecasting and better allocation of working capital.

Not just an IT project, it’s a change in mentality

John Mitchell, Episode Six: The costs of implementing technology solutions are outweighed by the benefits they bring

One of the reasons why businesses hesitate to integrate automated processes is because they are perceived to put a strain on the business through the implementation, both as an investment and in the resources required.

However, this should not be viewed as purely a corporate IT project. Many businesses and their partner providers are able to quickly integrate the necessary new technology and processes. Any issues in the process come from legacy systems within the financial institutions, which have been built, rebuilt and amalgamated with other systems many times over many years.

The need to interchange data through APIs at speed – in real-time processing – has highlighted the need for many to integrate third-party processing facilities to allow for the smoothest possible output.

Providing technology infrastructure that enables the process and core systems to work as established but unifying – and linking them into and across a new platform – means that companies can implement efficiencies that work for every level of the organisation.

Also, banks and businesses must understand that the costs of implementing technology solutions are outweighed by the benefits that these tools bring. These technologies greatly contribute to eliminating burdensome and arduous manual tasks, saving all parties time and helping them reduce costs.

Security

Businesses may view having automation through data interchange as a risky process prone to fraud, however this couldn’t be further from the truth. The digitisation of the trade finance process does not singularly eradicate fraud, and anyone promising such protection should be treated with caution.

The introduction and implementation of digital and automated processes within trade finance provides an opportunity to build multiple layers of fraud protection through different information stacks or systems that provide checks as the financing transaction is processed. It provides a 360-degree view of the ecosystems in which a business’ finances operate, allowing for encryption and verification at every interaction and layer within the process.

This ability to provide more checks will mitigate fraud and offer greater accountability across supply chains, providing greater transparency for finance providers and trade partners.

Trade as an asset

Trade as an asset class for institutional investors has long been a subject of discussion with the potential for gaining meaningful returns at comparatively low risk. As the digitisation of trade finance becomes more common, it will enable investors to judge trade assets with greater insights and certainty.

An industry that has long been paper-based did not offer enough oversight of the complexities involved in the trade process and the finance structures in use within the supply chain. However, digitisation of the supply chain and trade industry offer real-time analysis of a business and the trade finance in use. Digitisation of the process therefore provides the insights necessary to capture assets in a functional way for institutional investors, broadening the opportunity for the trade industry by opening doors to new finance options.

The digitisation of trade finance is no longer an option or consideration for businesses – it has become vital, catalysed by a pandemic. But the drive to implementation has brought efficiencies that can’t be ignored. Automation in trade finance provides huge value for all parties across any transaction, as it optimises working capital, reduces costs, strengthens controls and increases risk and fraud mitigation.

The next technology breakthrough in trade finance is automation driven by data interchange through APIs along with other technologies, such as blockchain-based networks, which are already improving automation. The way these technologies are utilised to manage processes, finances and risk will be essential to how banks and businesses adapt in the near future.