Manish Bharucha, CEO,Kyzer Software

From USD 7,616,520 million in 2019, the global market size of trade finance will reach USD 10,987,510 million by 2026 at a CAGR of 5.4 percent. But do you think market growth can alone promise success for anything? Probably no, right? So, what else do banks need in order to thrive? Yes, ‘automation’ it is! More than being a convenience today, it has become the dire need of the hour. It’s important for banks to position themselves as pioneers in the digitization of trade finance.

Trade finance

Trade finance signifies financing for trade, and it concerns both domestic as well as international trade transactions. Various intermediaries such as banks and financial institutions facilitate these transactions for eliminating the risks of payments and supply. Trade finance is a vital part of exports and imports.

Automation in the sector

When we talk about automation, it seems that the sector is gradually trying to reduce the manual workload and go fully digital. Without a doubt, trading in the international market is packed with uncertainties because exports and imports happen between entities in distant countries. There could easily be an absence of trust between the buyers and the sellers. This is where banks and other financial institutions come to the rescue. They help the entities to reduce the risk factor of trade finance via providing records and documents, including Letter of Credit (L/C) and Bank Guarantee.

L/C mitigates the payment risk as a bank guarantees the amount to an exporter on behalf of an importer after the delivery of goods, whereas Bank Guarantee is an agreement from a lending institution, ensuring that the bank will step up if a debtor is not able to clear all his debts. A lot of paperwork and extensive manual interventions such as document reading and scrutiny, data entry across multiple banks and regulatory systems, sanctions, anti-money laundering checks, and data analysis are involved in the procedure, making it an arduous function. Plus manual processing means that the transactions are riddled with errors.

But when we bring in technology that permits the banks to offer customers a web-enabled interface for conducting transactions online, including requests for Letter of Credit, Bank Guarantee, Regulatory Export / Import Data Management and Foreign Remittances, the trade gets streamlined as well as easier for Compliances and Audits. These solutions secure online requests and transmit them technologically along with documentary evidence. The vulnerabilities, due to the pandemic, have further increased the requirements for such digitized trade finance products.

What was once a convenience is now a necessity

An ecosystem-based offering that caters to the complete customer journey and lifecycle will lead to a new wave of innovation. Let’s dive deep to find out the advantages of automation:

• The integration of Distributed Ledge Technology (DLT) with trade finance products is likely to support efficient, cost-effective, and secure transactions. Smart contracts running on DLT provide a single and immutable record. DLT also prevents duplicate financing and enhances the credit quality of corporations. The industry is heavily investing in it because it has the potential to provide end-to-end digitalization of trade finance.
  • Tech-savvy solutions that help in decreasing the cost of operations, improve compliance, check anti-money laundering, and adapt to electronic trade documents are going to win the market.
  • The automation process utilizes customer historical data, scrutiny and compliance observations, blacklisting, AML, and sanction screenings to prevent duplicate request processing, financing, and verify the veracity of underlying trade.
  • Deferral management guarantees account level checks, transaction processing controls with an irrevocable audit trail, and documentation is transmitted electronically. It mitigates the existing high cost, error-prone and inefficient processes.
  • Robotic Process Automation (RPA) enables the digitization of transactions and is extremely beneficial in curtailing inefficiencies existing in manual and rule-based processes. The technology, when combined with Optical Character Recognition (OCR), further helps in converting paper documents into data, allowing seamless transactions.
  • The industry is moving towards a collaborative model, and the implementation of APIs enables the integration of a bank’s siloed legacy IT systems with third parties. This leads to a single-window transaction as it interconnects trade finance products across the ecosystem. Banks are extensively leveraging the potential of external service providers through APIs, creating an improved customer experience.
  • The adoption of digital models by banks with an emphasis on establishing STP outside of the bank’s four walls as well as leveraging open APIs to automate and digitize banks processes through the exchange of data/information digitally with third parties.
  • Improved data analytics support banks in assisting clients with timely recommendations and build solid relations. These advancements have opened significant ways to value new business opportunities.

Summing up

Today, the global network focuses on digitization and financing offered through a distributed trade finance platform. By connecting a critical mass of numerous parties in the trade ecosystem, it turns the much-needed digitalization of trade finance into a reality. In the forthcoming years, we will see how the journey towards machine-to-machine trade finance is evolving and how many corporates, banks and third-party service providers are catching up and moving to mass adoption.

Banks and other financial institutions will struggle to keep up with global buyers and sellers if they are slow in accepting these technological advancements.