Financing global trade sits at the heart of the relationship between banks and corporates. Although this is a business characterized by small margins, it is one of huge volumes: by 2026, trade flows are predicted to reach US $24 trillion.
Trade finance, however, remains a largely paper based, manual business—although technological advances bring significant opportunities to cut costs. Those advances could also help banks with their relative inability to gauge risk cost-effectively, especially for SMEs.
A slew of FinTechs have stepped onto the market in recent years in an effort to facilitate funding, the vast majority of trade finance is provided by a handful the world’s largest financial institutions. It’s a complex ecosystem, however, in which financial institutions must coordinate with insurers, institutional investors, and each other to not only originate trade finance, but mitigate risk and distribute assets.
According to Tradeteq CEO and Founder Christoph Gugelmann, financial institutions have a real opportunity to contribute to the overall well-being of businesses, supply chains, and the global economy, but continue to face plenty of friction from legacy infrastructure that prevents a holistic and seamless operational flow both within the financial institution and between partners.
A Digitization Path
When it comes to trade finance, digitization is key to streamlining data as it flows throughout an institution and with its various partners. Yet, as Gugelmann explained, managing trade finance data remains one of the biggest hurdles for banks, in part due to regulatory requirements of how and where data is stored. “It’s very important to host the data in the jurisdiction they need to host it in, from a regulatory perspective,” he said.
More positively, the trade finance landscape is evolving fast due to market-wide digitalization trends. That is pushing banks to move towards a digitally collaborative business model to stay relevant and retain market share.
Optimization Through Technology
The technology can identify patterns and outliers within the data that can more quickly raise any red flags for a bank and reinforce standard risk mitigation methods like ‘Know Your Customer’. Sophisticated data analytics tools can also help manage a broader landscape of risk, he said, for example by assessing how risk translated from one counterpart to another.
With access to trade finance an imperative component of economic recovery, financial institutions will continue to play an important role in stabilizing global supply chains. Though adoption of the cloud and data intelligence solutions that can support automation without compromising compliance, Gugelmann said, banks can seamlessly collaborate with each other and the non-bank investors eager to step into the trade finance space.
The result of inefficiencies is a trade financing gap estimated at nearly US$1.5 trillion, with anti-money laundering (AML), counter financing of terrorism (CFT) regulations and know-your-customer (KYC) requirements in large part to blame for preventing banks from expanding trade finance operations to some client and market segments.
Meanwhile, we think it is important for banks to reassess and modernize their core trade and supply chain platforms, as this will be central to the success of their other digital transformation initiatives.
An open, flexible, scalable core trade finance platform will allow banks to collaborate seamlessly with others, helping them to drive efficiencies, cut costs, increase revenues and lower risks. This represents a dream come true for banks that are willing to get ready, starting with their core.
By Kushi Mayur
References:
Pymnts.com