Trade finance and the banking industry at a crossroads: changing our mindset

The experiences and events we have seen worldwide in the past 10 years can only be described as extraordinary.

On the one hand, we have suffered the most serious global crisis since the Great Depression, from which today, after much effort, we are still only slowly emerging. This has changed – perhaps forever – the financial sector’s way of managing both credit and reputation risk at a global level.

On the other hand, there has been a genuine explosion in technology, which has certainly only just begun. It has been a little over a decade since the launch of the first smartphone on the market, nine years since the start-up of Apple’s App Store, and barely seven since the arrival of WhatsApp. All this has transformed mobile terminals from simple instruments of communication to channels for accessing products, services and experiences. It has also been eight years since the appearance of disruptive technologies such as blockchain, whose impact is, however, not yet evident in our daily lives.

The trade finance industry has not been immune to all these changes. Of course, the worldwide economic slowdown has clearly had a major impact, but there are also other factors at play. The uncertainty that has settled over the trade finance sector is not due exclusively to the changes being felt in the financial industry, which are caused fundamentally by regulation, falling margins due to cutthroat competition and the entry of new actors who compete in the most attractive parts of the value chain. These changes have also affected commercial flows, the nature and distribution of economic growth worldwide, the global production chains and the policies linked directly and indirectly to the exchange of goods and services. Added to this of course, above all, there is the technology revolution. All this points to the conclusion that this uncertainty is unlikely to be transient, but is here to stay.

Will the coming decade see a revolution in the world of trade finance, replacing banks with new intermediaries and traditional products – among them letters of credit (LCs), guarantees and import and export financing – with other types of solutions?

Obstacles to innovation

Apart from the structural factors described above, part of the response also lies in the digital revolution we are already seeing, but which in coming years will certainly reach unimaginable levels. This will not only be in terms of the way we handle today’s products, but in generating new ones with much more efficient processes, and in the wealth of information on the customers’ profiles and needs.

There is no doubt that these new ways of understanding the business and their real applicability are still in the early days of development, before these innovations become industrialised. Earlier initiatives to convert trade finance into a paperless environment have not had the expected success, and this business continues to be predominantly document-based, supported on an intensive paper trail. This creates a demand for teams of specialists in document revision, who require ongoing training and extensive experience.

The reason for this lack of success is the prevalence of multiple players, sometimes with different needs and capabilities, particularly depending on their size (small to medium enterprises (SMEs)) and location (emerging countries). It is also worth noting the role sometimes played by the regulators and their legal requirements. In other words, the level of sophistication and size of the actors in the trade finance ecosystem, as well as the attitude of governments, will determine the scope of the digital transformation. Certain challenges also remain to be resolved, such as the scalability of the technology or its widespread adoption by the market – starting with the financial institutions and including all the other stakeholders associated with the trade business; namely regulators, customs, carriers and insurers, through to importers and exporters.

Indeed, the challenges facing disruptive technologies such as blockchain concern their ability to inspire trust in their users while they meet the needs of the financial community. The achievement of a common platform and standards will enable wholesale adoption by institutions, prevent fraud such as the double financing of invoices and pave the way to new forms of funding based on the use of smart contracts. Big Data, artificial intelligence (AI) and the Internet of Things (IoT) will combine to make the document revision process more efficient.

In view of all this, what role will the banks play in the world of trade finance in 10 years’ time? No doubt their role will be just as important – possibly even more so – as it has been in recent years. Yet what certainly seems clear is that in the coming decade both the way of understanding our relationship with our customers and internal management of the products and services in the trade finance business are sure to undergo sweeping changes.

Technological innovations which impact on the customer experience will help create relationships with greater value for both parties but will, above all, respond to customers’ needs and demands – greater transparency and traceability of processes; better risk mitigation; the granting of credit at the precise instant in which the need arises within the supply chain; and management of the legal and regulatory requirements. All this will be compatible with more rapid processing of transactions at a lower cost and with a differentiated risk assessment. Customers must realise that they are dealing with a service provider who contributes value – not a mere processor of transactions, but a trusted adviser.

A new approach

All this requires adapting to a new reality: a collaborative approach to new arrivals (fintechs) will allow banks to capitalise on and enhance their extensive customer base (known, stable) thanks to the greater flexibility and the innovation capacity of the fintechs. Thus the banking industry can build a more profitable business by combining proprietary platforms with other platforms belonging to third parties. The back end must also adapt. Digital technology allows a reduction in costs and the expansion of the operational footprint without the need for additional resources. The improved efficiency of the know your customer (KYC) and anti- money laundering (AML) processes will ultimately have a positive repercussion on the customer experience by reducing transaction processing times.

In short, banks that wish to survive and endure as leaders of trade finance in this current scenario are facing considerable challenges, as they need to increase their agility throughout the product life cycle, add more value for their customers, while simultaneously becoming less expensive.

The key – and this is how we see it – is to ensure that the adaptation to new technologies is internalised by the teams and becomes part of our DNA as an organization. There is evidently a long way to go, but while the external environment continues to evolve the banks must advance in parallel in adapting their internal processes. We must not only be ready to assume a change in mindset, but we need to start right now to work towards this transformation, which will soon inexorably become an everyday reality. This must be our goal if we want to continue being a reference for our customers and creating opportunities for them.

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