Trade is a fundamental element that builds the global economic and financial system. Access to finance for trade activities is still a significant concern, and a whopping 45% of trade finance requests are rejected. The current challenging times are also adding to a higher increase in the global trade finance gap. According to the World Trade Organization, 80 – 90% of world trade relies on trade finance majorly supported by banking institutions. The global trade finance gap is estimated at $1.5 trillion, and the onus of shrinking this gap rests on the shoulders of banks. Corporates are earnestly looking to improve their service quality, expand trade operations, and ensure regulatory compliance without incurring additional costs.
Unfortunately, today, the entire trade lifecycle is bogged down with labour-intensive and heavy paper flow processes. This not only adds to high costs and revenue loss for both corporates and banks but also causes severe time lags throughout the trade finance lifecycle. Banks are further constrained with stringent compliance mandates, KYC checks, and AML requirements for processing the trade finance requests.
A complete digitized and automated trade ecosystem is the need of the hour. Banks need to start embracing modern trade and supply chain finance strategies for driving seamless trade transactions between buyers and sellers.
Digital Transformation in Trade Finance Operations
According to BCG, an integrated digital solution having functions like intelligent automation, collaborative digitization, and other advanced technology solutions would help global trade banks save US$2.5 billion and US$6.0 billion on a cost base of US$12 billion to US$16 billion, with the potential to increase revenue by 20% up to 35% over 3 to 5 years.
In a recent ICC global trade report, 60% percent of banks stated they have implemented or are in the process of implementing technology solutions to digitalize their trade finance operations. The report also says that banks are moving toward greater digitalization with a strong interest in investing in evolutionary technology such as digital trade, online trade platforms, digital ledgers, and supply chain finance. BCG states robotic process automation (RPA) and machine learning (ML) can help digitize trade finance operations, particularly, sanctions screening and compliance checks.
Pillars of Digital Transformation
Let us now look at the three pillars that enable banks to drive digital transformation.
Automation: According to ICC global trade report, 2018, the automation of trade finance operations such as letter of credit issuance, drastically reduced the end-to-end human involvement to final validation and authorization, cut processing times by 60%, and reduced full-time employee headcount needed for data entry and scrutiny by 70%.
Technologies such as e-documentation can replace paper processes and enable real-time transaction tracking. Adopting such technologies will help banks increase trade visibility, prevent duplication of efforts, reduce paper footprint, and ensure compliance.
Banks use optical character recognition (OCR), machine learning (ML), and natural language processing (NLP) technology to convert documents into e-documents without any human intervention. Banks have also started utilizing automated templates solutions to reduce the time taken for trade documentation creation and maintain document consistency across the entire trade finance lifecycle.
Collaboration: According to ICC Global Trade Report, 2018, all trade parties (importers, exporters, banks, customs and logistics institutions) collaborate with each other and collectively end up creating a huge amount of data during the transaction (about 5,000 data fields) which varies across the trade finance instruments. The report also regarded the letters of credit as the most complex trade finance instrument with its end-to-end lifecycle involving more than 20 players, more than 100 pages across 10 to 20 documents with duplicated information transmitted multiple times.
Banks need to collaborate with corporates and other counterparties for real-time visibility and quicker processing of their trade finance services with technological advances such as e-documentation and e-bill of lading. Such technology-based collaboration will empower banks and other trade entities to make quicker decisions and complete trade finance services in a shorter time.
Banks should also digitize their reconciliation process to optimize their staff’s efforts in managing and matching exceptions manually. Digitization of the reconciliation process reduces the risk of transaction errors and the possibility of fraud. Lastly, seamless customer experiences in trade and supply chain finance with intuitive customer interfaces empower frictionless collaboration between banks and other trade counterparties.
Digitization: According to the report, Role of Trade Finance for Inclusive Growth, Deloitte 2018, trade activities require an average of 36 original documents, 240 copies, and the involvement of 27 entities and the Fortune 500 companies spend over USD 81 billion annually on unnecessary working capital, and supply chain costs.
The documentation intensive manual work contributes to the majority of the trade finance related costs. Trade finance instruments such as e-bill of lading facilitate faster transfer of shipping documents between entities, reducing the payment cycle. It also helps improve the working capital position of exporters. E-bill of lading is gaining popularity because they are digitally processed, saving a ton of money; they provide real-time end-to-end transaction visibility and are highly secure.
The Way Forward
Financing trade is a highly profitable business entity for banks. Banks need to play a critical role in facilitating trade finance operations end-to-end such as financing, payment processing, and risk management through different trade and supply chain finance instruments. Banks need to strive to deliver a seamless trade finance experience by leveraging technologies such as machine learning, artificial intelligence, optical character recognition (OCR), e-documentation and e-bill of lading and advancements in customer interfaces. Banks need to have a stronghold in the trade space to bridge the global trade finance gap. This can be achieved when banks start incorporating digitization and automation practices in their trade finance offerings and operations to serve this connected real-time world.
For more information, please visit:
Oracle Banking Trade Finance: View solution page
Oracle Banking Trade Finance Process Management: View solution page
Oracle Financial Services: oracle.com/financial-services
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