For years, if not centuries, trade products such as L/C have been functioning in a paper-based, meticulous, exhaustive process flows. Painstaking as it sounds, this is what has ensured risk-mitigation and financing all these years, boosting global trade…
Astonishingly, the principles of for instance L/C have not changed too much in decades and the last considerable transformation, vastly influencing the longevity rather than the shape of the process, was probably introduction of SWIFT messages in the 1970s. The times are a-changin’, though.
So where are we today?
It has started with fast digitisation in retail banking. Strong competition in this sector combined with technological jump towards the end of the last century made the idea of a fully digital bank access, well…, not just an idea. As a result, smartphones are today our bankers.
This retail experience forcefully influenced the expectations towards business banking including trade finance. With trade finance, it never seems easy though…
One could say (especially if we talk to smaller traders who still struggle with the lengthy L/C processing and clearing of their cross-border trade payments in time) that trade finance is far behind in embracing digitisation. But in many respects that statement would simply be wrong. There are numerous highly innovative solutions, already available or underway. Some of them are by now quite well established in the banking world, like MT 798 or BPO (Bank Payment Obligation), other still seem to be rather experimental – blockchain or blockchain based trade platforms.
MT798, developed to allow much faster corporate-to-bank messaging, sped up the flow of information relating to trade finance transactions. This is, however, a solution available rather to big companies with infrastructure enabling direct usage of SWIFT messages.
Bank Payment Obligation, another SWIFT provided solution, constituted an attempt to replace a traditional letter of credit, combining “legally binding rules with electronic messaging and matching capabilities.”
Some banks go further by applying blockchain to trade processes. Last year, to finance soybean shipment from Argentina to Malaysia, HSBC issued an L/C for Cargill, an American agriculture company. The entire exchange was complete in only 24 hours and went down in history as the world's first trade finance transaction made via blockchain.
Not so long ago only a trade facilitation concept, ‘single window’ platforms also proved to be a good direction. Today there are some successfully operating – such as we.trade that already unites twelve big international banks.
Big players in the banking world evidently unite and employ both start-ups and experienced IT companies to push digital initiatives forward. SWIFT is clearly playing the key role in driving the digitisation of trade flows. None of these attempts, however, can be fully successful until majority of the stakeholders can actively take part in the digital chain of services.
Why so many are still behind?
Let’s not forget, though, that many banks still struggle to transform their time-consuming, paper-based trade processes to digital workflows. Much as blockchain sounds exciting, for these banks and their customers, it is still only a buzzword. Why is that?
The reasons are several. Limited budget for innovation. Legacy practices. Regulatory obstacles. Fear of the new. I would say, however, that the biggest slowing factor is that traders have had little or no alternative to the traditional trade banking products for a long time. This lack of competition for many years, definitely made many banks quite comfortable with their trade workflows as they are.
And there’s the rub: trade processing in banks have for years been product- instead of customer-based, making it a fragmented and burdensome process. That’s not the way to go - only a customer-centric approach can drive true innovation and help banks stay relevant to their customers in the ‘blockchain era’.
Today, processing one L/C is often disrupted and dragged on by the necessity to apply separately for financing. Or discounting. Or currency exchange. Or whatnot.
Let alone the delays caused simply by non-compliance of documents. Add difficulties in tracking cross-border payments and additional costs generated by payments through many correspondents, and what you get is a very high cost of risk mitigation that not every company can bear. Tough nut to crack, both for banks and for traders.
You could begin to hear it crack, if you will, by transforming the fragmented product-based approach into a workflow evolving around customer journeys. First step is making sure the full life cycle of a trade product is processed digitally (opening, amending, transacting, closing without ever approaching a branch).
This of course requires advanced front-end for the customer available through multiple channels, as well as the possibility of digital customer-bank communication. Having introduced that, banks can look into further innovations.
Changing technology and the way of transacting is not the biggest issue, though. It is often the mindset and lack of buy-in to invest in the transition that prove to be greater obstacles. This may be caused by the lack of clarity on the economics and return of such investments. However, customer-centric does not need to mean costly. On the contrary, departure from time-ineffective, manual and paper-consuming processing combined with automation of certain processes bring tremendous long-term savings and increase cost-effectiveness of trade processing.
Together is better…
It is safe to say that compared to other banking areas, trade indeed does lag behind in digitisation. But the delay is rather in scale of innovation, rather than lack thereof. It is critical to recognise that the digitisation process should inspire unions and alignments among banks and dialogue with their customers. Once that is practiced, the result can only be beneficial and profitable for all parties involved.
Aleksandra Grzegorczyk, Product Manager Trade Finance, Comarch