Putting Technology to Work in Trade Finance

For the most part, trade finance processes remain manual and
paper-intensive, causing delays, inefficiencies and increased costs for
companies. But these problems have been noted and the tide is turning. Recently,
we’ve seen a tremendous push to put technology to use in trade finance wherever
possible by speeding up transactions, removing inefficiencies and reducing costs
by introducing new solutions, standardising formats and consolidating
information. Moreover, technology is being applied to provide real-time status
updates on each step of the trade finance process to all participants in the
trade transaction. 

Challenges Faced by Banks

As trade
flows become increasingly global, banks are finding an even greater need for
processing speed and efficiency. At the same time, they face a lack of standards
when attempting to communicate with their corporate clients, whether through
proprietary bank channels, spreadsheets or host-to-host connections.

Currently, some banks work with tens or even hundreds of multinational
corporations (MNCs), each with their own back-office enterprise resource
planning (ERP) system. The challenge for banks is to convert all of the data
from those client systems into a standard format they can take in, and then
later send out reports in formats their clients’ systems can read. Addressing
this formatting challenge entails a significant investment in process and

Another challenge for banks is responding to regional
niches and market practices, which are taking precedence over the implementation
of global products. Furthermore, the adoption of specialised niche products and
alternative technologies by some providers is putting pressure on banks to
either join or risk losing share of wallet to competitors that have adopted the
solution. For example, multibank proprietary platforms have their own set of
rules, and banks must adhere to these rules to become a member and participate
in transactions with corporate members of these specialised, closed-loop

New instruments, such as the Bank Payment Obligation (BPO),
also create both challenges and opportunities for banks, most notably, the
decision to invest and build the capability or wait for client adoption. The BPO
is a response to the increased usage of open account trade and the risk it poses
to sellers. The BPO represents an irrevocable undertaking given by an obligor
bank (usually the buyer’s bank) to a recipient bank (usually the seller’s bank)
to pay a specified amount on an agreed date, provided a number of predetermined
conditions have been fully satisfied by the electronic matching of data
according to uniform rules established by the International Chamber of Commerce
(ICC). The BPO aims to protect sellers in open account transactions similar to
the way letters of credit (LC) mitigate risk in traditional trade, by
transferring buyer risk to an obligor bank.

The speed and magnitude
of BPO market adoption remains to be seen; around 50 banks have confirmed that
they will adopt BPO to the corporate market, although only a few of them are
live and piloting the instrument. Banks that eventually choose to offer
BPO-based payment assurance and financing services will need to make significant
investments in systems enhancements to accommodate the instrument’s 100%
electronic process.  

Challenges Faced by Corporations

Since the global financial crisis, successful corporations have continuously
reassessed their processes to find ways to free up cash and reduce their
financing needs. Unfortunately, many companies are constrained by lack of
automation, poor visibility of cash, transaction uncertainty and inefficient,
paper-intensive processes. A big obstacle has been a lack of system
standardisation and integration. Companies have trouble sharing data between
internal systems – such as payables, receivables and other ERP systems – as well
as communicating with their banks. If a company works with multiple banks, those
problems are compounded as each bank typically has its own formatting
requirements and proprietary platforms.

With multiple bank platforms
to access, it’s difficult for companies to secure a single view of all their
transactions. Trade finance is a ‘sticky’ business, requiring integration
between the systems of the corporate and its bank. Jettisoning the relationship
after all that time and effort isn’t usually an attractive option. In response,
a few large corporates with several banking partners are looking at ways to
replace or consolidate multiple bank trade portals with a single multi-bank
platform to improve visibility and achieve greater control over their trade
finance transactions.

Another impediment faced by companies’ quest
for paper-to-electronic conversion and automation has been the inability to
produce and exchange all of their trade documents electronically, especially the
transport document – the bill of lading (B/L).    To further complicate matters,
the B/L is also used as a title document in trade finance.  Several solution
providers now have partnered with major shipping lines to create electronic
bills of lading (eBLs) and present them electronically in data form similar to
other electronic documents. In addition, there are closed member groups where
buyers, sellers, banks, and forwarders can participate within their own legal
framework to electronically transfer the title on the shipping document from one
party to another. This practice is gaining strong adoption globally. Given that
the BPO is also based on exchange of data, eBLs can play a significant role in
automating BPO transactions in the future.

Looking Ahead

Many of these technological challenges will be addressed as new products gain
momentum and acceptance. Now that it has been endorsed by the ICC and has its
own set of rules similar to those governing LCs, the BPO is expected to gain
momentum and expand its user base in the next few years. The upsurge in BPO
activity will help drive another trend:  growing corporate-to-bank SWIFT use.
While more than a quarter of global MNCs now use SWIFT to communicate with their
banks for treasury and bank account maintenance, and the number of banks that
offer SWIFT channels to their corporate clients is growing rapidly, corporate
adoption of SWIFT for trade is negligible. With the BPO requiring corporations
to communicate with their banks electronically, look for the SWIFT channel to be
used more for trade finance activity by corporates.

These innovations
provide an opportunity for companies to automate current paper-intensive, manual
trade finance processes. Such automation can reduce costs, remove redundancy and
cut processing times. In addition, it can provide corporates with better
visibility and certainty around cash flow associated with their trade

Mobile trade platforms to date have been in the very
nascent stage and offered by only a select few banks with very limited
capability; however market adoption is changing rapidly. With the adoption of
smartphones and tablets taking off in the past few years and companies
increasingly allowing their workforce to access third party applications and
external websites from these devices, banks are gearing up efforts to either
provide mobile platforms or trade applications with a host of functions,
enabling today’s mobile professionals to authorise or amend transactions, access
records and check transaction status while on the go. As mobile trade becomes a
price of entry, banks must define strategies such as developing device-specific,
downloadable applications, optimised web capability, or both.

Staying Competitive in Trade Finance

Trade finance is changing at a
rapid pace, with the emergence of a range of technology offerings. Companies
will need to be strategic and select the right solution that will serve them
over coming years. Trade lanes are continuously changing and more transactions
are moving away from LCs to open account and BPO. Banks will need to
differentiate themselves by offering robust solutions backed by sustained
innovation and significant, ongoing investments in technological solutions.
These solutions must be flexible, scalable, easy to integrate and nimble enough
to change and adapt to local market needs.


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