Trade finance – how it’s catching up with the digital age

As seen here on Global Banking and Finance Review

 

Uzair Bawany, COO at Traydstream, explains that the ancient process of trade finance is finally being transformed thanks to the application of artificial learning, machine learning and robotics.

Although it drives the global economy, trade finance processing remains in a time warp and hasn’t really progressed over the centuries. Despite the modern digital world that we live in, current trade finance operations still involve manual, paper-based processes that are duplicated across multiple parties. The net result is that these activities remain extremely costly, time intensive and inefficient. At long last, the trade finance process is now the target for massive disruption to move into a new era of digitisation and efficiency.

Why change is required

A good example of the problem is the transfer of trade documents. A supplier will draw up the documents and send them to its bank, which will then send the documents to the buyer’s bank, which will then send them on to the buyer. All parties involved basically perform the same process, which is an enormous waste of time and resources – and can take many weeks to complete.

This status quo creates major inefficiencies at every point of the trade finance process, as well as security and compliance risks – with heavy fines and an abundance of regulatory obligations, becoming increasingly commonplace.  Some firms have tried to digitise parts of the process with electronic Bills of Lading and other similar components to a transaction, but this really isn’t solving the real issue – as checks still need to be performed.

Imagine the scenario of a trade transaction between two oil majors, transacting a large oil shipment. To start the trade, the shipment is made and the exporting major prepares its’ documents – this process could take between three and four days. The documents are then handed over to its bank for checking against the Letter of Credit, which could easily take two more days. At this point, it would be highly likely that the documents are sent back to the major for corrections due to discrepancies – which further delays the end-to-end chain. These documents are then physically sent to the buyer’s bank that will take another two days to process. If all is well, the buyer will get the documents to concur and be ready to pay.

This end-to-end process could take ten to twelve days, not to mention the holiday impact – depending on jurisdictions. That said, oil majors, typically benefit from a faster turnaround, and so the process can be quicker. On the other hand, with SME’s, or other sectors, this process through the banking system could take much longer. It’s also a process that goes on day in day out for all companies trading in the international arena.

The biggest barrier to addressing trading inefficiencies in the finance sectors has been the inertia to change. As trade finance processes have remained the same for decades, it’s hardly surprising there is a certain comfort factor associated with this.  Additionally, over the last ten years, financial organisations have been faced with huge regulatory pressures and increased capital costs. A general political climate where banks need to become more utility-like in their approach has also meant that “change” has not been their priority.

Thankfully, we are now seeing a new industry focus on efficiency and accuracy, driven by the huge attention on expense management – which is forcing organisations to be more receptive to change. Life after Brexit is also another key driver – especially when dealing with the inevitable changes in trading rules. Solutions are therefore being sought that enable operational processes to become leaner and fitter – and this feels like a behavioural shift which is more endemic.  This can only be a good thing for the industry.

Technology game changers

To overhaul the trade-finance industry and more specifically – the documentation process, senior management and business leaders in the banking and finance sector are embracing technology and championing it through their respective organisations. Digitalisation and leading-edge technology are now the key areas of strategic focus – driven by the promise of potential cost reductions, efficiency and compliance benefits.

New technologies, such as robotics, are positively disrupting the trade finance sector, specifically with the automation of key processes such as moving documents and data, enacting document comparisons and performing due-diligence checks. Other technology innovations like artificial intelligence (AI) and behavioural learning can arm trading partners with transparency and predictability in global trade and provide a greater capacity to identify potential non-compliance and fraud risks.

In practice

New digital, cloud-based, platforms are emerging that enable banks and corporates to complete trade finance operations, in minutes – rather than days. Through the use of best in class technologies, in a safe and secure manner, information can be shared, checks can be conducted and the entire process can be consummated quickly. These platforms work by scanning trade finance documents and extracting the data using advanced Optical Character Recognition (OCR) software which the platform can use downstream. Subsequently, the data is run through a very sophisticated artificial intelligence and machine learning-based, rules algorithmic engine.

These platforms are able to come up with responses and decisions which humans currently take on a daily basis, enabling the entire process to become data-driven – as opposed to paper dependent – with an exceptionally high rate of accuracy and precision. These automated steps include document discrepancy-checks, due-diligence, and regulatory and compliance screening, thereby making the role of the user, more the exception rather than the rule in discovering errors, and removing the need for mundane, repetitive activities.

The underpinning of any global system for banks and corporates needs to be in a very safe and secure environment, so platforms use the best in class measures to keep data partitioned and protected.  Very soon, blockchain technology will also be integrated to further enhance transaction processes and research is currently being conducted on live trades. Once incorporated, it will reduce the trade cycle time even more.

Positive outcomes

This new technology wave promises to reduce the costs and complexities of trade finance for banks and corporates, and even enhance working-capital management. The use of Smart contracts (i.e. digitised contracts), AI and Machine Learning to automate processes –  ensures a more streamlined operational process across the whole Trade ecosystem.

The ability to access, examine and approve original documents remotely and separately from other parties—anywhere across the supply chain— will improve logistical efficiency at banks, ports and terminals. By enabling individuals in different countries to collaborate on drafting digital documents, it will also reduce errors, centralise processes, maintain data integrity and accelerate the completion of agreements from weeks – to minutes.

Another key benefit of digitalisation is by increasing visibility and by making processes more efficient and reliable, it becomes easier to comply with regulatory requirements. With the increased control and visibility over documents, and the capability to instantly transfer documents across the globe – this can help organisations reduce the risk of fraud too. Documents can be issued or endorsed only by authorised users and can be configured to prevent unwitting transfer to sanctioned parties.

There are also wider economic benefits. As the cost of processing a letter of credit decreases, this reduces the entire cost of trade finance operations. The ease of process also facilitates customs-clearance procedures—allowing goods to move through supply chains more easily and reach consumers faster.

Looking forward

Although change won’t happen overnight, and transformation is still at an early stage, there’s clearly great potential for technology to create major efficiencies and opportunities in the trade finance sector. Ultimately, as finance sector organisations continue to show increased interest in collaboration, and as technology continues to innovate – the multiple benefits for all parties operating in trade finance will be transformational.

Expansion of Traydstream’s C-Level Continues

As seen here on Global Banking & Finance Review

 

Trade finance software firm Traydstream has announced the executive appointment of Shishir Vyas as the firm’s Chief Client Experience & Digitisation Officer.

As the fintech continues to expand its core offering to banks and corporates of automating the critical processes that underpin trade finance, the appointment signals the next stage in the company’s progress from pilots to commercial mandates.

In his role as Chief Client Experience & Digitisation Officer, Shishir will focus on leveraging the latest technology to enhance customer engagement (spanning across digitally enabled touch-points and assisted channels), and leading the creation of innovative solutions at Traydstream to improve the value derived by end users.

Shishir brings hands-on expertise in the implementation of internet and mobile banking, portal technology and architecture, and customer relationship management (CRM) or customer-centric solutions, gained from over 20 years at banks and other financial services institutions. He has led award-winning technology solutions for leading global banks, enhancing business capability across multiple markets. Previous to Traydstream, Shishir has worked at leading multinationals such as Citi, Mphasis, ANZ Grindlays, and TATA Motors, and most recently ran his own digital strategy consultancy business, focussed on financial services. He holds an MBA from Indian Institute of Management (IIM), Calcutta, and a Bachelor of Technology. from Indian Institute of Technology (IIT), Kanpur.

On his appointment, Shishir commented: “Having worked with some of the best and brightest technology folks in banking and technology, I was seriously impressed by how this highly talented team, comprised of banking experts and technology ninjas, was working together in close concert to create a solution for a challenge that no-one had attempted to address previously. I am thrilled to be a part of this superpowered team, and very excited to be leading the Client Experience & Digitisation efforts for transforming how banks, corporates and even SMEs engage in international trade.”

Traydstream is marked by its holistic approach to the digitalisation of trade finance, with a focus on the automation of key processes like document discrepancy-checks, due-diligence, and regulatory and compliance screening, as well as the initial stages of converting data to digital format (a process achieved by their proprietary Optical Character Recognition (OCR) technology). Designed and built by leading individuals from the banking and technology communities, Traydstream is making headway in an industry increasingly aware of its need for reform.

Beyond the Blockchain – The Role of Traydstream within End-to-End Transactions

 

A lot has been made recently of the advent of blockchain in financial services, and banks must be applauded for their commitment to change; consortiums like R3 are clearly positive initiatives that demonstrate the industry-wide desire to innovate. With global trade finance revenues reaching their lowest level in seven years, with a 5% decline year-on-year announced for the first half of 2017, as reported by GTR[1], this desire has reached a tipping point.

Trade Finance is one area, in particular, where the introduction of blockchain technology would appear to have a profound impact.

Trade remains an industry that relies on the iterative updating and transfer of paper-based documentation but with blockchain these iterations could be centralised – or rather decentralised – removing the costs and delays involved with the duplication and transfer of documentary credit between buyers’ and sellers’ banks and insurers. This approach enables the simultaneous digital recording of data across multiple parties, leading to secure transactions and instantaneous updating.

This is however only one part of the process as far as trade finance processing is concerned. The ‘heavy lifting’ involved in the scrutiny of transaction documentation for regulatory compliance remains largely un-automated, and this is where Traydstream has focussed its efforts.

Currently banks employ extensive teams of ‘document-checkers’ to scrutinise the transaction documentation. This involves different aspects of scrutiny including highlighting discrepancies between entries or missing fields; ensuring compliance with international trading standards and embargoes as set by the UCP Rules and ICC’s ISBP regulations; and spotting contravention of country and port specific sanctions, as well as internal banking policies.

Since the financial crisis these regulatory requirements have accelerated drastically with the number of individual regulatory changes that banks must track on a global scale more than tripling since 2011, to an average of 200 revisions per day, according to BCG research.[2]

This has led to spiralling compliance costs for banks with the cost of inaction being equally severe – ‘strict regulatory enforcement has brought cumulative financial penalties of roughly $321 billion (through to the end of 2016).[3] It is in this environment that the need for smarter methods of reviewing and scrutinising transactions has become mission-critical.

Traydstream’s solution is aimed at solving these challenges, reducing the regulatory burden without sacrificing transaction scrutiny or security. We have spent the last three years developing a platform that extracts data using a propietary OCR engine, breaks down the conditions of the document and scrutinises it for regulatory compliance using with what we believe to be a unique rule engine.

The platform mirrors exactly the job of a document checker today, using cognitive behavioural technology to learn from each transaction, memorise document behaviour, and perceive potential issues.

With this tailored use of Artificial Intelligence and Machine Learning, the platform can automate the end-to-end processes of trade finance using manual paper based records, OR their digital equivalents through blockchain technology.

Smart contracts (which are one of the most highly anticipated applications of the blockchain) are, in effect, computer programs that verify, or enforce the negotiation or execution of an agreement.  Clearly this has highly positive implications in facilitating documentation BUT they still need to be checked, scrutinised validated, and this is the purpose behind Traydstream.

At Traydstream, we view the processes behind regulatory compliance as one of the big challenges that lie in Trade Finance and have hit this ‘head-on’ to change the landscape on how trade is processed.   We are committed to delivering an intelligent end-to-end solution that will process in minutes what currently takes banks hours and in many cases days.

We see Traydstream as a real game-changer, whose solution is only improved by blockchain adoption.  Having concentrated our efforts on solving the processing piece of the trade puzzle, we are excited to be launching our solution into the market.

 

Uzair Bawany

Felix Bradshaw

 

[1] Global Trade Review, ‘Global trade finance revenues hit seven-year low’, <https://www.gtreview.com/news/global/trade-finance-revenues-hit-seven-year-low/>

[2] Boston Consulting Group (BCG), ‘Global Risk 2017: Staying the Course in Banking’, <https://www.bcg.com/publications/2017/financial-institutions-growth-global-risk-2017-staying-course-banking.aspx>

[3] BCG, ‘Global Risk 2017: Staying the Course in Banking’.