WINNING AT A CHANGING GAME - Trade Finance and Digitalisation
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Trade Finance and Digitalisation WINNING AT A CHANGING GAME
Financing global trade sits at the heart of the relationship between banks and corporates. Although this is a business characterised by small margins, it is one of huge volumes: by 2026, trade flows are predicted to reach US$24 trillion. Trade finance, however, remains a largely paper- based, manual business—although technological advances bring significant opportunities to cut costs. Those advances could also help banks with their relative inability to gauge risk cost-effectively, especially for SMEs. The result of inefficiencies is a trade financing gap estimated at nearly US$1.5 trillion, with anti-money laundering (AML), counter financing of terrorism (CFT) regulations and know-your-customer (KYC) requirements in large part to blame for preventing banks from expanding trade finance operations to some client and market segments. More positively, the trade finance landscape is evolving fast due to market-wide digitalisation trends. That is pushing banks to move towards a digitally collaborative business model to stay relevant and retain market share. Meanwhile, we think it is important for banks to reassess and modernise their core trade and supply chain platforms, as this will be central to the success of their other digital transformation initiatives. An open, flexible, scalable core trade finance platform will allow banks to collaborate seamlessly with others, helping them to drive efficiencies, cut costs, increase revenues and lower risks. This represents a dream come true for banks that are willing to get ready, starting with their core. 2 WINNING AT A CHANGING GAME
3 WINNING AT A CHANGING GAME
1. MIND THE GAP
Global trade is vast and is
Open account v documentary
set to get bigger. By 2026,
trade settlement
it is predicted that global
Global trade finance is carried out
trade flows will be worth either via open account settlement
US$24 trillion, up from or documentary trade settlement.
US$18 trillion in 2019.1
Open account settlement comprises
Trade finance revenues—the bulk of about 80 percent of the total. There are
which are carried out using open account a number of reasons for its dominance:
trade settlement (see box)—could be as
high as US$48 billion by 2021.2 • It is less costly than documentary
trade settlement.
Documentary trade finance constitutes • Technological solutions have brought
the lion’s share of business, and it’s one better risk assessment.
in which large corporates are well-served.
Mid-market and small- and medium-sized • It has been helped by the emergence
businesses (SMEs) have a far harder time. of efficient industry platforms.
• It works well where the buyer and
seller have an established relationship,
and where they are part of a large
supply chain involving MNCs and
large corporates.
• It is useful for recurring trade
transactions of a similar nature and
with established partners.
Documentary trade settlement is
used for riskier propositions: when the
buyer and supplier are new to each other,
for instance, or when the transaction
is large and non-repetitive in nature
or involves a higher performance risk,
such as an infrastructure project.
It also suits trade involving high-risk
countries as well as commodity trades
and transactions in which the underlying
goods are linked to market price risks.
4 WINNING AT A CHANGING GAME
In a recent survey, 45 percent of SMEs Yet if banks could gauge that risk better,
told the Asian Development Bank (ADB) that they could position themselves to capture
their requests for trade financing had been a slice of that US$1.5 trillion market (see
rejected.3 The rate for mid- and large-sized chart). More importantly, applying the right
firms was 39 percent, and just 17 percent solutions would also see them lower their
for multinational companies (MNCs).4 trade finance risk across the board, narrow
their compliance risks, increase efficiencies
That adds up to a huge, unmet trade finance and boost revenues.
gap in the developing world worth nearly
US$1.5 trillion, according to the ADB,5 with These AML and KYC factors undermine
40 percent of that total in the Asia-Pacific banks’ engagement on the trade finance
region alone.6 And even though this gap front in various ways: they raise the cost
hampers job creation and economic growth, of compliance; they contribute to higher
the ADB says, 60 percent of banks expect capital constraints; and they cause banks
it will increase over the next two years.7 to employ de-risking strategies to avoid
those factors in the first place.
What’s stopping banks from expanding
their trade financing operations? Anti-money In the short-term there are steps banks
laundering (AML) and know-your-customer can take to position themselves better
(KYC) requirements, the ADB says.8 —leveraging open banking and a wide
ecosystem of partners, as well as digital
Combating the financing of terrorism (CFT) is assets that have now proven their value.
a further barrier. In other words, a key reason Longer-term, banks should exploit data
for the gap is that it’s harder for banks to insights to determine a cost-efficient
gauge the risk of extending trade finance to way to understand the risks involved
smaller firms cost-effectively, and it’s easier in providing trade finance to SMEs.
simply to refuse.
Product & Bank Focus
Annual Revenue
Client Segment
(USD)
Supply Chain financing Documentary
(including receivable financing) Trade Finance
Investment grade/ Focus of global
> 5bn Global Global and regional banks
Fortune 500/MNC
Large Corporate 500mn to 5bn Regional/Global Regional/Global
Mid-market
50mn to 500mn Regional/Global Regional/Domestic Increased needs
Corporate
for trade financing
represent an
SME 10mn to 50mn Regional/Domestic Regional/Domestic opportunity for banks
Micro SME < 10mn Domestic Domestic
Small finance gap Medium finance gap Large finance gap
5 WINNING AT A CHANGING GAME2. ADAPTING TO TODAY’S
TRADE FINANCE REALITIES
There is a better way to do trade A New Landscape
finance, and finding it starts In addition to addressing these traditional
with recognising the range of issues, banks must adapt to keep pace
challenges that impede a more with global developments in trade finance.
efficient, profitable business: Over the past decade, digitisation has
wrought significant changes, not least in
• First, the business model is vertically
allowing forward-looking banks to work with
integrated, with banks owning the entire
others in unprecedented ways. A modern
value chain. That has numerous downsides:
core platform that is API-driven and that
it is inflexible, limits banks’ ability to grow
uses micro-service components doesn’t just
their client base, and makes them less
bring internal efficiencies and cost-savings;
open for collaboration with fintechs
it offers the chance to interact with third
and tech platform providers.
parties, and in doing so opens up a world
• Second, trade finance is largely paper- of opportunities for banks to collaborate
based and labour-intensive, and suffers with external providers’ digital solutions.
from fragmented information. This is This blend of internal and external integration
costly, adds time and errors to processing, is central to the future of banking generally,
means a lack of standardisation, and to trade finance in particular.
and further crimps already tight margins.
As we shall see, banks that take the approach
• Third, banks must abide by a range
of innovation and collaboration will gain new
of regulatory and compliance requirements,
markets, optimise profits and overcome the
which are made harder by the manual nature
shortcomings of the trade finance market.
of trade finance processing. The lack of
standardised reporting processes and formats They can do this in a range of areas. First, by
complicates this further, both within the collaborating with platform providers, banks
industry and with customs and regulators. can respond better to clients’ demands for
• Fourth, legacy IT systems are expensive flexibility. For instance, some large companies
to maintain, and integration with multiple prefer bank-agnostic supply-chain finance
other legacy systems adds to costs. platform providers; these connect with
That puts efficiencies out of reach, adds multiple banks, which means the company
complexity in tracking due to manual does not need to integrate into its banks’
handoffs, and makes it hard to reconcile proprietary platforms. This helps corporates
data across systems. to plug and play their banking needs with their
lead bank as well as other banking partners.
6 WINNING AT A CHANGING GAME7 WINNING AT A CHANGING GAME
Second, by embedding their products into Third, banks can benefit from integrated
marketplaces, banks can expand into the solutions that automate compliance and
mid-market and SME segments, tapping into document checks to improve process
a new customer base while at the same time efficiencies (see Box), allowing them to
solving a range of traditional challenges cut costs and offer faster turnaround times.
including KYC costs (see Box). Tradeshift is Such solutions can see banks achieve
one example: it is a B2B platform that digitises close to straight-through-processing
and connects “everything that happens (STP) in trade operations by:
between a buyer and a seller, anywhere
• Digitizing documents using optical
in the world.”9 Its network hosts more than
character recognition (OCR).
1.5 million suppliers, with financial services
partners including HSBC, American Express • Capturing data with machine-learning
and Santander.10 and robotic process automation (RPA).
• Automating checks by integrating that
harvested data with screening systems.
Trade marketplaces
Fourth, banks can connect to the wider
SMEs and mid-market firms are trading ecosystem via government
increasingly using trade marketplaces platforms, like Singapore’s Networked Trade
for cross-border trade and to manage Platform (NTP). These one-stop ecosystems
their operations. are designed to digitise trade processes
Such platforms have advantages and make trade easier, and can issue, store
for banks too—they can access trade and share key digital trade documents
marketplaces and use the data to: such as certificate of origin papers, export
licences, invoices and bills of lading. The
• Lower the cost of client origination
NTP goes further, offering price checks for
and onboarding.
non-commodity goods so that banks can
• Perform data/transaction analytics simply use an API call to verify whether
to better evaluate the real risk involved the transactions they are financing are
in financing and make financing priced legitimately—a key aspect of the
decisions faster. AML screening process. Other countries
developing single-window trade systems
• Cut the risk of fraud through the use
include China, India and South Korea.
of e-invoices and electronic data, as
opposed to using paper documents.
8 WINNING AT A CHANGING GAMETackling Inefficiencies Such automated solutions flag up
blank or missing fields; discrepancies
The critical inefficiencies along the
between documents; non-compliance
transaction processing value chain
with UCP trade rules; and parties that
are largely in the areas of pre-checks
might be non-compliant.
(limit-checking, compliance screening
and document checks) and processing Traydstream, a fintech firm that recently
(issuing letters of credit or bank partnered with Standard Chartered Bank,
guarantees, discounting and settlement). is packaging such automation solutions
in its products. It estimates that doing
Solutions already exist to improve
so cuts costs by up to 70 percent, and
process efficiencies by:
turnaround time from 2-5 days per stage
• Digitising documents using Intelligent to as little as 10 minutes.11
OCR to turn them into data sources.
Another such strategic partnership is
• Carrying out documentary checks –
between HSBC and Quantexa, which
for example, using artificial intelligence
leverages intelligent analysis to detect
(AI) or machine-learning (ML) along with
financial crimes such as money-laundering.
a natural language processing (NLP) rules
engine to check data against the Uniform While it’s true that many banks have
Customs and Practice (UCP) rules. tried these solutions with varying rates
• And running compliance checks using of success, the arrival of fintechs with
AI and ML interfaces to screen vessels which banks can partner can drive the
or names, for instance. maturity of such solutions.
9 WINNING AT A CHANGING GAMEFifth, banks can connect to global networks Finally, following a path of innovation and
of financial institutions. One example is collaboration will prepare banks for future
FCI, whose FCIreverse platform is used to trends—such as distributed ledger technology
finance buyer-approved receivables.12 Being (DLT) solutions for trade finance, which have
part of such interbank trade networks brings become increasingly important in recent
opportunities to grow banks’ trade finance years. Consortiums comprised of major banks
business. FCI’s 400-strong global network, and fintech providers have begun trialling
for example, is creating a supply chain DLT solutions for documentary trade finance
finance platform to deliver finance solutions. and supply chain finance. Although there is
The platform leverages FCI members’ local some way to go before a fully scalable and
market capabilities to help partner banks production-ready DLT-based trade finance
reach areas that they don’t currently service platform will be ready—and that’s partly
—and that until the development of such due to the challenges faced by consortia
networks they had no way of reaching. in developing scalable software platforms
and onboarding members—the industry is
Another such initiative, the Trade Information closing in on that goal thanks to improved
Network (TIN), founded by six global banks, collaboration between fintechs, corporates,
offers a simple platform where buyers and banks and others.
suppliers can upload purchase orders and
invoice-financing requests, and control As a consequence, we believe a successful
who can view their data. That allows member trade and supply chain finance banking
banks to select and approve requests. business will emerge from the current
The financing itself happens through their vertically integrated state, and create a
existing channels, and outside the TIN. collaborative business model (see diagram).
Traditional Vertically
Collaborative Model
Integrated Model
Banks own end to end value chain Banks collaborate with third parties to offer financing
and provide a proprietary offering solutions to client needs
Central Fintech/ Customs
Correspondent Partner
Customers Bank/Gov Customers Platform Marketplaces /External
Banks Banks
services providers parties
Collaborative offering across value chain
Processes Assets
• Customer relationship Customer
Channels Products and (Data &
Bank owned
relationship
• Channels Platforms Financial)
• Products
• Processes and Platforms
• Flexible “à la carte” banking for corporates
• Assets (Data & Financial)
• Better collaboration among finance and platform
providers to better serve customers
• Allows banks to prioritise focus on financing,
while partnering non-core activities
Source: Accenture
10 WINNING AT A CHANGING GAME11 WINNING AT A CHANGING GAME
3. PIVOTING TO A
COLLABORATIVE TRADE
FINANCE LANDSCAPE
It will take time for banks Fixing the Core
to get from their current point Simply applying individual technological
to a place where they can solutions and partnering with third-party
grab opportunities in that providers in different areas isn’t a long-term
solution. Today’s digital solutions might be
new, collaborative landscape. good, they do not, however, integrate well
Typically, their journey will involve: with the antiquated, inflexible, bespoke
Creating integrated digital channels for systems at the heart of banks’ operations.
a seamless customer experience; equipping Small, proof-of-concept projects aren’t the
themselves and their clients with rich insights answer either.
using data analytics; automating parts of
Instead, banks must implement new trade
their operations with RPA; developing APIs;
processing systems that are purpose-built
and adapting a cloud strategy, to name
to support documentary trade and supply
just a few markers along this digital road.
chain processing, and that are compatible
In planning their journey, banks should look with the collaborative solutions offered by
at the integrated outcomes associated with external parties. Such solutions would be
a collaborative trade platform, and work out long-term, API-driven and contain easily
their response to each. In that way they can customisable and selectively scalable micro-
provide the level of innovation, digitisation service components. They would be fully
and investment appropriate to that outcome’s integrated, far more efficient, eliminate the
importance from a business perspective, need for manual processing and reinputting,
and weigh that against the cost. cut costs and boost revenues.
Take, for instance, RPA, which is used in There are a few solutions available,
automating the manual processing of paper either from well-established players
documents. A cost-benefit analysis can easily that have invested significantly to upgrade
determine whether it is worthwhile for the their existing product suite, or from new
bank to switch to an automated solution entrants that have invested in functionality,
or to continue with its manual method, and security and scalability using a modular
to assess the value of implementing other architecture approach.
aspects of the collaborative trade platform.
To make the right choice it is key that
At the same time, simply inserting an RPA
banks perform a capability review of their
solution into an otherwise disconnected set
existing platform against the needs of their
of processes, as we have seen some banks do,
envisioned future business and operational
limits the efficiency gain. Banks will achieve
states, and do so with consideration of the
a far stronger outcome by using RPA in a
digital evolutions that are affecting trade
system with the fundamental building blocks
and supply chain finance.
in place: structured data, open and connected
systems, and standardised processes.
12 WINNING AT A CHANGING GAMEIn this way, banks can move gradually, It’s time to rethink that approach.
but surely, from the traditional model Why? Because clients, governments and
to a collaborative one (see chart), as the the competition are actively going through
trade finance business becomes more the process of digital transformation.
closely coupled with the openness of That adds pressure on trade finance players
banks’ platforms. that aren’t yet ready.
Why Now? Admittedly, one option is to keep on with
outdated core systems, though it should be
Traditionally, banks have struggled clear that the cost of this approach is high:
to make a business case for investing in failing to collaborate and integrate will see
their core trade platforms. Doing so risked business eroded.
their becoming a digital island given that
most external parties would continue On the other hand, shifting from a vertically
to transact manually and use paper. integrated banking model to a collaborative
model will bring a range of benefits, including
It’s also true that efforts to digitise trade the abilities to:
finance aren’t new: electronic bills of lading,
• Respond to client demands for flexibility.
for example, have been available for years.
However, digitisation steps taken to date • Tap into a new customer base.
have largely failed—in part due to a lack • Offer faster turnaround times and
of common standards and their limited lower costs.
adoption, and because the trade finance
ecosystem is fragmented across geographies, • Grow the trade finance banking network.
actors and scale. • Be better prepared for future trends
and developments, including regulatory
It is another reason why banks have and compliance needs.
refrained for years from investing in this
area. They’ve been waiting for a shift in • Be ready for government digitisation
the market to digital solutions that will initiatives.
work with their legacy platforms.
· Platform with strong API focus
el
· Own/co-own ecosystems & marketplaces to
od
Service
m
provide own and competitor products and services
aggregator
e
tiv
ra
bo
Finance and risk · API-enabled platform to embed banking
lla
mitigation products & services in third party /
Co
service provider customer platforms
· Some STP, Integration of Front,
Integrated portal provider (for
Middle & Backoffice systems
el
Trade, Cash, Payments, FX etc)
od
· Some API focus
m
al
on
· No STP, Integration of Front,
iti
Basic Portal Provider
ad
Middle & Backoffice systems
Tr
(for Trade transactions only) · No API focus
Source: Accenture
13 WINNING AT A CHANGING GAME4. GEARING UP FOR
DIGITALISED, COLLABORATIVE
TRADE FINANCE
By now it should be clear It will also require integrating seamlessly with
internal systems, being robot-friendly, and,
that, in the near future, being among other things, analysing internal and
competitive in the trade finance external data for real-time decision-making.
business will require connecting Getting there requires:
digitally to a range of external • Investing in technology and platform
players: existing and new solutions, and doing so by collaborating
with others.
payment gateways; trade finance
• Replacing legacy trade finance systems.
marketplaces; government
Thriving in the modern era requires a
single-window systems; core that is collaborative, API-enabled
interbank and DLT networks; and data-driven, and able to integrate
client ERP systems and third- micro-service components.
party solutions providers. The result will be a collaboration-ready
trade platform that allows banks to connect
seamlessly, both internally and externally
(see diagram).
Collaboration-ready bank trade platform
3rd Party Customer
Platforms Channels
Trade DLT
Marketplaces Networks
laborations
Col
D
ce
oc
an
Government Interbank
um
ai n f i n
single window Trade
e ntar y c
platforms Networks
BANK’S TRADE
ly c h
PLATFORM
di
pp
re
t Su
OCR/RPA/ In t e Analytics &
Automation g r a ti o n Reporting
AML/CTF Workflow
Core banking/
Payments
14 WINNING AT A CHANGING GAMEWill doing so open up the entire US$1.5 trillion That said, most trade finance banks are
trade financing gap to pioneering banks? not prepared to adapt to these new internal
That’s unlikely, because there are good and external ways of working to originate,
reasons why some of that is unfinanced; process and settle trade and supply chain
a digitised, integrated and collaborative trade transactions. Yet it is also the case that
finance platform won’t see a business case those which choose to gear up—to embrace
where none exists. But some of that gap is the future and prepare for platform-based
reachable, and a new approach will let banks banking—will be best-placed to avoid being
gauge risk in a way they can’t currently do “Amazon-ised.” With some Asian tech giants
and grow their market and their profits. taking an interest in this space, that moment
is coming, which raises the question:
How is your bank gearing up?
15 WINNING AT A CHANGING GAMEAbout Accenture References
Accenture is a leading global professional 1
2018: Global Trade – Securing Future
services company, providing a broad range of Growth, International Chamber of Commerce
services and solutions in strategy, consulting, (2018). See: https://iccwbo.org/publication/
digital, technology and operations. Combining global-survey-2018-securing-future-growth
unmatched experience and specialized skills 2
Ibid.
across more than 40 industries and all business
functions—underpinned by the world’s largest
3
$1.5 Trillion Global Trade Finance Gap Frustrating
delivery network—Accenture works at the Efforts to Deliver Crucial Jobs and Growth –
intersection of business and technology to help ADB, Asian Development Bank (September 3,
clients improve their performance and create 2019). See: https://www.adb.org/news/15-trillion-
sustainable value for their stakeholders. With global-trade-finance-gap-frustrating-efforts-
492,000 people serving clients in more than deliver-crucial-jobs-and-growth-adb
120 countries, Accenture drives innovation to 4
Ibid.
improve the way the world works and lives.
5
$1.5 Trillion Global Trade Finance Gap
Visit us at www.accenture.com
Frustrating Efforts to Deliver Crucial Jobs and
Growth – ADB, op cit.
Authors 6
2018: Global Trade – Securing Future Growth,
Nicole Bodack International Chamber of Commerce, op cit.
MD, APAC Corporate
& Commercial Banking
7
1.5 Trillion Global Trade Finance Gap Frustrating
nicole.bodack@accenture.com Efforts to Deliver Crucial Jobs and Growth –
ADB, op cit.
Olivier Decock 8
Ibid.
Principal Director, ASEAN Corporate
& Commercial Banking
9
See: https://tradeshift.com/about
olivier.decock@accenture.com 10
https://tradeshift.com/partner
Venkatraman Ramaswamy
11
Source: Accenture (August 2019)
Consulting Manager, 12
See: https://fci.nl/en/solutions/FCIreverse-def
Trade & Supply Chain Financing
venkat.ramaswamy@accenture.com
Copyright © 2019 Accenture.
All rights reserved.
Accenture and its logo are registered trademarks of Accenture. 191691You can also read
