Corporates’ Role In Helping Banks Tackle The Trade Finance Gap

There are a lot of factors that have converged to create a whopping $1.5 trillion in trade finance availability in the global economy today.

Banks’ risk appetite has lowered, while regulations, some financial institutions argue, have forced financiers to reallocate resources to compliance and risk mitigation efforts, draining the trade finance pot. Geopolitical issues like Brexit and trade disputes have complicated the risk factor as well. At the same time, continued use of paper in global B2B trade, via invoices, contracts and paper checks, makes the process of monitoring and validating trade transactions more difficult for providers of trade finance (while also heightening the risk for fraud).

One of the most effective ways of combating all of these issues simultaneously is also one of the biggest challenges for banks in the trade finance space: digitization.

FinTechs have emerged into the space in an effort to bring technology and efficiency into the market, but according to previous analysis from the Asian Development Bank, FinTech hasn’t been able to make a dent in the trade finance gap yet. With traditional banks retaining the top position as source of corporate financing, these FIs are facing growing pressure to address the gap — a feat that will require further digital overhauls.

Hardly a simple task for banks that often have decades-old systems in-place, says Lyron Wahrmann, head of digitalization at trade finance technology company Surecomp.

“Banks are challenged in that they have implemented their trade finance systems 30 years ago,” he told PYMNTS in a recent interview. “These are complex systems that have since evolved a lot. They’re based on old and expensive technology, and going through a technological transformation is a very costly project.”

As such, multinational banks have taken a unique approach to digitization that may have less disruption to their back offices (and their wallets). Rather than ripping out the old, financial institutions are seeking technology that can act as a layer between legacy systems and the customer, enabling a way for corporate clients to interact with those systems in a digital, modern way.

Propelling this strategy is open banking and an API ecosystem, according to Wahrmann. APIs (application programming interfaces) enable data stored within siloed and disparate back-end systems to move more freely between each other and into those platforms that act as a bridge between the bank and the client. It’s a strategy proving successful in areas like payments, noted Wahrmann, and now the financial services sector is looking to apply it to trade finance, too.

He pointed to an array of use cases for APIs to grow banks’ trade financing activities, with the technology promoting transparency that can mitigate the risk of fraud, thus lowering the cost of financing. APIs also enable banks to deploy more sophisticated data analytics technologies that can also address risk and allow for more affordable, lower-value trade financing deals, thus broadening trade finance to smaller companies.

Getting Corporates Involved

Perhaps the biggest opportunities in APIs and open banking is the ability for banks’ systems to integrate directly with corporate clients’ systems. For trade finance that means being able to seamlessly integrate information from invoices and trade contracts, for example.

In order for that to happen, though, it is essential that corporates participate in the digital transformation. In their own back offices, that could mean embracing solutions that enable electronic invoicing and payments in global trade.

Wahrmann said he’s recently seen corporates participating in this environment by pushing for their banks to adopt technologies in a “let me help you help me” strategy.

This is also encouraging the FinTech community to get involved, both by providing technology to the banks directly, and by providing technology for the banks to offer their own corporate clients in order to address any interconnectivity friction that could stifle trade financing.

Ultimately, banks must evolve and embrace digitization in order to not only address the trade finance gap, but improve the customer service across their entire range of products and services. In the trade finance space, that doesn’t necessarily mean a complete overhaul of those legacy systems. Rather, technology can mitigate much of the friction of working with those existing tools, Wahrmann said.

But banks can’t do it alone. Whether by encouraging their financial service providers to adopt digital tools, or by going through their own digital transformations, global traders have a major hand in addressing the trade finance gap, too.

“The success of these types of bank-led initiatives ultimately depend on the collaboration from the corporate,” said Wahrmann, “because ultimately, they are the ones receiving the service by the bank.”