Trade Finance Endures, And Overcomes, Banks’ Slow-Moving Innovation

A few years ago, Sameer Sehgal, the new CEO of trade finance firm Traydstream, said he probably wouldn’t have agreed that banks are playing a role in the innovation of the industry.

But trade finance is the target for massive disruption thanks to technologies like blockchain and robotics, Sehgal told PYMNTS, and banks are finally perking up to the need for progress.

Still, it’s not enough. Recent estimates from the Asian Development Bank pegged the global trade finance gap at $1.5 trillion in 2016, with SMBs bearing the brunt of that lack of financing for their global trade initiatives. Despite efforts from the FinTech community, the gap remains, and automation is far from ubiquitous, Sehgal said.

“Trade finance, in large part, hasn’t changed, even in centuries,” he explained. “The inefficiencies of processes are glaring — humongous.”

There are multiple parties involved in any trade transaction, and, according to Sehgal, there are inefficiencies at every point, meaning any transaction of funds or documents can waste valuable time. Take, for instance, 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 to the buyer.

“There are four parties, at least, involved, and they all do the same job,” the CEO said, adding that this process is essentially four parties doing the same job four times, “which is an enormous waste of time.”

It’s pain points like these that can see the most beneficial disruption from innovative technologies. In this example, Sehgal said blockchain can introduce far greater efficiencies, with one party uploading data to a distributed ledger for all parties to access.

“If you add blockchain, the seller can prepare the document and its data onto blockchain in a safe, compliant manner to the bank, the buyer’s bank and the buyer in one fell swoop,” he said, adding that this would reduce the time it takes to communicate from weeks to mere minutes.

Robotics is another interesting area in which Sehgal envisions potential to positively disrupt the trade finance sector, largely in the case of moving documents and data, while other innovations like artificial intelligence and behavioral sciences can arm trading partners with transparency and predictability into global trade, and a greater capacity to identify potential noncompliance and fraud risks.

According to Sehgal, there isn’t a single technology likely to overhaul the trade finance sector.

“It isn’t going to be any one,” he said. “It’s going to be all of  these.”

Adoption of these tools is slow, and, even in some of the most sophisticated banks, automation of many trade finance processes can be as low as 5 percent, the executive said.

“The opportunities are high,” said Sehgal of the potential for technology to create efficiencies in trade finance and possibly help fill the trade finance gap. “But it is not fully explored yet; the tools are evolving as we speak.”

Considering traditional banks play key roles in the trade finance industry, it is imperative that FIs also participate in exploration of ways to improve trade finance processes. Sehgal said that, especially among larger institutions, change “doesn’t happen overnight.”

Still, he sees hope in banks’ ability to promote trade finance innovation.

“Banks have realized that there is a lot of disruption on the way in all streams of banking,” he said. “In the last five or six years, banks have played a much more active role. It’s not enough, in my mind, but it’s more much active.”

Partnerships with FinTechs are a promising start to their involvement in making progress, the CEO continued, as are the venture capital units of banks that look to invest in and partner with the innovators.

“But it takes a long time for anything to get approved. Innovation within banks is usually not very fast,” he said. “There is much more they can do, even today.”

In his own conversations with FIs, Sehgal said it’s clear banks are trying.

“One sees that there is a desire to partner and engage with emerging technologies, but the decision-making process is still not fast enough,” he said. “There are too many invested parties that need to be brought up to speed for any partnership to happen, and that slows the process down to months, probably even longer. That’s not productive.”

But Sehgal said that as banks continue to show increased interest in collaboration, and as technology continues to innovate and present new opportunities for the trade finance sector, the financial benefits could be huge.

Returning back to the example of the four-way document share, Traydstream’s CEO pointed out that not only could blockchain, for instance, accelerate the speed with which all trade partners can access information, the speed with which agreements can be made and money can be transferred also accelerates.

“If you can get to that stage, think about the enormous working capital saved that companies around the world could realize,” he said. “It’s enormous. If this process is done in minutes, it’s an enormous save for banks and corporates — it’s mind-boggling.”