Intelligent Trade Finance: The Road Ahead

Spend Matters welcomes this guest post from Biji John, product manager, trade finance, at Finastra.

The trade finance industry is undergoing a unique moment of transformation. There is a virtuous circle between how the technologies of the fourth industrial revolution will enable trade financing, and how this in turn will power the innovation and adoption of these technologies in “Industry X.0.” In our last post, we explored ways in which AI, blockchain and the Internet of Things (IoT) will transform how trade finance is done. Here we explore some of the hurdles that banks face on the road to true intelligent trade finance, and provide some practical examples of banks that have overcome these challenges and serve as prime examples of intelligent trade finance in action.

The biggest challenge that banks face on the road to intelligent trade finance is the ability to manage vast and increasing amounts of unstructured data in this exponential environment. Banks, vendors and suppliers are still talking in their own language. There is a need to standardize rules through more uniform digital standards that will pave the way for more frictionless data exchange across stakeholders. Moreover, a willingness to collaborate and share ideas on the data that will have the most value when translated into uniform digital standards is critical.

Meanwhile, banks are increasingly worried about tightening sanction controls, cybersecurity and accurately predicting customer transaction behaviors through more consistent and automated KYC processes and data.

Cross-border data flows are impacted by regional data protection regulations, which impact the fluidity of international trade transactions. Governments and regulators must find ways to come to consensus around how data in their jurisdictions can cross-borders freely so that wider data flows can be compared and analyzed.

Going digital end-to-end in this new world demands that banks look beyond digitizing their own enterprises and develop business models that support digitalization and interoperability across the diverse corporate digital ecosystem. Defining a cost-effective, economically viable model demands true collaborative solution building. There is an urgent need for banks to co-innovate, working with technology vendors to design open interfaces to tackle the challenges and achieve frictionless trade. Once achieved, the benefits are tremendous.

IoT Use Cases and Examples in the Public Domain

  1. Track and trace for perishable goods. National Bank of Dubai (NBD) executed a blockchain trade transaction that tracked a shipment of fruit from India to the Middle East, monitored by sensor-enabled devices. The bank issued a letter of credit to Santander, while Aramex, a logistics firm, shipped the goods. Smart contracts were executed on the distributed ledger, leveraging sensor data to confirm contractual obligations using IBM’s artificial intelligence platform.
  2. Commerzbank – everything-as-a-service. Commerzbank’s prototype for a new “pay-per-use” loan for capital equipment taps into IoT to adjust repayment terms based on usage of the machinery on which the loan was used to finance. The bank says the ability of machines to communicate and post production data and capacity constraints over the internet is creating new business lending models, such as pay-per-use, pay-per-part, and equipment-as-a-service. Commerzbank’s big data and analytics division developed the platform in conjunction with networked machine tool manufacturer Emag and car parts supplier KMB Technologies.
  3. IoT triggered payments. Skuchain has built a blockchain-based platform, EC3 which comprises Popcodes to track the flow of goods with the help of IoT such as QR Codes, bar codes, sensors and RFID tags. Commonwealth Bank of Australia (CBA), Wells Fargo, and their joint customer, Brighann Cotton, were the first to execute a global trade transaction between banks combining blockchain, smart contracts, and IoT. The transaction involved a shipment of cotton from the US to China which was monitored on Skuchain’s system. The trade included a physical supply chain trigger (from IoT) to confirm the geographic location of goods in transit, before releasing the payment.

As the CBA/Wells Fargo example above shows us, there is an opportunity to combine blockchain, smart contracts, and IoT to trigger supply chain finance solutions and streamline overall supply chain management.

Celent’s recent trends report (Top Trends in Corporate Banking 2018-19) supports this: IoT has vast potential for supply chain management. From the supplier to the customer, from components to the finished product, and from the factory to the warehouse, the supply chain is the backbone controlling the flow of processes and data. And the physical and financial supply chains are tightly linked, with the use of letters of credit, pre-shipment finance, invoice factoring, and receivables financing happening along the way.

In the future, trade will increasingly be orchestrated on end-to-end, digitalized and blockchain enabled networks. To reap the rewards and capture the potential of intelligent trade services banks are exploring how an open platform that can integrate with the future networks of digital trade, underpinned by comprehensive back office trade automation can support their transformation.

In a world of intelligent trade services, the smartest banks will win.

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