July 20, 2021

Introduction

Trade finance, as we know it today, is mostly paper-based with multiple manual touchpoints involving remotely located stakeholders. The trade transactions are processed in disparate and disconnected systems, resulting in operational silos. Such documentary and labor-intensive manual workflows are inevitably error-prone and cause unavoidable delays in transactions. Additionally, there is a lack of trust due to high chances of miscommunication and fraud. Low confidence results in multiple verification processes at every transaction step, making transaction turnaround times even longer. This high-risk perception for transactions prevents banks from distributing the trade finance assets from their balance sheets. Consequently, banks must bear the entire risks on their balance sheets, which negatively impacts their statutory capital requirements.

Arrival of the Digital Tide

The latest wave of innovation in trade finance focuses on digitized trade networks – blockchain-enabled digital platforms connecting entities within the trade finance network through open APIs and facilitating data flow between them. A confederation consortium of banks and other large players in the trade finance space are betting on developing blockchain-based platforms. The extended trade ecosystem that includes insurers, logistics providers, and B2B enterprises can access the consortium network through APIs that allow them to connect with the banks and corporate clients.

Emerging blockchain-powered consortia like we.trade, Marco Polo, Komgo, and TradeLens aspire to digitalize trade finance transactions through smart contracts, connect different stakeholders via the consortium platform efficiently, and enable near real-time access to trade finance data through open APIs. In such a model, we see banks as mostly data consumers who use APIs to facilitate trade finance processes.

The capabilities that are emerging through these platforms are paperless trade, compliance, onboarding, governance, transaction initiation, logistics management, etc. These facilities will enable the electronic execution of financed trades with increased efficiency, speed, and accuracy, reduced risk and fraud, and improved compliance and productivity. Further, banks will be able to enhance trade finance services for corporate customers with better visibility into compliance, onboarding, and governance.

Benefits to Banks

While blockchain-based consortia and APIs help establish transparency and trust, the value delivered by a distributed ledger ecosystem coupled with APIs goes beyond that. APIs can fill the void of information asymmetry by bridging the gap between the platforms and involved parties through easy integration of their trade processing systems. Banks, in turn, can leverage the power of APIs by integrating existing trade finance asset distribution channels with the digital trade finance platform. The APIs can then strengthen the banks’ asset distribution portfolio by democratizing near real-time access to sophisticated trade data.

Experts claim that this could further alleviate the potential financial stress due to the upcoming Basel IV requirement, where banks would need additional capital that could otherwise impact the return on their equity significantly. Banks, thus, would be able to offload their balance sheets and transfer some of the risks through asset distribution. Big trade finance banks like HSBC Holdings PLC report that institutional investors are showing an ‘unprecedented’ level of interest in buying trade finance assets. Integrated trade finance platforms empower banks with information and clarity and improve risk assessment for trade finance assets. The potential integration with digital trade platforms through APIs results in growth opportunities for banks in trade finance asset distribution. According to experts, the distribution of trade finance assets to investors could grow to a multitrillion-dollar market in the coming years.

The Way Forward

In realizing the potential of digital transformation, the International Chamber of Commerce (ICC) has launched the Digital Trade Standards Initiative (DSI) – a collaborative cross-industry effort to enable the standardization of digital trade. As part of the initiative, ICC has identified two business use cases – Bank-to-Bank Guarantees re-issuance and Bank-to-Corporate Export LC Advising – as pilot cases to set base API standardization. Moreover, Trade Finance Distribution Initiative, a collaborative project for banks and asset managers, is trying to develop market standards and trial new technologies. It now counts some of the world’s biggest trade finance players as member banks, including Standard Chartered PLC, Deutsche Bank AG, Crédit Agricole SA, and HSBC. Banks should be readily embracing these standards while collaborating with other ecosystem participants.

As part of the global rollout of open banking, most banks have transformed their technology, enabling access to unmatched digital opportunities in the retail banking segment. The logical step next is to leverage the knowledge and make suitable investments in corporate and institutional banking portfolios. However, these integrations will not happen overnight. Banks require a strategic will, industry consortia, considerable resources, and sufficient budget to make this happen. In this climate, banks that are ready to ‘build on belief’ of open banking as a business model are sure to position themselves in the industry leaders’ league.

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Chiranjib Bhattacharjee is a Domain Consultant in the Open Banking Strategic Initiatives group with TCS Banking, Financial Services, and Insurance business unit. He is a part of a small digital native team operating as a startup within TCS. He has over 15 years of experience in IT consulting and solution development across Insurance and Retail Banking domains. Chiranjib is an intrapreneur who designs next-gen digital propositions for global customers for their small and medium business banking, retail banking and wealth management portfolios. He is an alumnus of XLRI, Jamshedpur and Jadavpur University, Kolkata, India.