Bank Trade Finance Digitization - Published in Times of India

Jan 24, 2022

Banks are growing adept at sharing information securely across institutions, given established underlying data strategies. A data model specifies the information to be captured, as well as how it should be stored and processed. In cases where a standard product taxonomy has been defined, a data model would govern how a specific product should be represented and would set rules about which records of a transaction are mandatory and which optional, how to tag such data into technical messages and storage systems, and which technical formats should be used for each record. The active engagement of all participants, including regulators, in the establishment of processes to address local barriers, will be critical.

In an environment where many separate organizations must exchange data, the information exchange must be coordinated to provide the greatest benefit to all participants. SWIFT has permitted the structured exchange of financial transaction data among banks for decades, resulting in the growth of dozens of message types tailored to best suit a certain transaction category, such as letters of credit and international guarantees.

FinTechs have recently offered new data models to interface with their new trading platforms. Some of these alternatives are based on blockchain technology. According to a McKinsey analysis, trade finance is an appropriate use for blockchain, particularly in the standard representation of data. As trade finance evolves in terms of goods, services, and digital interconnectivity, a standard, unified data model encompassing all products, channels, and events becomes increasingly important for assuring full interoperability.

With technology as a crucial enabler, digital innovations are inevitable in order for banks to execute their operations efficiently. Digitization aids in translating day-to-day trade transaction monitoring into a competitive advantage for the bank. Overall, the digitized solutions are a perfect fit for banks who would like to manage, monitor their trade transactions on a single dashboard, and have the solution customized and configured as per their banking process. It not only leverages current investments, but it also automates and enhances the efficiency of branch and service desk staff through value-added capabilities.

To avoid duplicate request processing, funding, and verifying the integrity of underlying trade, the programme uses customer history data, scrutiny and compliance observations, blacklisting, AML, and sanction screens. Deferral management ensures account level checks, transaction processing controls with an irreversible audit trail, and documentation is delivered digitally, reducing the current high cost, error-prone, and inefficient processes.

Innovative solutions that can help decrease operational costs, enhance compliance, prevent money laundering, and react to disruptions such as Blockchain and electronic trade papers will undoubtedly win the market, revolutionising the sector.

Standards for trade finance APIs

APIs have evolved into an efficient means for core participants in the trade ecosystem to interact. Such code is embedded seamlessly into millions of websites, enterprise resource planning (ERP) systems, and mobile devices, among other means, revolutionizing the way participants transact and access information. These interactions will become far more beneficial only when APIs employed for trade finance will be standardized.

This may happen in one of several ways. API standards can be advanced by regulations. It could also result from a bottom-up industry initiative, in which parties agreed to use standardized APIs to exchange electronic bills of lading.

Currently, trade finance does not have a common set of APIs to handle its many services. As a result, several banks have created their own proprietary B2B API catalogues to link their company to customers for trade finance transaction execution. If those clients wish to connect with another bank, they may need to devote additional cost, time, and resources to integrating those systems. In addition, technology providers and B2B trade platforms are adding their own API standards for their own proprietary trade products. This has resulted in the increase of API integrations that could otherwise be avoided through the standardization of trade finance APIs.

SWIFT recently announced that its KYC Registry will become the first global utility to integrate the ICC’s Sustainable Trade Finance Guidelines on customer due diligence. For now, it has already been adopted by more than half of its member financial institutions.

Streamlined processes and lowered cost.

Standardization has been a key barrier to the digitization of trade finance processes; once it has been achieved, more banks will be in a position to justify embarking on digital adoption journeys. Financing providers will greatly benefit from the wider adoption of standards, both existing and new, as well as from following broadly recognized blueprints. To secure the trade financing sector, which is already hindered by high cost-to-income ratios, operational efficiency must be improved. Selected global and forward-thinking banks have completed technological transformations in some areas of trade finance.

Those institutions have realized cost base improvements of 30 to 40 percent as a result of deploying technologies such as robotics and smart contracts.

Standardization of trade documents or communication protocols will also bring a new level of efficiency to logistics players.

Finally, developments in standardisation, process digitalization, and form electronification are anticipated to simplify government and regulatory activities, easing the administrative load on those being regulated. The digitization of trade finance not only makes it easier to satisfy administrative requirements, but it also enhances internal risk management systems. It will only serve to increase the size of the trade financing market. Today, banks have a tremendous chance to invest in the smart digital revolution.

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