Technology and Collaboration: Harnessing Opportunities in the Evolving World of Trade

By Dominic Broom, Global Head of Trade Business Development, Treasury Services, and
Joon Kim, Global Head of Trade Product and Portfolio Management, Treasury Services, BNY Mellon

The global trade landscape is undergoing significant change, driven by increasingly sophisticated technology and the rapid development of emerging economies. Technology has, for example, enabled small and medium-sized enterprises (SMEs) across the globe to trade over far greater distances, while advances in communication and transportation have supported the spread of global value chains. As a result, the global economy is more interdependent and interconnected than ever before.

What’s more—despite concerns regarding growing protectionism and isolationism sentiments—trade remains robust, and the general outlook for global trade is healthy. Global trade growth reached 4.3 percent in 2017—the fastest rate in six years—while trade flows are expected to hit a record US$24 trillion by 2026. Trade growth is being fuelled by the continuing economic progression of emerging markets, most prominently in Asia—with the region expected to account for approximately 60 percent of global trade growth up to 2020—but also in Latin America. This network of new trading corridors is opening doors to new trading partnerships and creating opportunities for businesses across the globe.

The gap: a barrier to trade

While trade is currently defying anti-globalisation trends, there is, however, another very real threat to global trade: the trade finance gap. The “gap”, which represents the difference between trade finance supply and demand, currently stands globally at an astonishing US$1.5 trillion. It is, in part, an unintended consequence of increased anti-money laundering (AML) and know your customer (KYC) regulations, drafted in following the global financial crisis (GFC) to help ensure the sanctity and security of global financial systems. The resulting substantial rise in compliance costs has meant that many larger banks have been forced to retreat from certain geographies or business sectors.

Consequently, SMEs and companies in emerging markets, in particular, are struggling to access trade finance, with the Asia-Pacific region experiencing rejection rates of 21 percent, and micro businesses and SMEs seeing well over a third–39 percent—of their trade-finance transactions rejected, according to the International Chamber of Commerce’s (ICC’s) 2018 Global Survey on Trade Finance.

Regulation is, of course, crucial to ensuring trade can be carried out effectively and securely. But if such a gap persists, this could have severe implications for trade and compromise the health of the world economy. Indeed, with both emerging markets and SMEs tipped to be primary sources of global trade growth in the coming years—and, as key trading partners for companies across the world—ensuring they can access trade finance is of paramount importance for the industry. It is here that technology and collaboration could play a pivotal role.

Applying technology to close the chasm

Technology has already altered how we trade almost beyond measure in terms of the physical supply chain, but it is also increasingly being used to enhance trade finance, with banks—and the wider trade community—exploring new innovations and how they could be applied. It is believed, for instance, that centralised databases could help to streamline existing KYC processes—removing the need for multiple banks to duplicate due diligence and thereby increasing efficiency and reducing the costs of compliance, while ensuring data integrity.

The global Legal Entity Identifier (LEI) initiative is one such example. Launched by the Financial Stability Board (FSB) in 2014, it stores details of registered companies worldwide, assigns each LEI holder with a 20-digit unique identification number and contains all the details needed to automate KYC checks for financial institutions (FIs). If it achieves critical mass, this initiative could be transformative, as global adoption of LEIs could potentially save banks issuing letters of credit upwards of $250 million in processing costs annually.

Blockchain also has the potential to be leveraged to reduce compliance and operational costs, by automating and centralising KYC processes. Blockchain is an ideal platform for KYC checks, as its distributed-ledger format registers data transparently while being cryptographically secure. The data stored and shared on these secure yet collaborative databases could, therefore, ultimately enable banks to authorise identity, as well as reduce the time and costs of onboarding new clients.

Technology is transforming trade

The role of technology in enhancing trade finance does not stop there. It is creating opportunities to transform existing processes across the supply chain—with enhancements to efficiency, transparency and security. Optimising the trade finance experience in this way could, in turn, help to significantly boost trade activity and economic growth by driving down costs and facilitating smoother, frictionless trade. Indeed, the Boston Consulting Group (BCG) has estimated that global trade banks could save upwards of $2.5 billion by adopting an “integrated digital solution that incorporates intelligent automation, collaborative digitisation and future technology solutions”, and increase their revenues by up to 20 percent.

Digitalisation—that is, the process of migrating trade-based documentation to a digital format in a move towards “paperless trade”—will make collaboration across the global banking network easier, with the information generated within the trade ecosystem more readily available and transmittable.

Artificial intelligence (AI), for example, is increasingly being used by banks to digitalise trade finance processes, with optical character recognition (OCR) and intelligent character recognition (ICR), for instance, being leveraged to enhance documentation verification. OCR technology is able to read data from a physical document, which can then be used to create an identical digital version. Crucially, this helps to streamline and enhance time-consuming processes, such as exchanging and ratifying bills of lading. ICR takes this a step further, not only scanning documents and recognising characters but applying “learning” to identify behaviour. ICR could, therefore, be particularly beneficial for highlighting unusual activity and mitigating manual errors or fraud.

Like other leading banks, BNY Mellon is exploring the use of AI for trade sanction filtering and is working on a proof of concept (POC). BNY Mellon is currently testing how AI and robotics can be harnessed to “read” various trade documents—in a structured format as required for compliance checks and monitoring—and then feed that essential information into its compliance system. All without the need for human intervention. In addition, a component of AI—machine learning—could also play a key role in helping to reduce the number of false positives in OFAC (Office of Foreign Assets Control) scanning and result in more consistent reviews. Here, human reviews will still be critical, however. Indeed, it is the combination of technology and human expertise that will result in the greatest operational efficiency and consistency—and an overall enhanced client experience.

Technology is also enabling data to become an ever-more important tool in trade finance, and it can be utilised collaboratively through technology platforms established for use by trusted user groups. This can enable transaction data and other associated information to be shared securely amongst different participants across the trade finance arena, to enhance existing processes and the ease of doing business. Various initiatives are underway in this respect, including the development of digital platforms for secondary market trading, which allow FIs to trade assets securely with a broader range of counterparties.

Moreover, digitalising trade creates rich data streams that can be harnessed by banks to gain a deeper understanding of clients’ businesses. Using powerful data analytics tools, banks can obtain insights into clients’ trading patterns and business trends throughout the supply chain, and create dashboards that help clients to identify opportunities to nurture and add real value to existing relationships. For instance, for companies looking to export to new markets, banks could provide information pertaining to trade finance products suitable for those countries, as well as details of different export routes and financial supply chain options.

In this increasingly complex, far-reaching and digital landscape, it is important that banks are able to provide effective, robust solutions that meet evolving market and client needs. By leveraging new technology capabilities and the vast libraries of data within their systems, they can not only enhance the client experience through improved efficiency, transparency and customisation but also help to fuel business growth and facilitate global trade opportunities.

Together for trade

Investing into new technology can, however, present challenges for many banks, given the costs and complexities involved. Yet, correspondent banking partnerships between local and global banks can provide the answer. Such non-competing alliances are powerful means by which banks can share technology capabilities—as well as knowledge and specialist expertise—in order to provide the very best service and trade solutions for clients, without the need for substantial investment. BNY Mellon is a strong advocate of the correspondent-banking model and is investing significantly in innovation and new capabilities to help support the global trade landscape.

With trade intrinsically linked to global economic growth—and with trade finance underpinning up to 90 percent of world trade—ensuring the wheels of trade can turn smoothly is crucial. It is, therefore, imperative that banks evolve and adapt, incorporating new digital capabilities into their services to meet the evolving needs of clients and helping to optimise and ease the passage of trade.

The importance of delivering digital capabilities to enhance the trading experience and alleviate the trade finance gap is increasingly being recognised by banks; but to truly revolutionise trade, the barriers that are locking access to trade finance must be tackled strategically and collaboratively, founded on strong correspondent bank partnerships. Yet, by taking such collaboration further, by opening up this dialogue to clients, fintechs, industry associations, regulators and governmental bodies, we can work together to promote digitalisation, accelerate change and allow global trade opportunities to be unlocked in this vibrant, interwoven world of trade.

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.