TRADE FINANCE AUTOMATION: BANKS DRIVING DIGITAL CHANGE
The shift to digital trade finance is accelerating, with Artificial Intelligence (AI), automation, and compliance leading the way in financial transformation
The trade finance sector has long prioritized digitalization, looking to improve operational efficiency and reduce costs across the global industry. The move to digital, however, is far from straightforward. BNY Treasury Services’ Zoran Kanlic, head of Financial Supply Chain for Corporate Trade, and Rachael Snow, global head of Core Trade Finance Products, examine the state of play as the stage increasingly becomes set for digital trade finance to take hold.
The rise of digital trade finance and automation
While digital transformation continues to sweep across the banking industry, progress within trade finance has been notably slow. With an estimated 4 billion paper documents active in the global trade ecosystem at any one time1 and evolving compliance demands to combat financial crime, the need to digitize trade finance is undeniable.
Barriers to trade finance digitalization
Several factors mean that digitalizing trade is easier said than done. First, legal obstacles remain in certain jurisdictions— prohibiting the use of digital versions of traditionally paper documentation — while a lack of common industry standards further complicates widespread adoption.
The complexity of cross-border trade also makes the task extremely challenging. For example, a transaction can involve as many as thirty different stakeholders across multiple jurisdictions exchanging documentation. As a result, digital trade solutions would have to meet a diverse set of business and regulatory requirements.2 While various vertical solutions that tackle specific pain points — or are built to target particular client segments — have emerged, there are very few horizontal solutions that bring together all the different actors in the chain. The fact that even where individual technology solutions exist, they are rarely interoperable, complicating matters and resulting in multiple so-called “digital islands.” These islands — and the market fragmentation they foster — represent a significant obstacle to widespread digitalization.
The impact of the Electronic Trade Documents Act (ETDA) on digital trade finance
Efforts have long been underway to bring about change to help create a highly efficient digital trade finance industry. A key breakthrough recently came with the passing of the Electronic Trade Documents Act (ETDA) in the United Kingdom, which gives digital negotiable documents the same legal recognition as their paper equivalents. With up to 80% of global trade conducted using U.K. law, this opens the door for digital documentation to become a viable, mainstream means of transacting,3 enabling greater efficiency and security. Several other jurisdictions have also adopted, or are seeking to adopt, a similar approach, including New York state, that would bring the percentage of global trade covered much closer to 100%. With progress ramping up as fundamental building blocks are put in place, the tide is beginning to turn in the quest to deliver digital trade finance. As the digital era takes shape, financial institutions (FIs) across the globe are leveraging technology developments to not only reduce paper-based processes and transform operational processes at pace but also to provide an enhanced end-to-end trade finance experience for clients.
The role of strategic collaborations in trade finance digitalization
To implement meaningful and effective change, cross-industry collaboration has emerged as a key strategy for many FIs. As a global correspondent bank, BNY recognizes the critical role of collaborations in uniting diverse perspectives and expertise to develop solutions. Not only do collaborations advance the industry toward a digital trade ecosystem, they also effectively mitigate the risk of further fragmentation.
Automating open account trade for efficiency and compliance
An important area of focus is the open account space. While traditional trade finance, such as letters of credit (LCs), remain popular, approximately 85% of trade is now performed via open account, where goods are shipped and delivered before the payment is due.4 Therefore, implementing digital solutions that can effectively support, facilitate and optimize such transactions is essential. In this area, BNY and Kanexa, a leading provider of automation solutions, have recently collaborated to create an advanced open account automation platform. This collaboration leverages Kanexa’s expertise in automation technology with BNY to offer companies a comprehensive solution for streamlining their invoice approval processes. The platform enables businesses to automate and digitize their entire workflow, helping to enhance efficiency and reduce costs and risks associated with current processes. This not only accelerates the approval process but also minimizes errors and facilitates compliance with regulatory requirements.
How Generative AI is transforming trade finance
Artificial intelligence is being widely adopted by banks to automate manual processes. Specifically, one emerging digitalization tactic being explored is investment in generative artificial intelligence (GenAI). This subset of AI is able to learn patterns from existing data to generate new content. It also has the potential to bring significant value to trade finance. As GenAI moves from theory to widespread reality, many are using the technology to help streamline internal procedures, extracting and inputting key data quickly and effortlessly regardless of a document’s format — whether it is digital, a PDF or even a handwritten note.
Expanding AI use cases in trade finance digitalization
The use cases for GenAI in trade finance processing are plentiful. BNY is applying the technology to analyze financial statements of clients in the United States, containing the new standards for disclosing supply chain financing (SCF) programs and advise them how to improve their programs. As of 2023, corporates are required to disclose the terms and size of their SCF programs to the Financial Accounting Standards Board (FASB) through a narrative in their financial statement (Form 10-K) footnotes. Instead of having a salesperson read through hundreds of pages of data and text, this task is automated by applying GenAI and getting concise summaries of the supply chain financing sections. Another use case being considered by BNY is how GenAI could be used to help advise guarantees, which tend to have unformatted text, so that this process can also be streamlined. By leveraging GenAI, banks can free up team capacity for more strategic, data-informed tasks and facilitate these new technologies while enhancing client experience and optimizing human potential.
Real-time insights and AI in trade finance
As the efficiency of the financial supply chain increasingly catches up with the speed of the physical supply chain, banks are seeking to further enhance their offerings through real-time advice and transparency. Similar to the postal tracking solutions that are available to consumers today, a real-time tracking system for both the movement of goods and the trade finance process would bring significant value from a cash management and working capital perspective. Moreover, by applying real-time data analytics and AI to get a comprehensive view of broader transaction processing trends, as well as insights into individual client activity, it is possible for banks to identify and understand pain points, common errors and potential opportunities, generating a more consistent, optimized operating model for clients with benefits for their business.
The future of digital trade finance and innovation
As the pace of digitalization continues to accelerate, a world of new opportunities has been unlocked. Solutions that seemed impossible in the highly complex, manual trade finance world of yesterday are now a possibility, if not already a reality. For instance, balance sheet management via distribution, which is traditionally labor-intensive, prone to human error and costly, is now able to be automated. This not only streamlines the process but also can improve accuracy, enhance control and provide better visibility for all stakeholders.
While significant progress has been made, the journey to digitalization is only just beginning. Going forward, continued investment in innovation and greater collaboration between trade finance participants will be critical to the industry moving away from ingrained, paper-based procedures towards optimized global trade and digital trade finance solutions and processes.
1Geraldine McBride, “Global trade still depends on 4 billion paper documents daily. The U.K. is trying to change that,” Fortune, October 2, 2023, https://fortune.com/2023/10/02/global-trade-4-billion-paper-documents-daily-uk-document-act-law-finance-geraldine-mcbride/
2Didier Casanova, David Dierker, Bjornar Jensen, Ludwig Hausmann, Jaron Stoffels, “The multi-billion-dollar paper jam: Unlocking trade by digitalizing documentation,” McKinsey, October 2022, https://www.mckinsey.com/industries/logistics/our-insights/the-multi-billion-dollar-paper-jam-unlocking-trade-by-digitalizing-documentation#/
3“UK economy to receive £1 billion boost through innovative trade digitalisation act,” GOV.UK, July 20, 2023, https://www.gov.uk/government/news/uk-economy-to-receive-1-billion-boost-through-innovative-trade-digitalisation-act
4Joon Kim, “Modernising open account trades,” Global Trade Review, December 8, 2021, 2”https://www.gtreview.com/supplements/gtr-scf-2021/modernising-open-account-trades/
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