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New Technologies create new opportunities in trade finance and working capital

At Sibos 2014 in Boston blockchain was the talk of the show and the movement towards adoption of new technologies was up and running. As Sibos 2018 opens in Sydney, APIs and open banking based on their adoption will be high on the agenda, indicating that the movement is gathering momentum.

In the intervening four years, there have been many ‘Proofs of Concepts’ but as yet no global industrialised banking function using Distributed Ledger Technology (AKA blockchain) – which does not mean that it doesn’t have a role. In the same period, Bitcoin, which introduced blockchain to the world, has yet to be hacked (though several Bitcoin exchanges have). With cybercrime overtaking drugs as a major criminal activity, the inherent security of DLT is a powerful incentive for its adoption. Cybercrime is a major threat to the banking industry and thrives on manual, paper processes that are supported by legacy systems built before the rise of cybercrime.

In one area, this characteristic of the technology could be a great advantage – and it is one that many pilots are targeting: trade finance. A recent report from CrowdStrike says that Supply Chain attacks have increased as cybercriminals focus on exploiting weak links with the average cost of an attack being more than $1.1 million.

Even better, it’s a growth area – supply chain finance is expected to grow by 15% in the coming years in revenue terms.

The demand is created by a shortage of working capital. Current processes rely heavily on messaging between many parties and the lack of interoperability between the systems stifles liquidity. For example, most banks’ core bank accounts, trade ledgers and invoice finance systems operate as standalone business units. This is frustrating for both corporate clients and the bank’s own relationship managers’ attempts to manage working capital.

The new approach of using open banking using APIs can bridge the interoperability gap by collecting the data elements needed and presenting true working capital picture for all to see. In doing so, it can remove the chances of double exposure of the bank to a corporate that is using a number of working capital components, i.e. a letter of credit (180 days) and adding further credit through import loans, (100 days) and adding Invoice Finance (120 days) for the same trade.

The need to improve liquidity where the buyer wants the longest time to pay an invoice (90 days) and the seller what’s the shortest time (30 days or less) is becoming critical. The UK Government is looking to enact laws to increase liquidity by enforcing a payment schedule of five days for SMEs. Currently £266 billion of SME turnover is locked up in late payments of 30 days or more –  equivalent to 15% of the average annual turnover.

The new age of real time payments is here. The UK has lead the way with Faster Payments, the fastest growing payment channel in the UK, and now there are more than 40 countries with projects underway. Here SWIFT’s GPI adds to international payments being paid faster and transparently. GPI enables payments to be tracked end-to-end through a cloud-based service and an API.

Payments being made in real time using new technologies that are highly cyber-secure is happening. The next step is to join these payment flows to the trade finance supply chain and working capital, which is starting to happen with the arrival of DLT ‘bank clubs’ such as Marco Polo and we.trade.

Trade finance is complex and has many different moving parts often with many different suppliers. New technologies can improve the situation, but to get the most benefit in the shortest time the best approach is to break the modernisation of trade into pieces. Working capital can be one piece, the flow of documents another and an ecosystem including insurance and logistic companies a third. The glue between them can be secure APIs, and DLTs can supply the security.

  

 

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John Bertrand

John Bertrand

Head of Solutions

Cognizant

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London

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This post is from a series of posts in the group:

Banking Strategy, Digital and Transformation

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