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Why trade and supply chain finance needs a technology awakening

Traditional trade and supply chain finance operations are undergoing a technological awakening: blockchain with smart contracts, Machine Learning, AI and the Internet of Things will bring trade into the digital age. 

McKinsey reports trade is in it self undergoing transition. In 2017, gross trade in services totalled $5.1 trillion against goods at $17.3 trillion with services growing 60% faster than services over the last decade.  The latest economic forecast expect annual export growth for 2019 – 2050: Asia Pac 3.9% to 6.6%, North America 1.8% to 3.8% and Europe 2.2% to 4.1%. Trade today generates revenue of $50 billion a year for banks.

Trade has been a laggard of technology change because of the historic need for physical documents. Banks have been predicting the removal of paper and manual processing for years but paper still dominates trade today. In the 2018 ICC Global Survey, 60% of the banks surveyed claim to be digitising their trade finance operations, but only 9% of banks have implemented solutions. Again, in 2019, the WTO reinforced the need for a technical revolution and KPMG reports investment in innovation and technology can drive a step change in trade.

The supply chain finance market should grow even faster, as there is a shortage of $1.5 trillion of trade that needs financing. Trade uses a form of, or a combination of, credit, guarantee and insurance. Today, with technology, financial institutions can provide credit and payments at each step of chain, almost instantaneously. Just look at the soaring adoption of cross border flows of free digital services for example email, YouTube and social media. These technologies along with DLT/Blockchain can bring scalability to global trade.

Banks and FinTech are creating a new world of Trade Network Groups, which use the latest technologies. These groups, now in double figures, include Marco Polo, Voltron and Komgo, are supported by trade banks. The key requirement is significant transaction flows.

Within banks, trade has been managed separately from the other banking areas, such as corporate banking and asset based lending. Trade requires these activities. These silos slows automation, as often more than one party at the bank needs to agree with another on what technology to adopt.  The ICC report noted little change in organisational structure over the last few years. Often stand-alone operations add significant risk, inefficiencies and extra costs to the processes. To optimize digital impact, these areas need to be pulled together providing what banks and corporates want – a true picture of their working capital.

To modernise trade four activities need to run in parallel:

1.    Transform the mountain of paperwork into an electronic format

  To remove the paper and digitise manual processes artificial intelligence (AI), machine learning and Robotic Process Automation (RPA) needs to be embraced at scale. The more data put through these activities, the better the results and confidence grows in knowing all the important clauses are on record. AI and ML have shown better results than manual screening.

2.    Use new scalable digital technologies e.g. DLT/Blockchain

Blockchain news has dominated the trade space. There are plenty of proofs of concepts with many claiming reducing transaction time from 5 - 10 days to one. SWIFT’s announcement of partnering with R3 is encouragement for DLT. SWIFT messaging is a cornerstone for the trade. In the first 4 months of 2019 banks averaged 2.7 million trade messages a month. It is this type of scale that new technologies require for trade.

  3.    Connect the new trade networks for collaboration and competition

  By connecting these new trade networks, regardless of the type of technology used, many new eco trade markets can be created.  The networks give secure, transparent electronic pathways for banks and corporates.  Sellers, buyers, shippers, insurers, have access to the information they need.  By providing corporates and banks simple, easy, intelligent access trade flows will grow quickly.

  4. Provide true working capital for the corporate and the bank

The corporate pays the fees and the move to open multi banking is growing (PSD2 and Open Banking), so banks need to accelerate the use of technology to keep their clients.  OVUM research in 2018 showed: 75% of corporates (up from 52% in 2016) will move banks for speed.

By pulling information from the legacy banking systems both banks and corporates benefit. The bank seeing the level of risk given to the corporate and the corporate sees its financial position with the bank.

Moving to intraday reporting banks and corporates can see and deal with anomalies rapidly.

Technology awakening is a must for trade and our future prosperity.  Trade today simply cannot continue in its present form.  SWIFT, went live 40 years ago with cross border payment standards and technology that removed the paper and Teletype from the banking system with great success.

Now it is trade’s turn to awaken to the benefits of technology.

 

 

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Comments: (4)

Ambrish Parmar
Blog group founder
Ambrish Parmar - Digital Strategy and Transformation Director - London 26 June, 2019, 05:40Be the first to give this comment the thumbs up 0 likes

Hi John,

Thank you for posting and I fully concur with your observations. Ambrish - Community group founder.

John Bertrand
John Bertrand - Cognizant - London 26 June, 2019, 09:48Be the first to give this comment the thumbs up 0 likes

Amish - many thanks and as 14% of the UK SMEs are in international trade they can really benefit from the latest technologies

Rory Yates
Rory Yates - Cognizant - London 27 June, 2019, 14:32Be the first to give this comment the thumbs up 0 likes

The issue here is ensuring corp banks worry endlessly about their clients businesses and have an intimate knowledge of how they are working and operating those businesses (and the role of the bank and its integrated service in this context) and how they can better make trade happen and the supply chain more effective. As you rightly point out, the true view of working capital, operated as key insight and the ability to inteject / make highly cosnumable bank serrvices in context, real-time is the key. The ecosystems aren't there, the start-ups have mostly disrupted the value chain in parts, so the market opportunity is wide open!

John Bertrand
John Bertrand - Cognizant - London 27 June, 2019, 15:351 like 1 like

Rory - excellent observation. Agree the market opportunity is wide open as trade and supply chain finance goes digital 

John Bertrand

John Bertrand

Head of Solutions

Cognizant

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

Banking Strategy, Digital and Transformation

Latest thinking in respect to Banking Strategy, Digital and Transformation. Harnessing our collective wisdom to make banking better. Ambrish Parmar


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