Plain-Sailing Future For Trade Finance Digitization

Trade finance is moving out of the paper age. But to fully leverage digitization, banks need to tear down data silos and standardize tools and procedures.

Trade finance, perhaps even more than other banking specialties, requires trust; there is inevitably a gap between shipment and delivery. Even today, trade finance remains dependent on hard-copy documents.

“Whether you are an importer or an exporter, if you are shipping something to another country you want to make sure that you get paid and you want to see original documents. You do not want to see a fax copy or a PDF,” says Joon Kim, global head of trade finance product and portfolio management at BNY Mellon. “The original document is really important.”

  • Marco Polo, powered by R3’s Corda distributed ledger technology platform, with over 20 banks worldwide
  •, using IBM’s blockchain platform and Cloud, plus Linux Foundation’s Hyperledger Fabric framework
  • Voltron, a coalition of over 50 banks and companies delivering a Corda-powered open platform for all LoC needs
  • TradeLens, which connects the entire supply chain ecosystem for containerized shipping, is jointly developed by IBM and Maersk and powered by Hyperledger Fabric
  • eTradeConnect, also powered by Hyperledger Fabric, is an Asia-Pacific consortium managed by the Hong Kong Monetary Authority
  • komgo, a live commodity trade finance platform built on the Quorum blockchain infrastructure
  • Vakt, a blockchain-based post-trade management platform designed for the oil industry, also built on Quorum
  • CargoX, which supplies on-chain bills of lading, based on the Ethereum network

That may be why trade finance has lagged behind other areas, such as cash management and retail banking, in adopting digital tools to streamline necessary communication between participants.

Yet with the need for coordination so great, trade finance would seem to be a natural for digitization of data. Digital tools can help prevent fraud, streamline transactions and provide deeper insight into client needs. If individual trade transactions were managed via electronic data exchange—not faxes, notarized documents, phone calls or scanned PDFs—they would be faster, less expensive to process and less liable to fraud.

Banks are increasingly seeking to leverage the advances made in retail and other banking sectors to improve trade finance. “If artificial intelligence [AI] technology can review and authenticate [trade] documents,” Kim says, “we can begin to create a digital infrastructure from that.”

To date, however, the sector has created largely centralized ecosystems—what the International Chamber of Commerce calls “digital islands”—in which data flows freely within each network but not between them, requiring paper documents to bridge the islands. Swift’s digital bank payment obligation and MT 798 authenticated message service to exchange trade data have enjoyed only limited success, for example; as they are too bank focused, deterring corporates from signing up. Similarly, logistics providers with platforms to digitize the logistics process are not linked to the financial side of the transaction, as banks remain wary of offering private solutions beyond their control.

Daniel Gould, deputy CEO of Anglo-Gulf Trade Bank, believes that for banks to successfully commercialize digital technologies requires not just swapping new IT for old, but a wholesale shift in culture. “Without it, banks will not truly leverage the benefits that digital technologies can bring,” he says. “Some banks have gone further than others, changing organization structures and hiring different types of people to build different operating models.” But, he notes, “Most banks have contented themselves with just adding shiny front-end platforms, keeping all the messy legacies hidden behind.”

Safety First

Fraud prevention may be where digital documentation adds the greatest value. Gould explains that when a bank has trade-transaction data in digital form, it can compare that transaction to thousands of other trades: “Any unusual patterns in the data, that could signify fraud, would lead to automatic flagging for further investigation.”

The Know Your Customer (KYC) process is likewise a big issue for trade finance, given the number of parties that can be involved in a transaction. “Technology becomes a very important future contributor to addressing the due diligence issues we face,” says Kim. “Technologies such as AI, maybe working with a KYC registry, could create standardization and improved efficiencies in reading documents in a more structured environment.”

Digitization helps turn data into insight, according to Kim. “We have plenty of data scattered around the business,” he says. With digitization, he adds, “We can ask, ‘where did that transaction go, how much was it, what was the financing, how many days did it take compared with the typical time frame?’ Once we analyze the data, we can make suggestions that can enhance the client experience.” Data analytics thus help banks better anticipate client needs­. “Imagine a scenario where a bank is able to predict when a client will need additional trade financing,” says Gould, “because, for example, there is a typhoon in Southeast Asia affecting the client’s supply chain and the client needs to quickly source the usual components from a different supplier.”

Make Blockchain Boring

But first, trade-data silos will have to come down; and tools and procedures will need to be standardized across geographies.

“Currently, there are many projects globally running with the aim of digitizing and simplifying trade,” says Haytham Elmaayergi, global head of transaction banking at Abu Dhabi Islamic Bank (ADIB). “One key solution,” he says, “is the blockchain.”

Blockchain, in theory, could connect the digital islands of trade finance; and with the hype of its early days fading, banks are taking it more seriously. Ben Singh-Jarrold, head of product marketing for R3, says he wants to make blockchain boring for corporate treasurers. “A corporate treasurer doesn’t need to know deeply about blockchain to access the business benefit,” he says. “They can go onto the app to issue a letter of credit [LoC], or initiate a payment negotiation with their suppliers and make it happen very quickly. They know they’re going to get paid, and there’s no friction when it comes to the paper chain later on.”

Technology companies are stepping up to help connect banks, businesses and third parties. The Marco Polo and Voltron trade networks are growing fast, with increasing corporate traction. “Over 50 banks and corporates tried Voltron,” says Singh-Jarrold. “There are similar numbers participating in Marco Polo, with major corporates like Daimler and Dürr publicly speaking about the business value of these transactions.” Marco Polo went live with its first products in October, and Voltron was scheduled for preproduction beta by Christmas.

One big bank, ADIB, is creating its own solutions. Its projects include the ADIB Direct platform and the future launch of a supply chain platform that will make use of data available from anchors and vendors both, to finance their open-account trade transactions and include solutions that will digitize the scrutiny of trade documents via optical character recognition. ADIB is also working with Etisalat (Emirates Telecommunication Group) and seven other local banks on the launch of UAE Trade Connect, an online platform to streamline invoice checking, minimizing or eradicating duplicate invoice financing.

Aside from supporting banks’ digital trade-transformation strategies, technologies like the cloud, APIs and AI can help the banks develop new revenue sources, observers say. “APIs in trade finance simplify interactions but also enable the creation of new products and, potentially even more importantly, new trade ecosystems,” says Dave Murphy, international lead, financial services at Publicis Sapient.

One such new ecosystem that promises to boost Afro-Asia trade could result from the recent white cane sugar trade from Asia to Africa, carried out on the awkwardly named dltledgers blockchain platform by Africa’s Trade and Development Bank and Singapore’s Agrocorp. Such digital ecosystems promise increased connectivity to the fragmented trade community of importers, exporters, shipping companies, customs agencies and banks. Collaboration is key, and transformation within banks is not enough: Anglo-Gulf’s Gould believes that financial institutions need to work with their clients to help the latter leverage the “benefits of digital.” A similar transformative process also needs to occur on the client side—and indeed at other businesses—if they are not to find themselves marooned on digital islands.