How can trade finance balance compliance costs and technology?
Even as the trade landscape shifts faster than ever, trade finance remains focused on manual processes. This is now starting to change.
Banks play a vital role facilitating international trade by providing their clients with a wide array of offerings. Supply chain finance includes distributing short-term credit to provide better working capital for the buyer and seller. Trade finance involves lending money to support the trading of commodities or working with export credit agencies to offer financing that may otherwise be risky. In both cases, there are numerous compliance checks associated with these offerings.
As a result, a myriad of importers and exporters rely on these financial intermediaries to reduce their risk exposure.
However, with trading relationships in a state of increased uncertainty over the last couple of years owing to rising tariffs and geopolitical and market volatility, managing trade finance has become significantly more challenging.
Moreover, the rising costs of providing trade finance, coupled with greater regulatory scrutiny, are weighing on banks’ trade finance growth prospects.
A typical trade transaction goes through numerous compliance checks during its life cycle, with each review racking up costs along the way. On average, a large trade finance bank can spend anywhere from US$25m to US$42m annually on risk, compliance, sanctions and anti-money laundering (AML) tasks – all without growing its business.
Underpinning these tasks is the continued use of paper to document millions of transactions. Although most banks acknowledge that using paper is costly and time consuming, the shift to automation has been slow, with few viable solutions implemented effectively across the industry.
In addition, the especially complex and distributed nature of trade finance means that it is highly exposed to financial crime. An estimated US$1t of financial crime proceeds flow through the US$9.1t industry’s trade channels each year. This not only threatens the global economy, but also causes monetary and reputational damage to financial institutions.
To address these key challenges, trade finance banks must change how they manage their manual compliance processes and existing detection measures to tackle illicit trade finance activity. Here, technology has a vital role to play.
Increased automation, along with artificial intelligence (AI) and machine learning (ML), can help trade finance reduce overall operational costs and improve customer experience.
One global trade finance bank recognized that, to make these necessary changes, it had a better chance of success by collaborating with external partners to find an innovative, digital solution that could benefit the trade finance sector as a whole.
The bank’s previous experience of working with EY teams, and its confidence in EY technology collaborator, SAS, led it to believe that by working together, the three firms could find technological alternatives to its paper-based, manual processes, helping the bank to play a greater role in facilitating and financing international trade in the future.