In the second of our series exploring four key themes to emerge from Sibos 2022, we look at four areas of innovation to promote standardisation and efficiencies within trade finance.
Two years of global supply chain disruptions have reignited calls for increased standardisation and streamlining of global trade and trade finance. The overarching goals remain broadly the same – increase accessibility to international markets and trade finance (particularly for SMEs), improve fraud detection, and reduce costs – but digitisation has now been joined by tokenisation as an avenue to achieving these goals.
Accessibility unlocks opportunity
The global trade gap of circa USD 2 trillion is the opportunity that enhanced accessibility to finance could open for lenders. On the other side of the arrangement, small businesses could gain access to new markets, reduce the relatively significant risk to them in trading internationally, and improve their operations with working capital.
The challenge here is the (lack of) visibility of SMEs further down complex global supply chains, where data is less available and creditworthiness harder to assess. Fraud prevention, digitisation, and tokenisation can all help improve accessibility, but it is important for institutions to ensure that their own efforts in these areas also serve to enhance accessibility, or they may miss out on the opportunity.
Fraud is (mostly) a data problem
KYC and KYCC (customer’s customer) compliance continues to be a significant challenge, particularly for SME customers. To remedy this, lenders can partner with new ratings agencies, trade platforms, consortia, or even each other to share data more effectively. A critical enabler to making this data sharing a success is entity resolution; the ability to map different data sets to the same customer identity.
Data sharing is also being encouraged by new regulations (e.g. the US AML Act of 2020) and can give institutions, particularly smaller ones, access to larger data sets to train fraud models. This is also an opportunity for larger financial institutions to monetise their data, providing the necessary technical and commercial infrastructure is in place.
Platforms drive digitisation
Despite various regulatory, consortia and government-led initiatives, international trade remains document heavy, with little standardisation or opportunity for automated processing. However, digital platforms are starting to drive standardised data and processes for certain trade flows.
For example, where a large buyer exerts significant influence over its supply chain there are many digital tools available to standardise and digitise the flow of purchase orders and invoices between buyer and supplier, creating a rich data set for lenders to utilise in loan decisions. However, adoption of such tools is typically driven by large buyers at the top of the supply chain and has limited applicability to SME-to-SME trade.
Tokenised assets are investible assets
Tokenising trade would take different forms offering different benefits. There is ongoing debate about whether financial flows will be tokenised, or just the data and documentation that accompanies a trade flow. Similarly, the level of decentralisation is indeterminate, although all parties agree that full decentralisation is unlikely.
However, we are already seeing some elements become more decentralised through common protocols and consortia (e.g. the Contour network from HSBC, Citi, ING, ICBC, BNPP, DBS and others). Banks that are not prepared to keep up with the pace of change in decentralised finance and trade should look to partner with fintechs or big tech companies to deliver future-facing solutions.
With tokenisation, trade can become a new investible asset class. This represents a new opportunity for investment and wealth managers, and potentially allows lenders to target customers outside of their risk profile, if it falls within the risk profile of investors. Market infrastructure is needed to support the creation and exchange of tokenised trade assets – the Monetary Authority of Singapore (MAS) is already running a trial, and others are likely to follow.
Lenders should work with wealth and investment managers, be they in-house or external, to identify opportunities to sell trade flows as an investment and access new customer segments beyond their traditional risk appetite.
How businesses trade is changing; bilateral arrangements are being disintermediated by platforms and networks to the benefit of all. This digitisation – and perhaps tokenisation of trade – will impact banks and payments providers, who will need to adapt to this changing landscape. The key theme and imperative will be partnership. Whether with data providers, trade platforms, or investment managers, lenders will need to actively collaborate across the value chain to remain relevant as trade continues to change.
Whether building standalone digital banks, modernizing core banking operations or navigating evolving regulatory landscape, Capco helps clients to harness innovative technology and business models to achieve operational excellence, and transform customer experiences that provide a competitive edge in today’s markets. Capco can help you to successfully implement ISO transition programmes at each stage of the process.