Unlocking Hidden Opportunities in Trade Finance with Automation and Interoperability

Trade finance has been around for a long time now and prides itself on its deeply-rooted rules. 

But here’s the thing—in a time of soaring interest rates and economic headwinds, there has been a drop in trade flows. 

As per the latest Trade Register report of the International Chamber of Commerce (ICC) Banking Commission, there was a 7.4% decline in trade and supply chain finance revenue for 2023 when compared with 2022.

Trade financing challenges are mounting: 

• Banks are leaving opportunities in the market untouched. 
• The complexity of trade finance perplexes clients. 
• 67% of borrowers are planning to switch up their roster of trade finance partners in the next 12 months.

In this article, we explore how static data and traditional processes can be replaced and vastly improved with scalable, easily deployable, and interoperable digital processes.

Addressing the pain points

What’s driving the slowdown in trade finance? 

• First up, paper-based workflows in trade finance 

Trade financing is traditionally reliant on paper and continues to be processed with static documents. As per a survey by Accenture, a mere 16% of companies—many of them larger corporates—stated that they are fully digital.  

Many trade finance clients have singled out manually-extensive processes as one of their greatest pain points. Players across the ecosystem have also claimed that paper-based models heighten fraud risks. 

• Lack of interoperability 

Another challenge for many financial institutions is the absence of a network to support and promote collaborative workflows within the trade ecosystem. What we need today is enhanced interoperability between solutions. 

• Trade finance products from banks fail to meet client needs 

The demand for trade finance is booming, no doubt. That said, clients today are seeking affordable, more flexible access to trade finance and innovative working capital solutions that fill the current financing gaps that are overlooked by traditional financial institutions. 

What we see today, especially among Micro, Small, and Medium Enterprises (MSMEs), is an underserved need for solutions such as pre-shipment financing and purchase order financing.

• Difficulty in transforming a well-established business 

Trade finance is big business for banks. It involves time-honoured practices, making it difficult to transform these workflows and bring in much-needed modernisation.  

Additionally, experts managing these traditional operating models and age-old processes are becoming fewer in number. 

With competition heating up, the needs of clients growing in complexity, and borrowers keen to explore new partners and products—banks and FinTechs will need to sharpen their digital capabilities to remain relevant and expand market share. 

Interoperability: The missing piece in the trade finance puzzle

The current state of affairs: 

• The global trade finance market is ripe with opportunities for banks and FinTechs alike. 

• On the flip side, the turbulent economic conditions are proving to be challenging for trade finance borrowers. 

The shifting supply chain dynamics and the potential of a worldwide economic slowdown may weigh in on trade growth flows in 2023 and 2024.  

In light of these developments, banks and FinTechs need to modernise trade financing solutions and adopt more agile ways of catering to the working capital financing needs of a broadening borrower base.

Why is interoperability needed?

Instead of tackling pain points within a single ecosystem, the key should be to ensure ecosystem connectivity among all players involved. This can be achieved only by increasing interoperability between trade finance platforms. 

In addition to this: 

• Financial institutions worldwide are pressed for better Service Level Agreements (SLAs) when it comes to turnaround time. To meet the speed of service that clients have come to expect, banks are forging tie-ups with FinTechs and other big techs to create the modern, interconnected solutions their clients demand.  

• Many trade finance platforms today are missing out on attracting a critical mass of borrowers due to a lack of end-to-end digitalisation. Banks need to start using more of their data across siloed trade finance systems to support faster decision-making. For instance, a standardised API for cross-border payment systems can connect different regional payment platforms and ecosystems—enabling real-time, frictionless payments in trade finance. This will further reduce the costs and delays associated with currency conversions and transfers. 

Given the growing practical applications of new technologies, it's essential to have a reliable platform that can seamlessly interact with various applications and microservices using interoperable standards. 

Introducing an interoperability layer will bring in ubiquitous access across networks and platforms and significantly enhance global efficiency, lowering redundancies and enabling the adoption of a series of global shared utilities and standards.

The interoperability layer is a collaborative effort involving relevant stakeholders and promoting specific digitisation of the trade finance industry. 

• It includes widely accepted industry standards and best practices to make trade finance more inclusive and collaborative. 

• It will give underrepresented segments like MSMEs and businesses in emerging economies a fair opportunity to operate in the trade finance market. 
• It needs to be compatible with the ongoing development of bespoke trade finance and working capital solutions addressing the current and prospective pain points of corporates and their ecosystem of MSME suppliers.

How banks can fully leverage trade finance with automation

According to the Asian Development Bank, advances in technology, specifically those linked to increased automation in trade, topped the charts as the primary factors that will result in the anticipated spike in both the demand and supply of trade financing. 

FinTechs are rising to the occasion by leveraging emerging and mature tools such as cloud computing, Robotic Process Automation (RPA), and Artificial Intelligence (AI) to enable banks to scale operations and accelerate transformation in the trade financing space.

By offloading routine tasks to automation, FinTechs are: 

• Minimising the likelihood of errors that can occur with manual processing. 
• Replacing traditional, paper-based workflows with intelligent automation.  
• Leveraging predefined rules and procedures to spot and rectify discrepancies before they affect financial outcomes.

Converging themes spell opportunities for global trade finance

Technology will be key to facilitating the interoperability between various trade finance players like banks, corporates, and technology providers.

FinTechs are winning with a due diligence model that is primarily technology-driven. They are also less insistent on collateral and more dependent on technology solutions to unlock financing for credit-worthy borrowers. 

At CredAble, our comprehensive working capital financing suite includes a range of on-demand trade financing solutions.

Our working capital financing solutions are backed by modern credit decisioning frameworks to enable banks to tap into the revenue growth and market share that await them in the trade finance market.

Think Working Capital… Think CredAble!