Making the trade back office to front and center

The head of Trade Finance & Transaction Banking of the London Institute of Banking and Finance, Alex Gray, says, and I quote, “Trade banks still rely on checking paper documents to ensure regulatory compliance. However, as the sector goes digital, the back office will be revolutionized in the interest of both trade clients and their banks.”

When Amazon listed in 1997, it was an online retailer of books and other information-based products, with more than 2.5 million titles. Many of its sales were driven by steep discounts. It did not know very much about its customers, and it was losing heavily. Today, Amazon offers over 350 million products, and it defines e-commerce standards in America with a landing page that presents differently for each customer.

Why does that matter to trade finance? Because those same e-commerce standards — a frictionless, personalized, journey supported by detailed data analysis — arguably shape what people expect from all businesses.

A digital trade finance experience

Until recently, trade finance could only dream of offering its clients a smooth digital experience. Documents of title, such as bills of lading, had to be in paper form — and these posed a challenge. The UK’s new Electronic Trade Bill is going to change that. By end of 2022 or early 2023, digital signatures will be valid in trade finance.

Clients will clearly benefit as the ecosystem will grow as fintechs come in and reduce the cost of trade finance for SMEs. There are indications that Amazon itself is looking at offering trade finance to its marketplace with decisions helped by its massive datasets.

How trade banks will benefit from digitalization

Trade banks will also gain from increasing digital services. In particular, digital document checking will revolutionize compliance — one of the biggest fixed costs at banks and one of the most sensitive back-office services.

Checking the billions of paper documents in trade finance is a manual process that requires close concentration. Even the most skilled and diligent checker can get overloaded. What’s more, the subject matter is complex. it can take up to four years to fully train a human checker, and as the work is demanding, good ones are hard to find.

Now, the software is in place to tirelessly check any number of trade finance documents for discrepancies 24/7. What is interesting about this is that it won’t mean full automation. It will mean that banks will make the best use of expert checkers — such as the specialists who have undergone LIBF’s Certificate for Documentary Credit Specialist — to improve their services. After all, when the software flags up a discrepancy, it has no understanding of how to proceed. Human judgment is required, for example, as to whether, a particular kind of fertilizer (a dual-used commodity) should be allowed through. Humans are needed to analyze what a fair price really looks like, or examine a suspicious-looking shipping route.

For the bank, the final compliance decision is binary: Either a transaction is acceptable or not. The analysis, however, is nuanced — too nuanced for machines for which there is no room for error. A compliance error can damage a client and the bank. However good the underlying coding and however much data is available to train the algorithms, the final call will always need a qualified eye.

The digital promise for end-clients is that trade banks will not only be able to make faster and better financing decisions, they will serve stakeholders better as all the knowledge in the back office finally comes to fore. This will bring much deserved recognition to the essential work that trade banks do.

The International Chamber of Commerce, through its Digital Standards Initiative in Geneva, is pushing for standardization of cross-border trade documents where a great number of international banks from the west are on board. The ICC Philippines shall be holding a Roundtable Talks with LIBF and Philippine bank executives on Trade and Transaction Banking this 13th of September.

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