It calls for banks and exporters to help improve this system
by fully digitising their decades-old processes and adopting an international
framework of trade finance standards.
At the heart of each of these problems is legacy
infrastructure and the reliance on paper processes such as faxes and
spreadsheets which are slow and have no transparency or standardisation. With
the need for automation and digitisation becoming the norm in all industries,
it’s clear these outdated approaches are quickly becoming unfeasible.
The key to improving the global trade engine is to adopt and
utilise new technology and incorporate modern infrastructure which enables more
automation, less friction and reduced costs. This approach is already leading
to widespread change – but it is just the beginning.
The technology and infrastructure needed to parcel trade
finance instruments into investable assets which help solve the trade finance
gap now exists. Also, modern AI tools can give firms early warning signs of
supply chain issues before they’re directly affected.
Turning trade finance into investable assets
Many businesses struggle to secure trade financing from
banks and it’s a persistent problem that has led to the widening of the trade
finance gap – the shortfall between supply and demand. Research from the Asian
Development Bank found that this gap has increased to $1.7 trillion.
The problem is banks are having to do more with less in the
face of capital constraints, so affecting change means first resolving this
fundamental imbalance. Understandably, regulation is a major contributing
factor – particularly Basel III, which requires banks to put aside more capital
when lending. As a result, global banks active in trade finance have had to
raise capital requirements and reduce their standardised risk weights. With
Basel IV on the horizon, the problem is set to get worse.
A large part of the gap results from SMEs in emerging
markets, so it will be difficult to address through additional lending or
credit. An alternative strategy banks are adopting is the distribution of trade
finance instruments to other banks and the capital markets. They recognise that
by adopting an originate and distribute model for their trade books, they can
open up additional sources of funding. This benefits not only the banks but
also their investors and the businesses and communities that depend on trade
finance.
It used to be that a vital missing ingredient was the
electronic trading infrastructure. However, in recent years, technology has
opened the door to this huge market, enabling assets to be bought and sold
through private distribution networks and settled like common fixed income
products.
Tackling supply chain risk through AI
Numerous systems today enable businesses to track how
consumers engage with them, send payments to counterparties and communicate
with people all across the world. Similar approaches are also helping trade
finance banks monitor risks in the supply chain more effectively.
The answer lies in the adoption of artificial intelligence –
a technology that has made significant advances over the past decade. For
investors and sellers of risk, including banks and factoring companies, it
holds the potential to help identify and monitor risks in the supply chain
before they become a systemic issue.
If, for example, a supplier has a cash flow problem,
unexpected weather patterns affect a supplier’s ability to manufacture a
product or an incident takes place that affects multiple companies with a
similar size and profile, firms can receive an early-warning sign to
investigate what happened and how it might affect them and parties across the
trade finance chain and respond quickly.
This ensures they are staying ahead of potential risks and
systemic events rather than reacting to them. Crucially, it is an example of
technology making the global trade and supply chain ecosystem more responsive,
agile and efficient.
Banks can also use AI-powered analytics to assess the
riskiness of clients, vendors and individual transactions – all of which can
suffer from the knock-on effects of supply chain disruption. Banks can begin to
do this with entirely new levels of granular insight and accuracy. In many
cases, this can open the door to new financing opportunities for businesses
that would have otherwise been overlooked using traditional methods.
AI helps by creating more accurate credit scoring models
that offer deeper levels of analysis. This can include a company’s payment
history, measurement of the risks of funding a specific transaction when
dealing with different counterparties and identification of specific supply
chain risks – then benchmarking them against their peer group.
The road ahead
Through eradicating legacy systems and adopting more modern
approaches such as these, the entire trade financing process has the potential
to run more smoothly and efficiently. Banks will be able to work their balance
sheets harder, allowing them to issue more trade finance without taking on
additional risk and remain compliant with international regulatory frameworks.
Collaboration across global trade is a vital component to
realising this future, and existing solutions have come about through banks,
fintechs, investors and other stakeholders working together and adopting
innovative technology. Ultimately, this is the formula required to truly
revolutionise this centuries-old industry.
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