I started in Corporate Banking (Trade Finance) about 18 years ago. Trade finance has since then evolved from focussing on Automation & STP to Computer Vision technologies backed by Machine Learning/AI to DLT networks run by a consortium of banks.
But are these changes going to bring any fundamental benefits to the customers? Are they getting easy-access to finance ? Better rates ? Lower fees ?
Let’s dissect what these changes mean and see what the future really has in store.
Computer Vision
Computer vision technology backed by Machine learning & AI are currently prevalent in 3 main areas when it comes to trade-finance transaction processing
Data Capture - Capturing data from the scanned documents and populating the relevant fields in the trade-finance systems. Like LC, Guarantee Applications, and others.
Compliance Check - An assisted compliance check, where the data in the documents are sent to a screening system for checking various compliance regulations.
Automated Document Check (LCs) systems to identify potential discrepancies in the document.
For all of the above to be effective, a significant amount of time needs to be invested in training the machine learning models by feeding different types of documents. In addition, people who have been in Trade-Finance and checked LC documents know that there are nuances in interpretation that these systems will take quite some time to adapt to. But nevertheless, this is an important tool in aiding the bankers’ process transactions quickly, prevent errors and oversight.
A key question is, if computer vision systems do not throw up a hit in the compliance check, or discrepancies in the document check, are the banks comfortable enough to go ahead, or would still do a manual eyeball check of the document?
It’s like a Tesla, it can self-drive but you need to be awake, with your hands near the wheel for a few more years.
Even when they become 100% accurate, what will be the end-benefit for the customers? Maybe they will receive the documents/payments 30 mins earlier. It is not a disruptive change and an interim solution until more and more documents get digitized.
DLT Networks
Distributed ledger a.k.a blockchain is a truly revolutionary technology. The power of this technology is in its “decentralized” nature i.e there is no central trust authority. Writing on the blockchain itself which is immutable is a side-effect of this. The DLT networks out in the wild are run by the trust authorities (banks) themselves and are not decentralized in the true sense. More on the decentralized nature of the network in the last part of this article.
There is a lot of enthusiasm regarding blockchain. No webinar, blog post including this is complete without mentioning the word.
Banks have jumped on to the DLT bandwagon as well and fierce competitors are working together in a consortium. This is a big indicator in itself that this is probably the future.
In a nutshell, these DLT solutions are powered by smart contracts, which can enable the validation of a series of steps that happen in trade, automatically. From matching a Purchase order to an Invoice to a shipment to a payment.
There are many platforms out there that promise to bring down the transaction processing times from days to hours compared to a traditional LC or open account. The reality of these DLT networks is that the ecosystem is still evolving. It is not yet commonplace to find a significant portion of transactions going through these platforms.
The adoption rates are low due to trade still running on paper and not to mention the huge costs involved in keeping these blockchain platforms up. When more and more banks, shipping companies, insurance companies join these networks and start issuing, verifying digital documents on blockchain we will see higher adoption.
So we can conclude that digitization of documents is the key, which is our next topic.
Digitization of Documents
What is digitization? Digitization is not creating and sending a scanned document or a PDF through a web platform to someone. It is just a dumb attachment.
True digitization is when a document is probably created as an electronic token or asset that is immutable, verifiable, transferable. The ownership details of this document will be verifiable public records.
The document is likely to be on a blockchain network. It will be the only unique record of its kind in the world just like every single bitcoin unit is.
When every trade document such as Invoice, BL, or Insurance documents becomes a digital asset/token and the chamber of commerce can attest and inspection companies can verify them digitally, it will lead to real disruptive change for the customers (importers and exporters).
With a digital document,
- the problems of verifying the authenticity, whether the signature is valid, forged, etc will disappear
- transmitting the ownership or proving the ownership will be instantaneous
- smart-contracts will be able to do matching of a contract to documents (as we saw in the previous section), they will be able to perform compliance checks.
- finally, get instant financing if conditions are met as well
Making documents digital is a cross-industry effort and COVID-19 has certainly accelerated such initiatives. Once the documents are digitized do we really need banks, let’s explore!
De-centralized Financing - Inevitable Future?
Exporter from India ships the goods, links his original invoice to the sales contract on the blockchain, and his shipping company issues a BL linked to this Invoice, inspection company has verified the shipment and attested the invoice.
Let’s assume the record of this transaction is available on an open de-centralized blockchain platform where there are lenders and borrowers, along with an immutable history of seller’s previous transactions indicating he is a genuine seller and the buyer in Cyprus has never defaulted on his payments.
Armed with this information, not only banks, but anyone will be able to finance the invoice. The lending platform can run on an intelligent smart contract, that can
- intelligently arrive at an interest rate based on the liquidity in the network
- spread out the risk, i.e 100 lenders can grant a single 10,000 USD loan, so even if there is a default, the risk is spread among lenders.
Once the data is on the blockchain, the entire process can happen in minutes and on a global scale. There will be no friction in getting financing and the coin will flip to a race for providing finance!.
Maybe it is 5, 10 years down the line. But this is the future we are looking at for trade-financing or any kind of financing. This is a disruptive change and is customer-centric.
Decentralized finance (DeFi) is already live in retail financing and you can google DeFi to see a slew of fintech companies who are providing crypto-loans. With many central banks set to launch their own digital currencies, DeFi concepts will evolve and be the de-facto standard for financing.
Conclusion
Banks are needed now because many trade documents are not digitized and banks act as a trust mechanism with a series of KYC, KYCC, Fraud checks.
Computer Vision technology is needed because scanned documents and PDFs are floating around currently in the name of digital documents.
With truly digital documents and assets on the blockchain, maybe the banks and some current technologies are not needed at all. Or they will evolve into a completely different avatar including the banks themselves!.
Banks probably are already aware of this future and that’s why you see more collaboration than competition in the blockchain space.