The ongoing digitisation of trade finance

As trade finance evolves, it is important to focus on both short-term incremental improvements to processes and longer-term innovations such as blockchain, says Dermot Canavan, head of Trade Finance Services, Product Management at ING Wholesale Banking.

Trade finance has existed for hundreds of years, if not millennia. As long as there has been trade between countries, there has been a need for companies and financial institutions to manage the risks associated with a process that, by definition, takes place in locations where the buyer or seller has limited visibility and in circumstances where they may not have a strong relationship with their counterparty.

Canavan portrait

Necessarily, the practicalities of managing those uncertainties are complex and often cumbersome. Even today the vast majority of documentation associated with trade, such as invoices, bills of lading or inspection certificates, remains paper based. As trade has become an ever-larger part of the global economy, and trade routes have lengthened, administrative burdens connected with trade finance have multiplied.

For companies involved in trade, the sheer volume of paper is challenging. Transporting, storing and accessing relevant information is difficult and increases turnaround times and costs. For banks, the use of paper-based documentation similarly results in complex processes and procedures.

Today, these burdens have been intensified by an increasingly stringent regulatory environment, with global, regional and national rules requiring an enormous amount of information about parties involved in trade. For example, banks are understandably prohibited from facilitating trade with countries facing sanctions. However, they also cannot be party to trading that involves a ship that at some point in its life has been connected with a country that has sanctions imposed against it. Paper-based documentation makes it difficult to achieve the visibility needed for effective sanctions screening.

 

Applying existing technologies to old processes

ING plays a leading role in financing large commodity traders and also works with a wide variety of small and medium-sized enterprises and large corporates around the world. The bank constantly reviews its processes and procedures with the aim of finding ways to make clients’ trade finance-related processes easier to manage. It also looks for opportunities to bring existing technologies to the trade world in ways that will reduce paper-based processes and support clients’ day-to-day activities.

ING’s guiding objectives when considering the applicability of existing technology to trade finance are to speed up turnaround times and make interaction with ING seamless for clients. It also seeks to streamline the bank’s processes to improve efficiency, reduce errors and – by substituting automation for repetitive tasks – free up time for functions that add value for clients. A further set of objectives is to make compliance with regulations, such as anti-money laundering, more straightforward and make it to easier demonstrate compliance.

A new solution introduced by ING, based on the Trafinas tool developed by fintech Conpend, achieves many of these objectives by using optimal character recognition (OCR) to scan trade finance documents and turn them into a machine readable format. The tool is capable of automating transactions, which improves speed and visibility. Two additional technologies – machine learning and neural language processing – will soon be added to the tool, improving functionality and performance further.

The solution will be able to automatically detect typing mistakes and auto-correct them in documents such as bills of lading and packing lists. Moreover, the use of machine learning means that when information on a document cannot be found in an expected location, manual intervention is only necessary on the first occasion: when similar problems arise in the future, the same fix can be applied automatically.

The use of OCR, machine learning and neural language processing will significantly lower the probability of errors in trade-related documentation. Furthermore, by digitising trade information, it will allow a bundle of documents that until now has been physically shipped around the world to be consolidated to a single electronic file. As a result, turnaround times will be cut, efficiency increased, and controls improved – a list of all parties to a transaction can be automatically compiled, which will facilitate instant comparison with sanctions or money laundering lists, for example. Ultimately, the new solution will enable ING to increase transaction volumes and lower costs for clients.

 

Why blockchain is a game change in trade finance

As well as using existing technologies such as OCR to improve the efficiency of trade finance-related processes, ING is also committed to harnessing the latest innovations to create new solutions that address clients’ needs in the medium and long term. A number of new technologies have emerged in recent years that offer enormous potential benefits for trade finance. Chief among these is blockchain, the technology that underlies the cryptocurrency bitcoin.

Blockchain is a shared distributed ledger that records all transactions in an encoded format so that data is secure. It is therefore an ideal technology for trade finance, which involves at least four parties – exporters, importers and their respective banks. All of these parties need to know at any given time who has ownership of goods being shipped; all must also book the transaction; pay fees and myriad other processes.

As blockchain can be updated securely and in real-time by multiple parties, it offers a single version of the truth that is visible to all relevant parties and can inform their own processes, such as when to account for a transaction. It is possible that in the future blockchain information relating to trading could be integrated directly into a company’s ledger, eliminating additional manual processes and increasing efficiency further.

At the moment, a number of individual companies and consortia are working on trade finance-related blockchain solutions. These will hopefully be interoperable: ING is encouraging the development of industry-wide standards. ING and dozens of other banks have invested $107 million into R3, a consortium developing distributed ledger technology for financial companies. ING has recently conducted tests of a blockchain-powered FX trade confirmation platform in partnership with Calypso and the R3 consortium and, separately, has completed an oil trade using blockchain.

 

An open-minded approach to innovation

ING recognises that banks no longer have a monopoly on innovative financial services technology. It is therefore important to work with partners, including other banks and fintechs, and embrace both competition and cooperation.

ING now has partnerships with more than 100 fintechs: blockchain-based technology created by last year’s ING fintech bootcamp winner Easy TradING Connect was used by ING to complete oil trades earlier this year; similarly, ING worked with Conpend for its trade automation solution; while consortia such as R3 are a key part of ING’s blockchain strategy.

By combining new entrants’ dynamism and innovation with ING’s experience, knowledge, network and commitment to cooperation with other banks, customers will be able to gain the full benefit of new technological developments in the short, medium and long term as trade finance enters a new era.