A Guide to The Digital Transformation of Trade Finance
Learn how to modernize and digitize your trade finance processes with this comprehensive guide. Discover the benefits of digital transformation and start streamlining your operations today!
This article focuses on how banking operations are digitally transformed by moving away from labor-intensive, paper-based methods and toward a digital trading ecosystem.
The Adoption of Digital Technology in Trade Finance
The 2020 ICC Global Survey on Trade Finance indicated that 83% of global banks have a digital strategy for trade finance. However, only 17% of the banks stated that they successfully implemented digital solutions. Accordingly, the shift towards implementing digital solutions in trade finance is underway; however, it needs to accelerate in response to the COVID-19 crisis.
Distributed Ledger Technology
When it comes to storing transactions, distributed ledger technology (DLT) (also known as blockchain) provides a decentralized, distributed record of transactions that can be trusted by all parties involved in the network. However, the mechanism used to ensure this trust varies depending on the platform.
DLT can play a significant role in digitizing paper-based credit documentation and demand guarantees. By replacing paper-based letters of credit and guarantee issuances, exchanges, and management with digital ones, DLT can improve operational efficiencies.
Optical Character Recognition (OCR)
Optical Character Recognition (OCR) technology allows for scanning and digitizing paper documents. Optical Character Recognition (OCR) creates digital files that can be edited, searched, and used in various digital workflows.
A global survey conducted in 2020 by the ICC found that 28% of banks utilize OCR for data extraction and creating searchable documents. This percentage includes trade finance-focused financial institutions like HSBC and Standard Chartered.
Robotic Process Automation (RPA)
Full process automation is made possible by robotic process automation (RPA), which relies on software to automate repetitive tasks performed by staff members and do away with manual tasks like data entry and document saving and uploading. Automation software like RPA can keep an eye on paperwork, sort it into relevant categories, extract useful information from it, and then upload that information to the bank's central computer system, all while handling compliance checks based on predetermined criteria.
Key Benefits of Digital Transformation of Trade Finance
Evaluations of Credit Risk
Improvements in the quality of credit risk assessments of trade finance clients may result from the increased data availability made possible by digitizing trade finance. For instance, big data analytics powered by AI tools can improve customer due diligence by automatically accessing and interpreting data about clients from online sources like digital financial accounts and social media.
Trade Finance Operations
Most banks worldwide may still need to have fully autonomous trade finance operations. However, even a partially changed process can simplify the bank's mechanisms to minimize transaction time and cost, reduce the chance of mistakes in documents, and free up space for other tasks that add value for clients by replacing repetitive tasks with automation. Banks and corporations could save time and effort in trade finance operations by digitizing documents, eliminating the need to physically gather, scan, and re-key data.
Compliance Procedures
Trade finance operations can also benefit from automation in anti-money laundering (AML), knowing your customer (KYC), and compliance checks needed for guarantees and documentary credits. This would make it much simpler and easier to prove compliance with international and domestic regulations.
Conclusion
Due to how complicated documentary trade finance is, banks must take the chance to change how they do trade finance to stay competitive in the future. In the near future, banks must adopt a broader perspective to address the growing demand for digital solutions and fill the resource gap in the traditional trade finance industry by putting money into new procedures and technologies.
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