Estimated reading time: 5 minutes

In a rapidly evolving world, where businesses are constantly seeking ways to streamline their operations and enhance efficiency, the trade finance sector is no exception.

To learn more about the challenges banks operating in trade finance face today and the pivotal role of technology in overcoming these hurdles, Trade Finance Global spoke to Carlos Teixeira, Global Head Business Strategy, Lending at Finastra, and Ravesh Lala, Head of Business Development, Hybrid Cloud Solutions at IBM.

The discussion sheds light on the success stories of collaboration between banks and fintech companies, illustrating how these partnerships drive innovation and sustainable practices in trade finance.

Helicopter view: The current landscape of trade finance

Trade finance has long been a linchpin of global commerce, facilitating the exchange of goods and services across borders. 

However, this traditional industry has found itself at a crossroads, facing a series of complex challenges. 

One significant challenge is the burgeoning demands of customers. 

With a growing need for faster and more digitised trade processes, banks are grappling with meeting these evolving expectations. 

Lala said, “There are actually several factors driving the growing demand to digitalise trade finance. Things like geopolitics, inflation, and access to capital, have all led to a rise in what we now call friendshoring … being able to take your global supply chain and reprogram the DNA of the supply chain at a moment’s notice. That’s only possible when you drive the digitisation.”

Customers and banks increasingly seek quicker processing times, reduced paperwork, and greater transparency in their trade transactions. 

This is causing the industry to transform digitally, shifting towards digital processes and solutions, and banks need to modernise their operations to meet these evolving demands. 

Digital transformation and embedded finance: The need of the hour

The digital transformation is well underway in the trade finance sector, driven by customer demand and the necessity to remain competitive. This digitalisation encompasses various aspects of trade finance, from document processing to transaction tracking and client communication.

Lala commented, “It’s important to remember that no two banks are the same. Everybody has a different technology footprint, a different architecture, and a different application stack. We can’t get six banks to all adopt the same infrastructure, but what we can do is start to normalise or abstract the infrastructure complexity so that they can start to interoperate.”

Technology tools have a vital role to play in addressing the issue of interoperability, which is critical in the multi-party embedded trade finance ecosystem, in an effort towards streamlining communication and data sharing in trade finance.

Teixeira said, “Especially when you look to the micro SMEs and where the financial gap from a trade finance point of view sits – it is key that we adopt technology to address this issue.”

Moreover, technology enhances the customer experience through digital self-service options, real-time transaction tracking, and improved responsiveness. 

This makes embracing technology solutions vital for banks to remain competitive, improve operational efficiency, and meet clients’ dynamic needs in the fast-paced world of trade finance.

Addressing regulatory challenges with technology

Friendlier digital legislation (for example, open banking) plays a crucial role in driving digital trade by providing a legal framework recognising the validity and enforceability of electronic transferable records and trade documents. 

This recognition eliminates the legal uncertainties that have historically surrounded digital transactions, making businesses and financial institutions more confident in using electronic records. 

As a result, digital trade practices become more appealing as they offer a faster, more efficient, and cost-effective alternative to traditional paper-based processes. 

With the assurance of legal validity, trade participants can transition away from cumbersome paperwork, reducing processing times, errors, and operational costs. 

This shift aligns with sustainability efforts by reducing the environmental impact of using physical documents. In essence, friendlier digital legislation fosters an environment where digital trade can flourish, enabling businesses to embrace more efficient and environmentally friendly trade practices.

Sustainability and ethical practices in trade finance are particularly relevant today, given the global focus on environmental and social responsibility.

Banks are not only focusing on financial due diligence but also assessing the environmental, social, and governance (ESG) impact of their financing decisions. 

Lala said, “The social impacts are going to far exceed some of the environmental ones. Technology is going to start enabling us to understand who our suppliers are – right down to the farmers. This understanding may allow us to uplift society and there’s a huge technological impact.”

As technology becomes more widespread in the industry, it will enable banks to gain insights into supply chains and monitor them for sustainable and ethical practices. 

Collaboration is key in these efforts, with banks partnering with technology firms like IBM to streamline operations and leverage technology and data to promote ESG initiatives and responsible trade practices.

The collaborative advantage, it all stacks up

Banks and technology companies like IBM and Finastra are joining forces to tackle the challenges and drive innovation.

Teixeira said, “We are true believers that collaboration is the new innovation. It lets us do what we do best, which is trade finance, and then look to partners where we can leverage technology.  The cloud technology that IBM provides is key in terms of our collaboration.”

Together, IBM and Finastra offer a comprehensive solution to banks, helping them modernise their trade finance operations. 

Finastra excels in working with the application stack, concentrating on lending and trade finance applications. 

The operational stack involves technology like AI and automation to streamline processes and enhance operational efficiency. Lastly, the infrastructure layer is the foundation, ensuring that different banks and financial institutions can interoperate effectively, even with distinct technology footprints and architectures.

Lala added, “It’s not just the technology providers that need to work together, it’s the buyers, it’s the suppliers, it’s the banks. There’s an entire ecosystem that needs to work together.”

This journey towards innovation and sustainability in trade finance is not without its challenges. However, banks are proactively seeking solutions to address these challenges and better serve their clients in the modern world of trade.

As we move forward, the collaboration between banks and numerous technology companies will play an increasingly vital role in shaping the future of trade finance. 

These partnerships will continue to drive innovation, streamline processes, and promote responsible and ethical trade practices, ultimately benefiting businesses and economies worldwide.