Considerations for trade banks in navigating the digital world

The trade finance sector is under pressure to respond quickly and agilely to the shifting digital landscape. Customer interactions in social media, consumer banking and other customer-centric industries have led to more demanding expectations. To meet these expectations, trade banks face the challenge of providing digitally sophisticated and interconnected services.

Identifying emerging technologies, as well as partners who can deliver them, has become crucially important to trade banks to help them extend their reach, provide an improved customer experience, decrease costs and increase revenue.

New competitive forces

An important concern among many trade banks today is rapidly growing competition. According to CB Insights, trade finance represents between $5 and $10 trillion of the $17 trillion international trade market. The firm also believes that there is another $1.5 trillion in unmet demand for trade financing. The sheer size of the trade finance sector is drawing many new market entrants, which are often non-banks offering bank-related services. 

Non-banks and other entities, including FinTechs, often perceive trade banks as slow moving, paper intensive and ripe for disruption. In addition, many of these newcomers offer greater marketing shrewdness, fewer regulatory obstacles and more innovative services than traditional banks.

Because of the substantial capital resources required to provide the full spectrum of trade finance services to large corporations, FinTechs seem unlikely to displace international banks now or anytime soon. Further, third parties (e.g., trade finance networks and FinTech partners) offer traditional banks promising opportunities for expanding their services to corporate clients.  

Collaborating to innovate

Banks can no longer sit on the sidelines as competitive threats increase. Yet, for many banks, finding the right trade network to join or FinTech to collaborate with can be a daunting endeavor. For instance, the vendor selection process can be time consuming and detract from pursuing other important projects and priorities. Trusted relationships with third-party solution providers also can be difficult to establish and require constant vigilance to maintain.

Narrowing the field based on the solution provider’s technology expertise is a great way to start. From a trade finance perspective, three areas of innovation appear to be the most promising:

• Intelligent process automation (IPA)
• Application program interfaces (APIs)
• Blockchain and distributed ledger technology (DLT)

Many FinTechs and network consortia have built proof-of-concepts (POCs) and early stage technology products in these areas, as well as other areas critical to the ongoing transformation of trade finance.  Unfortunately, such developments do not guarantee the new technologies will scale up, achieve significant commercial acceptance or become sustainable over the long term. 

In addition, the new technologies themselves may be immature, and their interoperability standards may never achieve widespread use. POCs developed in what are essentially controlled settings may never prove their commercial viability, and the value propositions for technology investments can be difficult to establish. Finally, new technology adoption may conflict with or even cannibalize the bank’s internal development efforts.

Evaluating new technologies

A trade bank that adopts a reasonable due diligence process for evaluating new technologies and partners can achieve the strategic upside while mitigating the downside risks. Rather than an approach that attempts to “boil the ocean” with the introduction of multiple vendors and technologies, a careful parsing of the possibilities is recommended. Important questions to ask include:

• Do the trade finance networks or technologies have reasonable market acceptance?
• Do the capabilities reduce transaction time and costs while providing a seamless customer experience?
• Does participation meet the expectations of buyers, sellers and other critical stakeholders?
• Will the solution save time and effort and allow bank employees to concentrate on more value-added tasks?
• Will “smart workers” emerge (i.e., bank personnel working with artificial intelligence)?
• Will the bank gain competitive advantage, become more tech savvy, and be more likely to attract technologically sophisticated employees?

Conclusion

A trade bank’s ability to interconnect and interoperate within an expanding trade ecosystem will be key to its success in the new digital world. Finding networks and technology providers that are innovative and mature enough to have a meaningful impact on customers and operations is critical. Cutting-edge technology will not always succeed initially. However, setbacks must not stop progress toward advancing trade digitally. Adopting new technologies will transform trade banking, which in the new digital world is an absolute necessity.