How Banks Can Gain Visibility and Control In Trade Finance

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A large trade finance bank spends between $25 - $42 million every year on risk, compliance sanctions and anti-money laundering (AML) tasks. In this article, we tackle how to solve the lack of visibility, risk monitoring and compliance and manual processing typical to trade finance transactions.

There is no customer journey more fragile, complex or fraught with landmines than international trade. These transactions cross oceans, span multiple languages, currencies and companies, involve detailed specifications, navigate lending, payment and billing negotiations in multiple legal jurisdictions, and rely on timely manufacturing and shipping that can be affected by geopolitical situations, weather, documentation hold-ups, customs delays and many other potential obstacles.

What is trade finance in banking?

Trade finance is comprised of financial tools used to support and smooth out lending, risk and payment gaps between international buyers and sellers. It is estimated to grow into a $13.66 trillion market by the end of 2032. 

Trade Finance Risks Banks Manage

Customer risk

Can and will a customer deliver what’s contracted when they promise and/or make good on their payment? Business interactions between parties always have delivery, quality and payment risks, but that can be magnified in international trade.

Country risk

These are risks related to the stability of another country’s regulatory environment and government oversight, restrictions or laws, taxes and duties, political stability and weather, plus other factors.

Financial risk

Changes to currency valuation, interest rates, commodity pricing, and raw material costs can affect trade outcomes. Liquidity is no longer cheap or readily available for corporations in the current macroeconomic environment, and that can add further strain to managing supply chain risks.

Trade Finance Challenges

In addition to the inherent risks that are part of international trade, there are also cumbersome obstacles that make this customer journey more difficult than other transactions and relationships.

Evolving trade policies: Always an ongoing challenge, banks are under pressure to keep up with worldwide policies, sanctions and regulations plus monitor parties involved in the transaction for the same.

Digitalization of trade finance documentation: Covid offered a harsh lesson - the archaic procedures used to manage global trade threw supply chains into a loop during the pandemic. It’s spurred the adoption of digital document sharing, but it’s a big change.

Growth of open-account trade: Approximately 80% of international trade is done via open account trade, where goods are shipped before payment is received. This is both an opportunity and a challenge. It accelerates the supply chain, allowing goods to get to their destination more quickly, but it can cause problems for exporters and banks supporting them if payment isn’t made or is late. 

Limited trade partner visibility: Buying or sourcing items abroad adds to the number of parties involved. Typically, these multiple parties operate in different languages, regulatory environments, political climates and currencies. When buyers, sellers or financial institutions are left in the dark at any step in this complicated, multi-party journey, it increases the risk of miscommunication, stalled steps and even fraud.  

“Diversification has become the main strategy to build supply-chain resilience. But this brings its own risks, increasing complexity and potential choke points, and isn’t a perfect solution.”

-Ana Boata, Global Head of Economic Research at Allianz Trade

Manual paperwork and processes: International trade has traditionally been paper-intensive because documents form the essential framework that structures and guides each transaction. Paper and manual documentation is the main pain point in trade finance for 65% of banks. 

Typically, import-export transactions include a letter of credit or other trade finance product instrument, commercial invoices, bills of lading, and insurance certificates. When a business uses an ecosystem of international partners, the level of complexity grows and is harder to monitor. 

As much as 30% of banks’ trade operations capacity is dedicated to manual compliance reviews. Trade transactions go through compliance review two to four times during a typical lifecycle affecting processing and verification timelines and increasing opportunities for human error, delays or financial losses.

“Compliance checks are definitely one area where automation can be applied. But now we’re going a little beyond that, exploring how we can execute and process the actual deals in a more automated fashion. In doing so, we can deliver improved standardization and efficiency to meet clients’ evolving needs and enhance the client experience.
- Joon Kim, global head of trade finance product and portfolio management, Treasury Services, BNY Mellon

Trade Finance Transformation - Visibility, AI Insights and Automation

Underscoring these risks and challenges is the need for banks to get their arms around the supply chain and its data, and to see stakeholders and activities across their customers’ ecosystem. We recommend three steps to gain control and visibility of trade finance transactions.

1. On-demand tracking through ecosystem orchestration: Connect your customers and  their trading partners into a view that centralizes all of a trade finance transaction’s activity in one place. An orchestration platform is designed to thread together disparate parties so banks can see touchpoints in the transaction in real time to monitor progress and remedy problems quickly if they arise. This unified view will preferably also offer tools in which the bank, the customer and its partners can collaborate and communicate too, eliminating email threads and phone calls. 

2. Standardize steps using journey orchestration. Using a drag-and-drop journey builder for trade finance empowers banks to create repeatable journeys with core steps common to all customers, but also provide flexibility to adjust and reorder steps on the fly, with no-code tools to accommodate different customers. The result is always-available clarity around what is required, by whom, and what’s next, specific to each customer, without starting from scratch with bespoke journeys every time. 

3. Use AI to automate and analyze trends, red flags, and irregularities: Banks have a big stake in ensuring transactions are complying with all of the regulations of global participants but also monitor AML and KYC compliance. This is easier with the massive computing power of AI. It can spot patterns and alert banks to deviations or potential outliers very quickly, so they can review and resolve concerns before they lead to trouble.

4. AI automations and copilot capabilities: Automating any part of this highly manual process is a win for efficiency and accuracy. Generative AI is well-equipped to take over routine tasks, from journey and document summarizations to simplify understanding of international regulations and requirements to triggered actions and next-best recommendations that move the process forward. Trade finance teams are freed up to focus on the most intricate aspects of this increasingly complex financing. 

As more commerce moves online, companies that have historically been linked to what might be thought of as “traditional” supply chains are now, “increasingly dealing directly, and digitally … with a whole different set of counterparties,” demanding that trade financing is firmly woven into the technological infrastructure linking buyers and suppliers.
-Debopama Sen, head of payments, Citi Services

Orchestrating Trade Finance with OvationCXM

Technology is on the cusp of transforming trade finance from a historically document-heavy, inefficient and opaque transaction into a digital, AI-powered process. For banks that want to gain full control of their trade finance ecosystem, and the data that is siloed in it to successfully manage customer needs, mitigate risk and gain operational efficiency to drive revenue, OvationCXM’s low-code platform is a powerful solution.

We work alongside a bank’s existing systems and augment them with powerful data aggregation and ecosystem and journey orchestration tools. With our technology, for the first time, financial institutions can see and control every step in a trade finance transaction, no matter how complicated. It’s not uncommon to experience 75% greater visibility using our platform than without. 

Learn how we streamline the oversight of trade finance processes, provide you with full visibility into your customers’ trading ecosystem and do it without rearchitecting your tech stack. While delivering same-year ROI. Request an introductory call to see OvationCXM in action.