In choosing the processes to automate, banks should start with client-facing activities (document handling, service enquiries, etc.) before more complex internal processes like due diligence and compliance checks. This strategy improves retention led by better customer experience and thus better revenues. A recent Deloitte study highlighted that a typical bank could realize cost savings of 30-50% just by automating their client onboarding process in a commercial banking value chain.
Collaborate with the ecosystem
The collaboration pillar of Wipro’s ACT framework goes beyond the processes executed within the walls of the bank. This pillar focuses on two main areas:
- Automating end-to-end processes and systems involving multiple agents using Straight Through Processing (STP) in Trade Finance ecosystems.
- Partnering with other banks and financial technology companies (Fintechs) using Application Programming Interfaces (APIs) to execute operations. These are effective when a bank’s abilities are strained due regulatory requirements, limited presence in a different region, shortcomings in capabilities, or other similar challenges.
The intent is to help banks leverage mutual dependencies across the extended ecosystem and promote adoption of digital capabilities, with an emphasis on establishing STP outside of the bank’s environment. This requires an increased collaboration with a number of external parties as banks aim to establish end-to-end automation of processes and systems. Processing Letters of Credit (LC), bills, commissions and charges, tracking status of LCs and Guarantees, and managing related communication with customers are a few use cases that benefit from STP. Many leading banks have already perfected this approach in Trade Finance. For instance, a large U.S. bank implemented sophisticated STP for supplier finance and receivables purchase programs.
STP has evolved more from an incremental feature to a “must-have” capability among global banks. The recent transition in Trade Finance operations where clients request real-time processing and the introduction of real-time instruments including instant/real-time payments has accelerated the need for STP. Any human intervention in such operations introduces risks and costs that prevent banks from meeting their clients’ expectations. On the other hand, banks should also ensure that STP happens with limited supervision and activities. They should incorporate review mechanisms as part of the STP procedure to counter all possible risks and ensure compliance.
APIs enable the seamless and secure exchange of data and information with third parties. This further allows third parties to plug-in to new products and applications. In Trade Finance, APIs have allowed partner banks to create interfaces for clients with useful features such as providing the status of various products based on the parent banks’ network capabilities and data. In the UK, one large bank has been a pioneer in this area and developed APIs to allow clients to view the status of their bank guarantees in real-time. In addition to providing greater transparency, APIs also enable banks to deploy more sophisticated data analytics technologies that can address risk and allow for more affordable, lower-value trade financing deals, thus broadening Trade Finance services to smaller corporates and companies.
APIs also help banks in overcoming their challenges related to legacy and rigid backend systems that may inhibit them from providing state-of-the-art features for their corporate customers. Similarly, any updates to existing products and/or services can be introduced to the clients at a fraction of the cost and time it would take compared to using a siloed and legacy infrastructure.
As collaboration will introduce other parties into the transactions, participating banks can ensure security for the data shared in such integrations by implementing single policy enforcement points that will help guarantee information security and centralize the access of APIs across different systems. This will allow banks to mitigate fraud risk and enforce segregation of duties with the ability to access and review data between multiple systems.
Transform for the future
The final pillar prepares banks for changes in both the near and long term. Like the Collaborate pillar, such changes are driven by sector-related factors like structural changes and evolving industry standards that may transform the future landscape of the Trade Finance business. Banks need to closely monitor these developments and gradually embrace new technologies to be better prepared for this changing future. Some of these disruptive technologies include Artificial Intelligence, Blockchain, Internet of Things (IoT), and Machine Learning. These technologies will help banks prepare for the new future of Trade Finance that will move from a vertically integrated model (bank owns the entire end-to-end value chain) to a distributed model.
The future of Trade Finance will enable seamless connectivity and real-time exchange of data among all parties to the trade transaction. Blockchain, in particular, offers immense potential for dematerialization, efficiency, speed, and lower costs. A future digital ecosystem, leveraging Blockchain and other emerging technologies like IoT, will eliminate the need for manual processes, duplication, and other paper trails. Smart contracts based on Distributed Ledger Technology (DLT) are immutable and provide a single record. The movement and availability of real-time data provides the added advantages of reducing fraud and reconciliation issues. Leveraging blockchain further enables a significant reduction in the time required to process a transaction as data can be traced and modified through multi-signatory mechanisms. The real-time settlements and reporting characteristics are expected to reduce costs.
Moreover, integration of IoT can enable real-time shipment tracking and allow instant payments and release of invoices in open account trade transactions. These technologies will also prevent duplication of financing while strengthening the credit quality of borrowers. Integrating these technologies into a single platform can serve as an ecosystem that seamlessly connects trade parties across the physical and financial supply chains. The future state of Trade Finance aims to bring harmonization, process simplification, real-time data exchange, reduced costs, and enhanced security to reduce fraud.
These movements require time and capital investments, compelling most banks to invest in these technologies under lab-led innovations or through consortiums and industrial entities. We.Trade, Marco Polo, Voltron, Komgo and Hong Kong Trade Finance Platform are a few well-known examples of such consortia on emerging technologies. While such organizations are promising, integrating banks across different countries in a single platform requires time, supporting the notion that banks will gradually adopt such technologies.
The Trade Finance business is undergoing structural changes due to emerging marketplaces and new-age technologies. Banks continue to struggle to digitize their Trade Finance business in an effort to reduce the role of manual processes, yet many are considering modernizing their Trade Finance business to bring efficiencies and reduce complexity. As they work in emerging digital ecosystems to seamlessly connect parties and facilitate real-time data, financial institutions can leverage Wipro’s ACT framework to plan and prioritize the modernization of their Trade Finance business.