Digital transformation in international business

Trade finance and digitalisation

The future of global trade finance depends on data, innovation and digitalisation

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Regulation is playing a crucial role in shaping innovation in trade finance, but it is by no means the only driver of change. Jörg Motel, Global Head of Product Management Trade, and Alexander Pawellek, Principal Product Owner, Trade Finance Digitalisation & Strategy, discuss the technological advances that are helping to build the future of trade.

Challenges of digital transformation and innovation in global trade

International headwinds and the resulting disruption to global trade are adding a further layer of complexity to the challenges of digital transformation and innovation in global trade. Exporters and importers alike are now focused on maintaining stability and continuity across supply chains.

While the desire to transform heavily paper-based global trade is evidently there, this shift won’t be easy. Collaboration is essential if the benefits of digitalised trade are to be realised. A range of participants from across the supply chain will need to cooperate – from governments and port authorities, to logistics companies, importers, exporters, industry bodies, and financial institutions (FIs).

For FIs, deciding where value can be added while working to address the day-to-day concerns of clients requires a balanced approach. These are influenced by a range of factors.

Regulation drives innovation: documentary checking and data reporting

Regulation is a major factor influencing the direction of digital innovation. Corporates will find that documentary checking is now consuming more time and resources than it had done previously – in no small part due to the expansion of compliance requirements levelled on FIs in recent years. Many FIs are therefore prioritising the digitalisation of this stage in the process.

The anticipated exodus of highly experienced operatives presents an impending challenge to the industry. The generation of skilled personnel who cut their teeth on processing high volumes of paper trade documents manually will soon be reaching retirement age. This is set to leave a gaping hole in the market, making the need to optimise current compliance processes even more urgent.

There is increased investment in the automation of paper-based documentary processing from banks, particularly in areas such as optical character recognition (OCR), machine learning and AI to review documents. As well as significantly reducing review times, these innovations also enable staff to dedicate their time to tasks that add more value. Such technology is currently used by Commerzbank, for example, for conducting compliance checks. The bank also aims to extend this to support the regular checks of trade finance export documents.

Meeting ESG reporting requirements will require innovation

The evolving regulatory landscape is also shaping how corporates are looking to technology and innovation to meet incoming ESG reporting requirements.

For instance, Germany’s Supply Chain Due Diligence Act, which came into force at the start of 2023, mandates that companies with over 3,000 employees monitor the social and environmental standards of not only their own operations, but also those within their supply chains. The threshold of companies required to comply with the act drops to 1,000 employees by 2024 which will then include much of the German Mittelstand. Similar legislation for the European Union is also expected by the same year.

Corporates simply cannot spare the resources to undertake the required due diligence manually, given mounting cost pressures and the risks of non-compliance – including significant punitive fines and reputational damage. Technology provides the needed solutions to be more efficient and accurate.

Information hubs: banks optimising data accessibility for all

Through technology, FIs and corporates alike are able to streamline the due diligence process by automatically identifying crucial data and applying it to fulfil regulatory requirements. Application programming interfaces (APIs), for example, facilitate this exchange of data by allowing communication between trusted applications, participants, and platforms. For example, an API can lift a list of supplier names from a corporate’s internal system and send them to an impartial ESG ratings provider to corroborate ethical standards within the supply chain.

Corporates can also rely on their banks to integrate data and facilitate easier access to their information. For instance, a bank could be an intermediary to an ESG ratings provider – or even calculate an environmental footprint on behalf of its client, mobilising transaction and shipping data, and use the same network to connect their corporate client with a CO2 certificate provider.

FIs will view this as an opportunity to strengthen their relationships with clients, positioning themselves as far more than just providers of finance. FIs can also add value in their capacity as an “information hub”, keepers of a library of rich data to be accessed securely and applied across a range of areas, from internal reporting to the fulfilment of regulation.

The true value of data, however, can only be unlocked through analytics. At Commerzbank, we have invested heavily in big data and advanced analytics, sharing our findings with our clients. For example, we have used data to help corporates identify risks within their supply chains, exploring alternative trade corridors and ways to diversify their suppliers. This has proved invaluable as the war in Ukraine continues to impact global trade.

Banks can advocate on behalf of their corporate clients

FIs can also work on behalf of their clients, using their seat at the table in industry working groups to advocate for corporates and help shape the regulatory landscape and associated digital solutions.

As we’ve already seen from Commerzbank’s participation in working groups with the International Chamber of Commerce (ICC), positive change can be achieved through collaboration. We are supporting the ICC’s efforts to promote standardised digital regulation internationally, in a way that factors in the unique circumstances of distinct regions. By participating in such initiatives, FIs are promoting and advocating market acceptance of new technology, thereby helping to pave the way to a smoother, widespread roll-out in the future to the benefit of corporates and trade participants.

While the long-term potential of big data to transform the world of trade is exciting, it’s easy to underestimate what this transformation actually entails. When it comes to effecting positive change within the industry, Commerzbank’s philosophy is: “think big, implement small”. This approach typically involves identifying areas where value can most easily and effectively be delivered to clients. New concepts are driven forward through collaboration with key early adopters. These are innovation-minded clients who can dedicate the necessary resources to pursue new projects. The natural next step – depending on the solution – could be to involve another stakeholder in the chain, such as a logistics company. We are optimising this approach by concentrating our efforts on our core markets, particularly those with legal frameworks which already facilitate electronic trade documents.

Trade finance ecosystems: leveraging analytics and connecting a global network

Digital innovation is enabling data to be leveraged across the supply chain, paving the way for more efficient, streamlined trade finance processes. Together with external platforms and tech providers as well as corporate clients, FIs are driving the development of these digital trade finance ecosystems – with the aim of enabling stakeholders in global trade to share information more easily.

Distributed Ledger Technology (DLT) could well be one of the means to achieve these ecosystems. The open and versatile nature of blockchain and DLT means some processes, such as payments, can be completely automated. Combined with sensors connected to the internet of things (IoT), it is also possible to directly link financial transactions with the underlying physical exchange of goods. Instead of a manual process involving several departments, sensors can automatically and instantaneously reconcile the delivered versus the expected data points and trigger a payment or financial transaction.

Recently, Commerzbank partnered with Deutsche Telekom subsidiary T-Systems, in a project focusing on IoT sensors, DLT and smart contract technology combining financial and technological expertise. These product innovations are developed together with corporate clients in order to directly address the real-life pain points of existing processes.

Linking the right parties to rapidly deliver meaningful efficiencies will be the key to success going forward. Getting this right will help us all in building a truly digital trade ecosystem of the future.