ONLINE MARKET PLACES WILL HELP RE-INVENT (AND DIGITISE) TRADE FINANCING by Andre Casterman, FinTech business developer in Treasury, Trade and Capital Markets and CMO at INTIX, a financial data management fintech company

Trade finance has been a very slowly moving space when it comes to embracing digital innovations. However, this is now accelerating: developments in the Corporate Trade space as well as innovations in Capital Markets show game-changing value propositions for CFOs and treasurers.

Corporates were first to digitise trade flows

Corporates started to adopt digital technologies to operate their business-to-business supply chain activities several decades ago. The use of electronic data interchange (EDI) links was initially introduced in automotive and retail industries, and later expanded into manufacturing, healthcare, pharmaceutical, utility and construction companies. Goal was then to accelerate the communication with suppliers. Focus was on digitising the corporate-to-corporate (B2B) information flows such as purchase orders, shipping documents, invoices, ...

During three decades, the use of electronic communication continued to increase firmly in the business-to-business (B2B) space and expanded to electronic invoicing (e-invoicing). Acknowledging the benefits of digital communication, several governments around the world encouraged, sometimes mandated, over the last 7 years, the use of e-invoicing. This further increased digitisation in the B2B space involving millions of SMEs through digital platforms.

Some of the e-invoicing platforms that were launched before the financial crisis of 2008 have become prominent players, such as depicted on Gartner’s Magic Quadrant on Purchase-to-Payment. A plethora of domestic e-invoicing platforms are now in business and helping corporates of all sizes digitise invoices, usually focusing on the high-volume national markets.

Whereas the corporate-to-corporate space was actively moving (and moving fast) towards digital processes, the corporate-to-bank and bank-to-bank spaces camped safely on their established paper practices. The only notable development during the first decade of the 21st century was about banks starting to roll out their own single-bank portals to address their clients’ needs for online trade finance services.

Figure 1: The business-to-business space was the first one to digitize trade flows whilst banking processes continued to depend on the exchange of paper documentation.

Trade-related digital innovations have now entered all spaces

Fast forward to 2017 and the situation is very different as technology has invaded all three spaces – corporate-to-corporate, corporate-to-bank, and bank-to-bank. And much more is actually happening but I will expand on that in later sections.

1. In the corporate-to-bank space, large corporates have increasingly adopted multi-banking trade software solutions. Such offerings help treasurers and trade managers manage all types of trade finance flows such as demand guarantees, collections, letters of credit, bank payment obligations and sometimes receivables financing. Multi-banked corporations operating substantial volumes of transactional flows are those attracted most by such multi-banking trade finance offerings. Global Trade Corporation (GTC) is a leader in that space working also with SWIFT’s multi-banking messaging services (FIN and FileAct) and trade standards (MT 798)
2. On the B2B shipping and logistics side of the market, a very limited number of platforms (two actually) took on the challenge to digitise the bill of lading as well as other key shipping documents and are engaging with a growing number of banks. I am referring here to essDOCS and Bolero. essDOCS serves 18,000+ clients of all sizes and located around the world
3. The very paper-intensive inter-bank space has also been attempting to digitise trade flows as the ICC rolled out eUCP as well as an ISO 20022-based settlement instrument known as the Bank Payment Obligation (BPO - see reference 1 below). Use of those legal schemes is still limited to a small number of banks. Banks' appetite for digitising the bank-to-bank trade flows only started recently and has been very slow to move along given the legal complexities and IT investments required. Yet they have proven critical for early adopter banks wishing to respond to demanding clients. The Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, TEB, Standard Chartered Bank, UniCredit and Commerzbank have been very active on the BPO, primarily in the chemicals and car industries.
4. In this same inter-bank space, banks recently piloted the use of blockchain technology to digitise bank-to-bank trade flows but the few implementations are - at this stage - limited to glorified trials.

Most of above mentioned innovations succeeded to transform paper-based information flows into electronic equivalents. When doing so, counterparties maintain – or slightly adapt - their established legal and business practices and gradually move information flows to technology-based processes and software applications. This approach is bringing immediate benefits in terms of cost efficiency and speed, but it also limits the extent of the newly proposed value propositions as digital technologies are introduced in bilateral relationships - without revisiting the full business model.

Among recent product launches, multi-banking online market places have emerged in both primary and secondary spaces with the aim to provide superior value propositions by reinventing trade processes.

New avenues to innovate: Online market places offer superior value propositions

A new way to roll out technology-based business innovations has recently emerged in trade finance, with a focus on enhanced interactions and collaboration among transactional parties through common platforms. They are often referred to as online market places. Some even describe themselves as exchanges of trade assets. In such centrally managed services, all players involved in a transaction are connected to and interact with a central counterparty platform acting as a trusted service provider. This is offering users a very different experience compared to the previous digitisation model, where players keep on using bilateral business practices.

The following picture compares the two models:

Figure 2: Online market places bring all involved parties together and enable to re-invent trade business processes

The benefits of such platforms are numerous as their users (also clients) work collaboratively on an end-to-end transactional workflow. Users are quickly on-boarded given the limited impact on their internal back office applications. The initial cost to join such platform is very low as usage-based pricing is often applied and back-office integration is not required from the start. The value propositions brought by such platforms are superior to the ones brought by the digitisation of bilateral interactions. Platform owners define and operate full business processes and can therefore have stronger control and value add on the evolution of the transaction (e.g., escrow service, automated decision making, artificial intelligence checks at transaction level). Such market places also offer a superior level of added value as they re-invent the end-to-end business processes. Evolving user needs can be quickly accommodated as a single software instance needs to be upgraded.

The following outline compares the key attributes of both innovation models:

Digitising existing bilateral business interactions

• Bilateral - Institutions digitise bilateral information exchanges using agreed data structures and business processes
• Software and Standards - Software solutions are developed or acquired by both institutions and made compatible by using agreed messaging standards
• Automation at bilateral level - Business process is improved incrementally with multi-banking capabilities, automated data aggregation, STP data flows, …
• Improved bilateral processes - Increased speed, visibility, efficiency thanks to paper replaced by digital – however limited to bilateral relationships

Digitising the end-to-end business process with online market places

• Multilateral - All involved institutions join a common platform and participate in transactions based on multilateral rules
• Platform Service - The central platform manages transactions in a complete and collaborative way enabling faster time-to-market and service upgrades for all parties
• Innovation at transaction level - Value propositions are maximised through auctioning, escrow service, proxy payment, automated decision making, analytics, artificial intelligence based checks, …
• Re-invented transaction-level process - End-to-end business process is re-invented and offers more value to all participants

As per above comparison, online market places score better than traditional digitisation models.

In the corporate-to-bank origination space, new request-for-quotation platforms recently emerged so as to provide corporates with streamlined access to their trade finance banks at sourcing level. Two recent multi-bank origination bidding platforms located in Europe and the Middle East seem to enjoy successful product launches. I am referring here to Mitigram and Trade Asset Exchange (TAEX). Surely others will follow suit. Other market places have emerged in the receivables space as well as in the secondary space, as outlined in the following section.

The trade ecosystem has also found new avenues to innovate as well as new players to engage with – I am referring here to institutional investors.

New players to involve in trade flows: capital market firms

As trade finance has suffered under the new regulatory requirements imposed on banks, capital constraints have started to become a priority. Trade banks have identified the need to position this business as an attractive asset class towards capital markets, also called the buy-side. This trend was triggered as post-crisis regulatory requirements increased the cost of capital. Balance sheet management became a priority for most trade banks and selling down assets became critical to release regulatory capital, and manage their balance sheet. Such balance sheet improvements enable banks to originate more transactions and to provide more funding to their clients.

This regulatory driven market development has led to a series of innovations aimed at bridging the trade banks with the asset management firms. Bringing more liquidity into the trade space was until now possible through various intermediaries structuring (synthetic) securitisation programmes. It is now also achievable via specialised market places bridging the trade space to the wide community of institutional investors.

Two new platforms are being launched this year to help banks in this respect:

• TrustBills combines the efficiency benefits of an online market place and the access to institutional investors. This platform provides a new, cost-effective way for the buy side to access a highly profitable market with an attractive risk profile and short-term self-liquidation. TrustBills offers sellers of trade receivables (unconfirmed or confirmed) several benefits such as speed, pricing fairness, convenience and KYC/compliance. Since Q2 2016, two German banks - DZ Bank and Deutsche Bank - have partnered with and invested in this new venture
• Capital and Credit Risk Manager (CCRManager) facilitates the distribution of trade finance and working capital obligations between financial institutions. CCRManager is offered to banks, non-bank financial institutions, and institutional investors only. It helps banks to address balance sheet (RWA decrease), return on equity and cost challenges. A total of 16 financial institutions signed up since early 2017.

Conclusion

Digitising trade and trade finance is a very long journey. Early digitisation attempts in trade have delivered tangible value to the industry and corporates have been much faster than banks to realise the benefits, which have mainly been about automating B2B trading processes.

Whereas the initial digitisation wave helped the market migrate away from paper-based practices to digital ones, we now see new online market places through which corporates, banks and investors can operate transactions collaboratively, using as many streamlined and automated processes as possible.

We can expect those platforms to bring superior value propositions as they overhaul business practices and deliver much more than digitisation. They achieve this by connecting all parties involved in the end-to-end transaction workflow including new ones such as insurers and institutional investors and can therefore reinvent trade finance practices and leapfrog the digitisation objective.