Executive Summary

Every single day, four billion pieces of papers are circulated between the physical and financial supply chains of businesses involved in cross-border trade. Many of these documents are used to satisfy requirements stipulated in letters of credit and documentary collections.

As trade and supply chains grow more complex—involving more intermediaries, service providers, regulatory clearances, and certifications— companies, especially MSMEs, face greater challenges in accessing financing and by extension, more complexity in market access and documentation. At the same time, banks face mounting pressure to improve compliance, reduce costs, go green and provide more meaningful work for their employees.

As margins in trade finance business reduces, the biggest challenges that banks are facing today include improving service levels, increasing scale of operations and ensuring regulatory compliances without adding additional cost. With the ever-growing competition, it is imperative for banks to optimize the complete trade finance processing from origination, issuance, amendment to collection.

Banks have tried to automate trade initiation partially using standalone application for capturing data, processing applications, managing documents, etc., but unified end-to-end trade finance automation is missing.

Some of the key challenges arise from the fact that core banking systems act as transactional system, however they do not provide trade finance module. As a result, banks are required to leverage third-party trade applications.

Most of the big size and multi-national banks are using home-grown applications to handle their day-to-day trade financial transactions. Banks do maintain a technical team also for handling system updates and maintenance issues serve as solution. The solution thus developed is customized to the specific needs of the bank but it has an additional reoccurring cost attached to it and time-to-market is also high.

Second option available to banks is buying a ready-to deploy point solution along with their core banking system. Point solutions are domain-rich and ready-to deploy but the initial cost of the product is very high and getting bank-specific modifications will cost a fortune.

Why do we have low efficiency of the trade finance process?

  1. Absence of end-to-end automation: Repetitive work in multiple applications leading to operational inefficiency.
  2. Movement of physical documents: Document-intensive nature of work, which necessitates movement of documents across departments and users, thereby leading to the delay to process cycle times.
  3. Missed Turnaround Times (TAT) and Service-Level Agreements (SLAs): Too many manual actions across different teams, sometimes leads to push transaction in no man’s land or remain unattended, resulting in missed SLAs and customer.
  4. Manual handling of regulations: Manual control for regulatory, internal compliance, domestic and international trade guidelines, country-specific compliances.
  5. Inefficient tracking of transactions: Spreadsheets based manual processes for transaction tracking.
  6. Manual compliance and exception handling: Users need to refer the policies and procedures every time an exception of internal compliance issue to be raised, to check for exception handling matrix.
  7. Poor inter-departmental coordination: Ineffective coordination between different departments, including trade operations, branches, Credit limit, FX treasury, etc.
  8. Lack of automation capabilities: Lack of capability to define and collect customer-specific charges, do compliance check at initiation due to inter-country movement of documents and review capabilities at branch.

What are the Features of Required/Expected Trade Finance Software?

Advancements in technology have raised the bar of expectations of the corporate customers. They prefer to reach out to banks which can provide efficient, web-driven, coherent and integrated services to suit individual customer needs.

Customers expect banks to: (1) Provide solutions that allow them to seamlessly connect with the bank in order to complete their international trade transaction through web portals and/or handheld devices, (2) Perform follow up activities required in completing lifecycle of a trade, (3) Be a one-stop-shop for all trade instrument needs viz. documentary products, guarantee products, payments, SWIFT, purchase order financing, invoice discounting, etc. (4) Meet SLAs for processing the trade transactions without any error.

In view of these, the expected Trade Finance software must have the following capabilities.

  1. Flexibility/Adaptability
    The Trade Finance software must be highly configurable to the bank’s business processes, easily customizable to the regulatory needs of any country or location, empowers the bank to adapt quickly to regulatory policies and updates and has the ability to configure milestone notifications triggered by transactional events or dates across all products in the system.
  2. Reduced Turn-Around Time In Trade Processing
    The Software must have capability to automatically generate and process outgoing and incoming swift messages, seamless reconciliation and allocation of interests accrued on cash-backed letters of credit, in-built document management tracking and handling, detailed tracking of all credit lines available to banks with their correspondent banks, enables banks to reconcile offshore charges on trade transactions of their customers and automates the process of returning the unutilized portion of trade allocated Foreign Exchange back to its source.
  3. Robust Reporting Features
    The software must be able to provide real-time business intelligence through snap-shot reports and analytics for decision making, reporting framework that supports the generation of regulatory report.
  4. Advanced Technology
    The software must have in-built Optical Character Recognition technology and Handwriting Text Recognition technology that automatically reads all kinds of scanned hard copy documents and populates them to their appropriate fields and transactions through its artificial intelligence features. Easy integration to any system or third-party applications, including the local regulatory portals and banks’ in-house applications. The solution must be cloud-agnostic and service APIs driven. It must be Compliant with SWIFT standards.
  5. Operational Efficiency
    The software must enhance productivity through reduced workload fueled by manual processes, keep trade operations going regardless of staff movement and achieve optimum decentralization of transaction processing through bank branches.
  6. Cost Containment
    The software must have the capability to prevent all income leakages in transaction processing especially on Pre-Negotiations, tracks daily charge accruals and automatically stops accruing either on negotiation or when cash is provided. The total cost of ownership must be competitive when compared to other trade products.


Author
Fisayo Fatade
Managing Partner
Business Kinetics Nigeria Limited