Network connectivity in trade finance: a new generation of technology

The last decade has seen a substantial change in global trade bank attitudes towards innovation and collaboration. 

Driven by existential challenges, including the rise of fintechs and heightened customer expectations, a new generation of bankers and institutions have sought to meet the challenge of digitisation and modernisation. 

This change in approach has resulted in a variety of new initiatives, particularly in the distributed ledger technology (DLT) and blockchain space. 

It seemed each month, a new set of banks were announcing a consortium of one sort or another, using new capabilities like DLT, cloud computing, and artificial intelligence to provide transparency, generate real-time transactions, reduce fraud, and generally propose solutions that would digitise the entire physical and financial supply chain.

Burgeoning trade ecosystems–the challenge posed today

With this backdrop, as a technology partner, CGI has encouraged banks to embrace the burgeoning digital ecosystem era. 

Digital channels, whether through direct connectivity to customers or via new networks acting as connective hubs, require banks to think about how they enable integration to participants across physical and digital supply chains, not just correspondent financial institutions (FIs) and direct corporate customers.

The industry set about focusing on how to connect these ‘digital islands’ to ensure successful interoperability with significant contributions coming from the recent ICC report.

Reconceiving the global trade finance ecosystem.

In an abrupt shift, June 2022 saw two significant network closures. 

we.trade, described as the “first enterprise-grade blockchain-enabled trade finance platform”, became insolvent. 

Meanwhile, the HSBC-led Serai platform also closed after failing to build a business case around Small and Medium-sized Enterprise (SME) financing. 

These headline-catching names beg the question: are digital islands sinking, and should banks be looking for a lifeboat? 

Is this unexpected?

It is fair to say that many in the industry have expected consolidation in this space. 

The Blockchain & DLT in Trade industry report shows an array of solutions across the market. 

With overlapping competition in terms of solutions and target audiences, fintech failures are as high as 75%, and with recent market upheaval, it is expected that some portion of these platforms would merge or fail, resulting in the ultimate success of the best market solutions. 

What should banks do? 

Many institutions may take this as a sign to reconsider participation in potential networks or reduce focus on connectivity. 

This would be a serious mistake, particularly with recent trends seen in the BAFT-CGI trade technology survey. 

The survey indicates that most institutions view platform modernisation as well as the development of APIs to be the most critical technology investments to achieve business goals over the next five years. 

It is often tempting to be a follower rather than a leader, but technology investment and strategic planning lag years behind actual implementation no matter how agile the organisation. 

Ultimately, true end-to-end digitisation in trade will greatly enhance global GDP and offer significant revenue opportunities for digitally-enabled banks. 

This digitisation relies on standardised system-to-system connectivity, which will drive interoperability between industry networks, corporate channels, and front and back bank office platforms.

Tips for navigating the evolving digital trade landscape

How should banks look at the recent trends and strategically take advantage of the evolving ecosystem landscape? Some practical thoughts from a technology partner:

1. Modernise technology solutions to ensure the ability to connect flexibly

Many banks are on legacy systems that are not consolidated across the business. 

This financially impacts maintenance and hinders the ability to drive the innovation of products. 

Before a bank is even capable of considering participation in the broader trade ecosystem, the adoption of a modern platform is critical.

2. Pay close attention to industry standards and bodies related to them

If you are participating in a network or building your capabilities, aligning to industry standards should be part of your strategy. 

No single channel or platform may be set to stand alone in the way that the SWIFT network has for banks over the last few decades. 

With that in mind, it is important to understand how to maintain the web of connected networks and APIs as more functionality and expectations come from clients. 

One way to reduce this risk and technical debt is to look to industry standards, such as those promoted by the ICC’s DSI initiative, SWIFT, and the DCSA.

3. Closely review opportunities with network participants and ensure a full understanding of value proposition and long-term viability

Participants need to pay close attention to the actual business purpose of any given network or platform that they join. 

Consider the strategy, is the onboarding platform used reducing visibility and engagement with customers? 

What is the motivation and business benefit of working with a specific party? 

Is the desired platform used providing a core service that cannot be replicated by alternative means?

4. Do not become tied to any single platform/solution

Customers will expect to connect to a variety of channels to serve their interests. 

Becoming tied to a single solution may have repercussions financially and functionally, if that platform does not meet the long-term expectations of the market. 

Referencing industry standards earlier ensures that multiple providers can meet the company’s needs should said company be dissatisfied with one player over another. 

The next generation of digital trade

The concept of network connectivity in the trade space is not going away. 

SWIFT, the ICC, BAFT, ITFA, DCSA, and other industry bodies are defining the next generation of digital standards, rules, legal frameworks, and best practices. 

Fintechs are continuously evolving new value-added services that can be leveraged by networks of financial institutions, buyers, sellers, insurers, and government bodies. 

New and complex interactions between corporate customers and platforms supporting trade transactions will be needed. 

Financial institutions that are able to understand that complexity and react agilely to develop end-to-end solutions for their customers will be the ultimate winners in this generation of trade banks. 

Read the latest issue of Trade Finance Talks, July 2022