The trade finance space has seen a huge influx of capital in the development of fintech solutions to address some of today’s most pressing trade challenges. This has been fueled by the concept of open banking, which evolved in retail banking with EU regulations like the Payment Service Directive 2.
Based on the principles of open banking, many fintechs, mature IT vendors, as well as cash-rich super-scale banks, are furiously investing in the development of functions and services via APIs. However, unfortunately, many smaller and medium-sized banks – as well as the corporates – are unable to keep up with the development due to a lack of resources and specialist knowledge.
“It’s not about what you do, it’s about why you do it.”
It may be time to take a step back and not look at what is being developed and how, but why? A former trade finance IT company CEO recently summarized the problem of focusing on the technical benefits of open banking: “No one is interested in cloud and APIs. No one cares about technology.”
It seems mindboggling at first, however, it opens up the discussion to look at what lies beneath. APIs are the “what and how” of connecting an ecosystem, but the “why” is much more important. Knowing why is the catalyst to engaging a wider audience, to allowing the smaller, mid-sized banks and corporates to buy into ideas and solutions. So why are we building a more connected world in trade finance?
If you are responsible for the trade finance business in a bank or corporate, you continually need to generate value for your customers as well as to gain a competitive advantage. It is crucial to differentiate yourself from the competition by offering a more customer-centric, streamlined and efficient digital experience. You need to deliver new features with a fast time-to-market, better workflows and easier to use interfaces.
The trade finance gap is a measure of how much trade is unfinanced versus the potential. Economically, it comes down to the transaction cost being too high in relation to the value of the transaction. There is a significant need to reduce the cost per transaction to intrinsically link trade finance services with existing supply chains and to include a broader spectrum of players in the unserved markets.
Being focused on the ‘why’ makes space for the ‘how’
The promise of open banking is to empower the owners of accounts, funds and other assets, emancipating them from the stifling grip of proprietary banking environments. The technology of open APIs provides guidelines, a framework and standards; it provides real-time connectivity, transparency and speed; but it is entirely dependent on banks of different sizes using systems that are API-enabled. As open banking brings value for the masses, it should be inclusive and far-reaching and not just a luxury for the megabanks.
So how can smaller and mid-sized banks benefit from a leading API-enabled back-office trade finance processing solution for example? Simple; the cost and time barriers to adoption need to be lowered:
Provided via cloud-based Software-as-a-Service (SaaS) as a fully vendor-managed service, the cost is shared between dozens of banks making it economically far more viable. Experience shows that the total cost of ownership of a SaaS deployment versus on-premise can be reduced by at least 30-50%.
Typically the time to integrate a back-office trade finance solution to internal risk, finance and other downstream systems can be reduced from several years to just a few months. By default, this also reduces any potential project, resourcing and operational risk.
When a cloud-based solution meets a trade finance system
The icing on the value generation cake, however, is when a cloud-based solution is also connected to the wider trade finance ecosystem (e.g., vessel tracking, fraud prevention, data insights solutions). This accessibility not only increases value for every user but also significantly reduces the cost, as each connection only needs to be built once. By contrast, the number of connections would grow exponentially according to the number of banks and third-party providers with an on-premise deployment.
In summary, let’s forget about technology, about open banking, cloud and APIs and talk about generating value, enabling customers to drive growth, facilitating a more inclusive, efficient and enhanced service, to banks and in turn to bank’s corporate customers. Let’s use open banking as a means to open up trade finance, to make it more accessible to those smaller businesses who may not previously have had the means.