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De-risking trade finance operations: A transitional approach

trade finance
Trade Operations
Paperless Trade
CargoDocs ADP
Machine Learning
Business Intelligence
Transition Technology

Author: Jacco de Jong, Managing Director, essDOCS Consulting.

*This article originally appeared in 'De-risking trade finance operations: A transitional approach'

The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.   

One US-headquartered bank recently revealed it has reached the staggering figure of 70,000 employees directly or indirectly involved in compliance-related activities. In the context of trade finance, a European-headquartered bank mentioned that its trade finance operations staff spend at least 50 per cent of their time executing compliance-related procedures and tasks.

Needless to say, this not only has a significant impact on the pricing and profitability of trade transactions for banks, it also leads to overwhelming pressure, fuelled by constant fear of the ‘compliance thundercloud’ ever-looming over trade operations teams. This because we all know that when ‘compliance thunder’ strikes, the exorbitant fines imposed by regulators can potentially put smaller banks out of business overnight, while similarly creating major challenges for larger global trade banks.

This begs the question: Why is it so labour-intensive coping and complying with all these requirements and regulations – particularly when conducting trade finance?

The primary reason may come as a surprise to outsiders. It relates to the historically tech-averse, ‘traditional’ legacy of trade and trade finance, a field (still) overwhelmingly dominated by paper documents. Where most business areas across the finance spectrum have already undergone a significant paradigm shift in processes, the traditional world of trade finance continues to rely primarily on paper-based practices. Nonetheless, this is about to change.

Digitisation – or going paperless – is no longer a hype-fuelled catchphrase but a legitimate business requirement for any organisation looking to survive, compete and navigate through all the hurdles faced when dealing with complex, heavily-regulated trade processes. The focus has therefore shifted from what some refer to as ‘rip & replace’ digitisation to transition technology instead. Namely, solutions that take into account current processes, future desired-states, and how to bridge the gap between the two (while giving equal measure to both), in turn enabling a structured, speedy yet realistic transition to digital trade!

To that end, we recently launched our CargoDocs ADP (Automated Document Processing) solution, supporting trade banks in coping with continued compliance challenges while also enabling a much-needed transition to paperless trade.

As current trade processes are still largely paper-based – where all key trade data is ‘locked’ therein – it is crucial for banks to accurately capture and digitise this data. CargoDocs ADP utilizes powerful OCR (Optical Character Recognition) capabilities to extract critical data,  in turn combining Natural Language Processing (NLP) and supervised Machine Learning (AI) to structure data accordingly – enabling automated document/data-checking and validation plus critical compliance and trade-based money laundering checks.

Interestingly, banks normally only ever capture around 40-50 key pieces of information from paper documents for screening purposes, meaning that most information is not screened at all. Technology that is equipped with features that screen all data, including data from supporting documents, while also accommodating for pre-printed wording in headers and footers, is much more preferable. Experience has shown that even segments of typically un-screened data can result in significant compliance hits for trade finance banks.

However, it is possible for technology to go further than enabling regular compliance checking, crucially addressing Trade Based Money laundering concerns and spotting suspicious deviations. ADP is equipped with an interactive Business Intelligence dashboard, where users can drill down on flagged data, while alerts can be set based on tailored criteria per bank or even user.

Another major time consuming, and therefore costly, task for trade finance banks is comparing data against other data. One obvious example would typically be the examination and cross-checking of trade documents under Letters of Credit. With the right technology in place,  document data  becomes readily available, and , as such, comparing data between documents becomes extremely simple. What’s more, the icing on the ‘comparing cake’ is the additional capability of checking document data against the underlying transaction (the Letter of Credit) and the governing rules (e.g. the UCP 600).

Make no mistake, de-risking trade finance operations continues to be a challenging task, as stringent regulatory requirements constantly add pressure to already-stretched trade operations teams, increasing costs, delaying transaction lead times and in extreme cases, leading to huge fines.

Transition technology – which focuses beyond just capturing data but on the effective use and re-use of data – enables banks to efficiently and realistically achieve those much-desired cost savings, while also reducing operational and reputational risk.

For trade banks, it’s never too late to get started on a journey to digitised, paperless trade. And what better way to kick off than by tackling those ever-looming compliance thunderclouds, head-on.


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