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Why (Paper) 'Less is More' in Trade Finance

bank payment obligation
essDOCS Consulting
Financial IT
Jacco de Jong
Paperless Trade
trade finance

Or, how is the process of disruption working?

Do you still buy CD’s or rent a DVD every now and then? I presume in most cases the answer will be a clear “no”! Digital services such as Spotify and Netflix have clearly and successfully disrupted these traditional products and their delivery channels.

The same trend is occurring in many other areas such as hospitality (AirBnB), transportation (Uber), retail (Alibaba) and more recently, the finance world. Non-bank finance providers and methods such as crowdfunding via Kickstarter are just a few examples of new, dynamic tools used by corporates to attract working capital.

The historical “top of the food chain position” of banks is no longer a reality.

Nowadays, banks face fierce competition in their core areas of business, topped off by additional challenges in terms of compliance, sanctions, regulations and the odd scandal here and there. What’s more, banks tend to react by addressing recurring symptoms with ‘aspirins’ instead of gearing up to avoid becoming obsolete.

In random order, the most common aspirins are: increase compliance staffing, cut costs by offshoring or outsourcing, exit unprofitable business lines or customer segments, and the most popular pill of all: cut jobs. One could argue that this approach does relieve a few headaches, but what are the long-term effects?

Let’s think about why services like Spotify or Netflix are currently the ‘norm’, even when most of us still have loads of CDs and DVDs lying around at home. In short, it comes down to the fact that these services offer what we want, when we want it, how we want it and at a reasonable cost.

Now if we mirror this customer mind-set to digitized banking, and more specifically Trade Finance banking, it is currently very hard to ‘Spot-the-FI’ who will be the visionary disrupter in this space. The first brave movers are taking steps, but we have yet to see a bank taking a bold move forward.

Yet, the opportunities are countless and the pre-conditions are already in place.

A major first step in the right direction is the shift towards electronic documents (eDocs), yet much more can still be achieved in order to reach entirely digitized, paperless processes in Trade Finance.

Which brings me back to the ‘what we want’ aspect, with regard to corporates who use Trade Finance services. Traditionally, corporates’ have their own specific focus, or mandate if you will, when involving banks in their trade operations: that trade finance transactions should simply be supportive in terms of risk mitigation, financing and as settlement instrument.

Yet digitization can eliminate a lot of corporate frustration. One example being the stress around ‘discrepancies’ in documents presented under Letters of Credit.

By enabling collaborative drafting of electronic shipping documents, parties can ensure the documents meet their specific transactional requirements. Since documents created on our CargoDocs platform consist purely of data, these eDocs can be easily utilized under eUCP transactions or checked automatically under Bank Payment Obligation (BPO) transactions. This minimizes human intervention, mitigates fraud and error risks, and certainly reduces (if not eliminates) the need for data re-entry.

Next, there’s the ‘when we want it’ requirement – where digitization benefits become all the more apparent. Wouldn’t it be great if importers no longer had to worry about physical paper documents arriving in time for unloading? No more risk of incurring demurrage or shipping guarantee costs! Through paperless, digitized practices like issuing and transferring (endorsing) electronic Bills of Lading, users have an extremely simple, secure and intuitive means to execute trades without wasting time and money couriering documents between parties.

Then there’s the ‘how we want it’, where much can still be achieved in the corporate-to-bank space. Corporates would like to have as much, if not all, bank-related information and communication available via one channel/platform, a ‘single window’, tied into their ERP environment. Yet this can only be achieved by enabling a paperless environment based on data and standards, which is why our paperless trade platform, CargoDocs, is ISO20022 messaging-enabled.

Finally, there is the ‘at a reasonable cost’ expectation. Here is where traditional paper-based trade transaction handling by banks is often perceived as being expensive. And all this despite the fact that handling fees charged by banks are, in reality, often under-represented and under-charged, considering how labour intensive such processes can be. In a paperless trade environment, many of these tasks can be reduced or even avoided. What’s more, the cost of sending documents via courier no longer needs to be borne. In turn, banks can still add a lot of value to their customers via their risk mitigation and financing capabilities and assign freed up resources to critical client service and advisory tasks.

I realize I am only scratching the surface in terms of the potential and benefits. For example, I have not even touched on the benefits for banks in terms of AML, KYC and the all-important compliance filtering aspect. In a paperless environment all data can be clearly scanned and tracked, leading to increased traceability and auditability, something that can never be achieved with paper-based transactions.

Clearly (paper)’less is more’ when it comes to Trade Finance, both for corporates and their banks. It is now up to the banks to prepare themselves and benefit from the disruptive digitization wave rapidly gaining force in this space. Corporates, for the most part, have already gone digital and are always open to adopting beneficial technologies such as electronic Bills of Lading.

However transitions are never easy, especially those involving a paradigm shift.

And it’s for that exact reason that we’ve formed a dedicated consultancy arm – essDOCS Consulting – entirely focused on supporting your transition toward digital Trade Finance!

This article originally appeared in Financial IT Special Sibos & GTDW Edition (Fall 2015) and is republished here with permission

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