Thanks to the advancements in digitalisation, data-driven processes and distributed ledger technology (DLT), the trade finance industry has its sights set on a future where seamless, fast and transparent settlement via interoperable platforms is the norm.
But concentrating on long-term objectives, though never to be discouraged, can leave corporate customers asking: “What about the here and now?” Certainly, such concerns are understandable since, today, paper-based transactions can cause material delays to international commerce.
For instance, let’s imagine a shipment of goods from a Mittelstand manufacturer waiting to be discharged in Singapore by the buyer. Before this can happen, the banks of both the supplier and buyer must check paper versions of the Letter of Credit documentation—a process that can take up to 10 days. While the shipment is waiting, additional storage costs are incurred at the port, thus adding possible strain on the relationship between buyer and supplier.
Banks are working hard to prevent these bottlenecks in the supply chain. At Commerzbank, we do this in close collaboration with our corporate clients. After all, only by truly understanding the pain points that companies are faced with during their everyday operations can we make material improvements. Moreover, we maintain an ongoing dialogue with our clients to ensure that we aren’t merely innovating for innovation’s sake—instead, we make sure that we are addressing the greatest strains that companies encounter. To this end, we are focused on two key areas.
First, we are committed to partnering with specialist fintechs to harness existing technologies that already have widespread applications in other fields—such as optical character recognition (OCR)—within the banking world. Second, we want to promote the advancement of entirely new products and services based on technologies such as DLT in order to ease the evolution of a digitalised trade finance space.
Transformations are already in play
We can delve into the solutions that are already providing respite to the corporate customer today; and those that hold promise for changing trade settlements in the years ahead. The first is automation in trade finance, which represents a form of digitalisation through which we are blending new technologies into traditional processes. Through a strategic partnership with Conpend, a specialist fintech, Commerzbank has begun to automate trade finance processing. Starting with the automation of certain anti-money laundering (AML) checks, Commerzbank aims to have automated 80 percent of compliance pre-checks by 2020. Once completed, this will save time for all parties without compromising any regulatory commitments and, for the corporate customer, automation should lead to faster settlement, as well as error-free processing.
Second, Commerzbank is one of the founding banks of Marco Polo, the fastest-growing trade network that connects the trade data held by banks, corporates and third-party service providers involved in a transaction via application programming interfaces (APIs) and Corda blockchain technology.
Proactive collaboration has already led to significant breakthroughs: in August, Commerzbank and Landesbank Baden-Württemberg (LBBW) completed a real-time pilot transaction between Voith and KSB SE. The pilot proved for the first time that a logistics provider (in this case, Logwin) can trigger a payment obligation in favour of the supplier via the Marco Polo network, even though in this case the data transfer for this transaction was executed via the DLT platform simultaneously to the settlement of the real trade transaction. This follows a similar pilot in March involving the same two Germany-based corporates, which saw two commercial transactions executed via the Marco Polo network and, importantly, financing formed part of this pilot. We continue to lend our support to R3 and TradeIX through the Marco Polo initiative and have long recognised the potential that distributed ledger technology holds for our corporate clients—namely increased security, transparency, efficiency for payment processing and straightforward financing in favour of the supplier. The goal for future development is to expand the Marco Polo network, bringing additional relevant parties for trade transactions on board—such as insurance companies, inspection authorities, local chambers of commerce. In this way, the entire supply chain can swiftly and digitally be mapped.
Multi-bank platforms for supply chain finance (SCF) are becoming increasingly common for larger multinationals and is part of the introduction of SCF programmes on both payables and receivables sides—many of which are now provided by multi-bank technology platforms. Thanks to this development, rather than one bank delivering their own proprietary technology platform, corporates can access financing from more than one financial institution—and all following just one simple know-your-customer (KYC) onboarding process. This single-platform approach affords corporates a raft of advantages. Not only does it improve the corporate access to larger volumes of financing, it also leads to greater transparency over best-value pricing and greater risk diversification. Since multiple banks are involved, corporate clients can glean insights from each of these institutions, according to their respective areas of expertise.
Further progress requires integrated thinking
The initiatives mentioned go some way to improving trade finance in the here and now. But, for trade finance to be truly transformed for the corporate, the trade finance industry must work together to achieve the following:
Interoperable trade finance platforms: In trade finance, corporates are already beginning to demand a world where invoices on enterprise resource planning (ERP) systems can be readily extracted for financing without any need for paperwork.
Standardised global governance of commercial transactions: Before interoperable platforms can become effective, what first must be established are valid obligatory standards for use by all trade parties in a supply chain. Of course, this requires buy-in at various levels, from corporate, to financial institutions and, ultimately, from inter-governmental institutions.
For this reason, we are fully behind the Universal Trade Network (UTN), which we consider a significant step forward in the quest for establishing industry standards. It’s an industry initiative focused on improving interoperability between the various trade finance platforms currently emerging. In short, the UTN’s end goal is to help introduce a “network of networks”—an ecosystem where every trade finance platform can communicate with another.
In addition, the UTN seeks to encourage the creation and adoption of open standards and protocols. Its members thus far comprise those banks involved in the Marco Polo project, but the grouping is now looking to attract other participants in the supply chain—corporates, in particular.
The further commercialisation of emerging technologies: It’s critical to learn how to turn the raft of latest innovations—DLT, smart contracts and the internet of things—into market-ready solutions for the trade and supply chain finance worlds.
To serve this purpose, Commerzbank recently became the first bank to set up an Enterprise Lab at the Fraunhofer Institute for Material Flow and Logistics IML in Dortmund. An extension of the partnership that began in 2017, the Innovations Lab aims to analyse and predict how financial and physical supply chains may operate in 2025. This insight puts us in a prime position to ensure that the innovations and decisions we make today will address the challenges our clients face in their operational landscapes tomorrow.
Welcoming the next era of trade finance hasn’t been an easy route; and there are many miles left before we reach our destination. But we at Commerzbank strive to make it a smooth journey not only for tomorrow’s travellers but today’s, too.
