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Iain McLennan, head of trade finance and supply chain at Finastra, explains why now is the time for true digital trading.
Global Finance: Are we ready for end-to-end digitalization of trade?
Ian McLennan: Yes, the world is now ready for end-to-end digitalization of trade and supply chain finance. We have been on the verge of this for several years now. We started this journey before the pandemic, saw the pandemic accelerate, and have now witnessed further fundamental changes over the past six months that have moved this journey forward. One of them was the Electronic Trade Documents Act, which allowed [treated the same as paper documents] from the end of September 2023 under English law. Other countries such as Germany, France and the Netherlands are moving forward with similar legislation. Another reason why we are now ready is due to the potential benefits of digitalization in terms of carbon reduction, as well as business and operational efficiency, such as real-time data processing capabilities, process efficiency, etc. The International Chamber of Commerce said that digitizing trade documents could generate up to £25 billion ($32 billion) in additional growth this year and up to £224 billion in efficiency savings.
GF: What are the benefits and challenges of artificial intelligence in trade finance?
McLennan: AI has been used for several years to verify document compliance and resolve fraud issues in the trade finance industry, and as AI matures, so will its use in the trade finance industry. To understand how to do this, I asked ChatGPT how it would benefit the trade finance industry. His proposals included enhancing fraud detection and compliance management capabilities; eliminating manual processing, for example by automating invoice or payment processing; understanding trade transactions and trade flows, and supporting decision making based on this; and supporting clients and colleagues with knowledge and assistance in managing transactions.
The further development of artificial intelligence in our business will bring obvious benefits. However, there are potential challenges for AI, including data quality, cost, scalability, ethics, and repeatability.
GF: How is collaboration driving the development of trade finance “as a service” solutions?
McLennan: We talk a lot about the trade ecosystem, which includes the physical movement of goods, the paperwork flow and the financial flows associated with the transaction. There are a significant number of participants and information providers in this ecosystem. We are now seeing significant collaboration between various participants, industry organizations, application providers and others. Several partnerships are also being formed to address major systemic issues, although we need to be mindful of some challenges, particularly in retail chains. Networks are notoriously complex, and I use an analogy from Lord of the Rings: “There will not be one network to rule them all.” Compatibility is key here. We’ve been talking about compatibility for a few years now, but now it’s at the forefront. For as-a-service solutions, we create added value with our partners who operate as a service to our customers, allowing them to realize the benefits of those relationships. At Sibos, we introduced our concept of a trade finance utility with IBM, where we see the value of creating a trade finance stack as a service that a customer can interact with without the need to engage multiple partners.
GF: How can technology help the trade finance industry prioritize environmental, social and governance goals?
McLennan: Technology will enable the trade finance industry to meet the necessary ESG standards as they evolve, so it’s not really a matter of prioritization; it’s really about execution and standardization. There are already several ESG solutions on the market. I work closely with a company that provides automated ESG assessments. The partner has aligned itself with frameworks such as the UN Sustainable Development Goals and the EU Taxonomy and works with many financial institutions and other bodies to frame its offering from a market perspective rather than just a “one bank’s view”. Based on my discussions with colleagues, this is where I believe the trade finance industry is ahead of other parts of the financial sector. Establishing a framework, as well as access to the necessary data sources, will be key to demonstrating ESG compliance and addressing potential issues associated with greenwashing. Additionally, the technology allows any such assessment to be seamlessly updated based on significant changes in input data, meaning you can have an up-to-date view of the transaction or counterparty based on current information.