Despite the fact that global trade finance revenues decreased by 8 percent from 2019 to 2020, according to S&P Global Revenue Pool, the COVID pandemic disruption led to an escalation of fraud and loan impairments. This caused some major banks to withdraw completely from the sector, particularly in Asia. The global Trade Finance market size is projected to reach $10,987,510 USD by 2027, from $7,616,520 in 2020, at a CAGR of 5.4% during 2021-2027.
Trade finance relates to the processing of all documents needed to finance importing or exporting activities: letters of credit, guarantees, commercial invoices, bills of lading, certifications of origin, etc., easily consisting of more than 100 different relevant document types. Information must be extracted from the original documents and compared with other data or databases needed for AML/KYC to exclude any illegal activity. For instance, data sources related to military and dual goods, sanctioned vessels, etc., can include up to 2,000 rules that must be checked, resulting in complex and time-consuming processing.
Trade finance is manual, repetitive, cumbersome, and time-consuming. Only 9 percent of banks report that digitization has led to a reduction of time and costs in trade finance transactions (ICC 2018), and many are struggling with constant, high labor costs and falling margins. For instance, HSBC used to process 100 million documents with 4,000 credit officers. Standard Chartered processes about 36 million documents per year. In total, 4 billion documents are screened and checked yearly by the banks, according to the ICC, which recommends standardization, legal alignment, financial inclusion, and automation of heavily paper-based processes (ICC Digital Trade Roadmap, 2020).
Could Distributed Ledger Technology (DLT) be the answer? Many international trade finance companies are fast uncovering the value of using DLT as a shared platform for storage, retrieval, and accessing business-critical documents. This is not surprising since its very nature of the technology is manifested in the distributed, shared, and open ledgers, beholden to no one and verifiable by all.
DLT-based infrastructure is particularly suitable for enhancing trade finance processes– an area where paper-heavy processes like bills of lading and letters of credit still dominate. Trade finance transaction embraces a wide range of companies including importers and exporters, banks and financiers, insurers and export credit agencies, and other service providers, such as customs organizations. Day-to-day activities range from lending and factoring to issuing letters of credit, export credit, and insurance. Documentation is a key aspect of trade finance, which is why service companies receive large troves of applications daily that require faster, cheaper, safer, and transparent processing.
Intelligent capture can transform how financial institutions digitize, manage, share, approve, store, and secure documents with DLT. Intelligent capture technology enables users to automatically capture documents and extract, process, and retrieve data from paper or electronic sources. Recent advances in optical character recognition (OCR) and artificial intelligence (AI) have helped move the technology from the back office to the point-of-origination, speeding up the processing of invoices, remittance documents, customer orders, and other documents.
Intelligent capture technology has also paved the way for the creation of e-bills of lading and other e-docs, such as Customs Declaration, Dangerous Good Declaration, Packing List, and Commercial Invoice. This enables efficiencies, faster processes, and automation. With support for seamless integration with distributed ledger technology, intelligent capture can enable trade documentation to be digitized and transferred quickly, and to be electronically tracked.
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The use of intelligent capture technology for document processing in DLT will also unlock the following benefits for businesses on the blockchain platform:
- Delivery time for trade documents can be reduced from multiple days to just under two hours.
- Digitizing documents at the point-of-origination reduces the time required to create and transmit such documents, as well as labor and other costs.
- Better transparency and real-time monitoring can be achieved throughout the supply chain, as transaction details can be instantly shared with all parties.
Current advances in IDP (Intelligent Document Processing) — software that captures data from documents (e.g., email, text, PDF, and scanned documents) and from different locations and via different devices (desktops, laptops, smartphones) and NLP (Natural Language Processing), which enables financial institutions to react quickly to text on the web, social media or newswires containing market commentary, analysis or central bank communications, enabling them to spot issues or trends that may impact financial markets, make more informed investment decisions, and streamline risk management and compliance, have tremendous transformative potential for financial services.
Integrating capture capabilities into blockchain's distributed ledger technology has the potential to bring new opportunities and efficiencies to international trade finance. For example, digitizing bills of lading or letters of credit at point-of-origination will accelerate and secure their legal transferability and drastically reduce delays in couriering the documents.
With its built-in capabilities for data export, intelligent capture enables sharing of electronic data with multiple participants across a distributed ledger, increasing visibility and transparency, while lowering costs. A key element in this is the Distributed Ledger Technology, which enables open-source, decentralized, replicated, shared, and cryptographically secure operations in Blockchain. The system is validated through mass collaboration, rendering it applicable in other trade or business. Coupled with intelligent capture, DLT can greatly accelerate processing and transaction time as a whole for trade finance. The adoption of innovations such as software robotics and intelligent capture can help re-invent distributed ledger technology, making it significantly faster, while improving consistency and regulatory compliance.
To learn more about new solutions for challenges in 2022 and beyond in Trade Finance, read the white paper.