Changes in the trade finance banking sector: Blockchain, ESG, and data standards

The banking and financial sector is undergoing a major transformation, driven by the emergence of disruptive technologies such as blockchain, environmental, social and governance (ESG) initiatives, and data standards. These changes are having a significant impact on trade finance banking, as financial institutions look for innovative ways to increase efficiency and reduce costs. By leveraging these technologies, banks can significantly reduce the time, cost, and manual labor associated with trade finance transactions, while introducing new levels of transparency and trust. For example, blockchain can be used to streamline the payment process, while ESG and data standards can help to ensure compliance and provide more accurate data. We will explore the various ways in which these changes are impacting the trade finance banking sector, and how financial institutions can leverage them to reduce costs and increase efficiency.

What is trade finance banking?

Trade finance is the financing of international trade and commodities, along with the various risks associated with financing. It is a critical component of every country’s import and export business, as well as being an important source of revenue for financial institutions. Trade finance banks are responsible for providing a wide range of financial products and services to businesses involved in international trade. These products and services include short-term and long-term credit, letters of credit, and guarantees. Trade finance is a highly regulated industry, with governments regulating the types of risks financial institutions are allowed to take on. Government-imposed risk assessment rules are intended to protect taxpayers from losses by reducing risk and increasing the transparency of trade finance transactions.

Supply chain Finance platform for Changing markets

There have been some clear shifts in the market in a post-COVID world. The pandemic-induced shutdowns and disruptions have highlighted the hazards that hyper-optimized but undiversified supply chains might face when big obstacles arise. The Ukrainian crisis is also causing a rethinking of supply networks and logistical routes.

As a result, many businesses are attempting to create ties with alternative suppliers in order to prevent future shocks.

Another major shift in supply chain management has to do with the accessibility of inexpensive capital. Companies with a lot of liquidity—that had the luxury of controlling their supply chain with their own cash, which was legitimate at the time––are realizing that this is no longer the best approach to manage supply chains since cash has become prohibitively expensive. Supply chain Finance is in more demand to come up with better ways to inject liquidity into their supply chain.

Impact of disruptive technologies on trade finance banking

Key disruptive technologies that are transforming the banking and financial services sector are also having an impact on trade finance banking. These include blockchain, ESG initiatives, and data standards.

1. Blockchain - Trade finance is a paper-intensive activity that involves the exchange of documents between a large number of entities, including exporters and importers, banks, insurers, transportation and logistics firms, and government officials. The unique features of blockchain — the ability to connect multiple parties in a decentralized network while providing a permanent, tamper-proof, and distributed digital record of transactions. The technology of Blockchain boosts the efficiency, transparency, and security of the global trade finance ecosystem.
2. ESG - ESG initiatives, which began in the 1980s as a means of measuring a company’s impact on society, have now expanded to include an assessment of a company’s impact on the environment and the economy. ESG initiatives are now being applied to trade finance, providing banks with greater visibility into the supply chain and lending criteria.
3. Data standards - Organizations around the world have been working together to agree on standards for the collection and sharing of data. Data standards can help banks to improve the accuracy of their data, as well as make it easier to share this data with other financial institutions.

Challenges of adoption and implementation

The adoption of disruptive technologies such as blockchain, ESG initiatives, and data standards has the potential to transform the trade finance banking sector, but it also brings challenges. While these technologies offer the potential to significantly reduce costs, they also bring new requirements and challenges. This can result in significant investment in resources and expertise to ensure that banks are ready to implement these solutions. It can also lead to longer implementation and adoption timelines, since these technologies are often in the early stages of adoption. These challenges can make adoption of disruptive technologies challenging, especially for smaller financial institutions.

Benefits of blockchain technology

The most significant disruption to trade finance banking is the potential application of blockchain technology. Blockchain could be used in the letter of credit process to facilitate the issuance, amendment, and final payment of a letter of credit. The blockchain solution could also be applied to the trust and trusteeship process, as well as to other front-end functions. With the use of blockchain, parties could gain quicker access to information and greater control over the data being shared. Blockchain could also help financial institutions to comply with the new Basel standard on information sharing.

Adopting ESG initiatives in trade finance banking

ESG initiatives, which provide data on aspects such as social responsibility, environmental impact, and supply chain sustainability, have been applied to trade finance operations for a number of years. These initiatives have been largely driven by social pressure to ensure that business activities conform to high standards. ESG initiatives have been applied to trade finance in the areas of biodiversity, biodiversity and indigenous peoples, child labor, climate change, hazardous substances and chemicals, human rights, and community health and safety. Financial institutions can use ESG initiatives such as due diligence in the supplier chain to identify and mitigate risks to the financial institution and its customers.

Benefits of data standards for financial institutions

The adoption of data standards in trade finance banking has the potential to significantly improve the accuracy and accessibility of data. Data standards can help financial institutions to increase the accuracy of their data, as well as make it easier to share this data with other institutions. Although data standards can help financial institutions to improve their data management, they can also require significant investment in technology and expertise to implement.

Incorporating Technology into Trade finance Banking

Digitizing Trade Finance works with the public and private sectors to identify and develop technologies and associated technology standards that facilitate connections between digital islands, trade finance inclusion for small and medium-sized enterprises (SMEs), and trade technology for emerging market economies (EMEs). Banks and other financial intermediaries pioneered electronic fund transmission via wire transfers, the SWIFT network, and other innovations in response to their clients' market requirements. The new technology and activities are a continuation of that forward-thinking approach to increasing efficiency, lowering costs, shortening transaction times, and reducing fraud and other criminal conduct. There is little doubt that international trade is transitioning to a totally digital environment, and the financial industry is clearly supporting that endeavor.

Best practices for leveraging these technologies in trade finance banking

Before financial institutions decide to invest in new technologies, they should have a clear understanding of the benefits each solution brings to the table. This can help to avoid costly mistakes and enable institutions to select the technologies that best fit their needs.

Financial institutions should prioritize their investments in new technologies to ensure that they have the resources needed to implement them successfully. This can help to avoid overloading IT with the added work and complications associated with implementing multiple technologies at the same time.

Instead of trying to implement all of the new technologies at once, financial institutions should start with one or two solutions. This can help to keep the costs associated with implementation at a minimum, while also providing institutions with the opportunity to test the technologies to determine whether they are a good fit for the organization.

Conclusion

Trade finance is a critical part of any country’s import and export business. This industry has been impacted by the emergence of disruptive technologies such as blockchain, ESG initiatives, and data standards. These changes are having a significant impact on trade finance banking, as financial institutions look for innovative ways to increase efficiency and reduce costs. By leveraging these technologies, banks can significantly reduce the time, cost, and manual labor associated with trade finance transactions, while introducing new levels of transparency and trust.