Trade finance is about to be transformed.

Trade finance is about to be transformed. Source: Shutterstock

Can collaboration help banks unlock a $1.5t opportunity?

COLLABORATION is something that banks are beginning to value in the age of digital transformation and disruption.

They’ve finally realized that providing customers with the best experience isn’t about investing in an expensive, bleeding-edge technology solution.

Rather, it involves finding the pain points for customers and solving them using the right tech solutions — and that’s exactly what the banking community is doing with trade finance.

According to Reuters, HSBC, Standard Chartered, Citibank, ANZ Bank, BNP Paribas, Deutsche Bank, and Banco Santander have joined forces to build a brand new digital network to help make trade finance simpler aiming at —ensuing that manufacturers and exporters have access to cheaper and better finance options.

And while experts believe that the network will take a few months to be developed, it is expected to be operational by the third quarter of next year.

The most important bit, however, is to note that the network is a result of bankers collaborating to improve the market rather than waiting for a new technology to disrupt existing processes and force the change — as was the case with the payments business.

Understanding the customer’s needs

Trade finance is a US$9 trillion industry. Essentially, it’s the provision of funds (and guarantees) by banks to importers (and exporters) to pay for cross-border trade transactions.

Usually, such transactions are challenging and hence, bankers need a lot of time to authenticate and validate applications since the counterparty is usually in another country, following different laws and trade rules.

It’s a problem that traders and bankers have faced for decades now.

Creating a digital network linking companies, suppliers, and bankers will not only lower costs for small and midsized companies but also provide them with more access and better services.

Further, it will allow banks to access trusted trade information on the network, reducing the risk of double financing and fraudulent trades.

Most importantly, the new digital network is going to radically transform the experience for all stakeholders in the trade finance industry.

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To be fair, neither does the network use groundbreaking technology nor is it the result of a revolutionary idea. It’s simply something driven by market forces.

Customers have been asking for a solution to the trade finance problem for years now, prompting startups and regulators to explore whether blockchain and other emerging technologies can provide a solution.

However, the only way — the right way to solve the problem was to have an initiative driven by banks who are typically seen as the custodians of the trade finance industry. They’ll be building the network on a model similar to the conventional SWIFT (payments) standard rather than experimenting with the blockchain.

It’s interesting to note that if the collaboration is a success, banks might be able to unlock the US$1.5 trillion annual demand trade finance from SMEs that is out of reach because of the high costs and greater than average associated risks.

News of the network has already attracted another 20 banks to participate in the development of the network and excited 60 big corporations who are waiting to be on-boarded once the system is ready for trial.

Thus, collaborating to transform the industry might provide big returns after all.