Digitization & Automation in Trade Finance
  • Thu, 04 Aug 2022

Alexander Paetzold, COO Trade Technologies & MD Trade Technologies Germany GmbH

Digitization & Automation in Trade Finance has already been on the agenda of different industry bodies for decades. However, given the complexity of the topic, i.e. technical specifications, industry standards, legal aspects, and customs requirements, the industry is still waiting for a breakthrough in this area.

One of the key challenges that need to be addressed is to devise a unified digital language. This would allow a seamless data exchange between different data warehouses/platforms that all follow their own distinct logic, and have their own distinct functionalities, i.e. from the ERP System to the Treasury-Management System, from the ERP System to the relevant platform for Customs purposes, or from SWIFT to any internal company platform.

To address this, the ICC just recently published their paper Standards Toolkit for Cross-border Paperless Trade – Accelerating Trade Digitalisation through the Use of Standards. In their Foreword, they take a look at today’s processing of cross-border transactions and come to the following statement: “A cross-border transaction involves multiple actors and on average requires the exchange of 36 documents and 240 copies. Currently, fewer than one percent of trade documents are fully digitized.”.

As a first step in implementing a more unified digital language the ICC is focusing on the following categories:

  • Foundational Standards
  • Identified Standards
  • Corporations and Micro-, Small- and Medium-Sized Enterprises
  • Carriers, Freight Forwarders and Logistics Operators
  • Customs Authorities and other Cross-border Regulatory Agencies
  • Interoperable Digitalisation Frameworks

On the plus side, some common ground already exists within different industries or within distinct groups of companies/regulatory bodies that all play their role in international trade. However, the main challenge remains - to unify this digital language across different industries and groups of companies/regulatory bodies. Only once this challenge is truly mastered all market participants can benefit from the advantages of a seamless data exchange, which are, for example, higher process efficiency, subsequently reducing transaction cost, better transparency within the physical and financial supply chain, and better results in overall risk – and working capital management schemes.

Regarding Digitization & Automation in Trade Finance in general, it is the Financial Institutions that play a key-role in the processing of transactions in international trade, especially in the area of Documentary Payments such as Letters of Credit.

Once again, the ICC paves the way for the digitized processing of Letters of Credit. In their paper Automation of Documentary Examination under Documentary Credits from June 2021, they published the results of their analysis on how Financial Institutions can improve their internal set-ups to allow for a higher degree of automation in the document examination. They came up with the following driving forces behind automation in Trade Finance:

  • Artificial Intelligence (AI)
  • Machine Learning (ML)
  • Optical Character Recognition (OCR)

Based on the different ways to utilize one or more of the above aspects, the following matrix was developed to outline the different levels of automation that (in general) could already be implemented as of today:

  • Level 0 - No Automation: The entire document examination process is executed manually using paper documents.
  • Level 1 - Document Imaging: Paper documents are scanned, and the document examination process is executed manually by a human based on the scanned images.
  • Level 2 - Basic Automation: The scanned images are processed by OCR and Data Capture, and the results are used to support the document examination process by automating simple tasks or reducing data entry. A human is actively involved in all steps of the digitization and document examination process.
  • Level 3 - Partial Automation: The process largely automated and supervised by a human. Only certain critical parts of the document examination process are manually executed.
  • Level 4 - High Automation: The entire process is automated, and a human is only involved in handling exceptions when requested to intervene by the system.
  • Level 5 - Full Automation: The entire document examination process is standardized and executed without human intervention.

Although many Financial Institutions already started their own distinct digitization journey quite some time ago, it is not to be expected that human knowledge and experience can be replaced by automated processes in the very near future.

In addition, it cannot be expected that all relevant players are adapting to the same standards/levels of automation at the same time. There will be a certain period in which paper, along with paper/digital hybrids, will have to be processed concurrently.