Fintech is changing trade finance — finally. I spoke to André Casterman and Christoph Gugelmann about the effects of digitisation, which companies are driving the changes, and how young professionals should position themselves to benefit from new opportunities.
André Casterman is Chief Marketing Officer at INTIX, Non-Executive Director at Tradeteq, Chair of ITFA’s Fintech Committee, and a veteran of SWIFT.
Christoph Gugelmann is Founder and CEO of Tradeteq. He previously worked in various roles at Galena Asset Management, Bank of America, Morgan Stanley, and Goldman Sachs.
Q. What is the background to the digital transformation the trade finance industry is currently experiencing, and why is it happening now?
Financial institutions are continuously investigating ways to increase operational efficiency and decrease cost. In wholesale banking, most of the so-called “transaction services” have been digitised (e.g., payments and liquidity management) and this has enabled large banks to grow volumes substantially over the last two decades whilst keeping cost under control. Technology made this possible. Trade finance is an exception to this trend as this business line has remained paper intensive and heavily relying on manual handling when it comes to document exchange, document scrutiny, reconciliation and credit / risk management.
Despite several attempts over the same period to digitise trade finance, one must admit the basics of the business haven’t moved much. Letters of credit, collections and guarantees still require piles of paper documents to be exchanged which slows down banks’ internal processing and risk / financing decisions. Recent trade-related services such as Supply Chain Finance have been digitised and automated as they involve more simple processes than traditional trade services.
This low level of digitisation of trade services is now attracting top management attention as senior leaders within banks expect the cost of trade finance operations to shrink thanks to technology. Progress is now being achieved thanks to mature technologies such as OCR [optical character recognition] and digital trade finance platforms.
Besides the growing digitisation and automation of trade finance processes, another key development is of paramount importance in the short term: using data as a new economic asset. Automated processes, improved with machine learning, are being fed with both reference data (e.g., institution profile, localisation, credit profile), transaction data (e.g., payment patterns, history of trading relationships) as well as financial data (e.g., annual statements) and market data (e.g., news, macro insights). As the volume of data that machine learning can digest and take into account is beyond human capacity and as data is accessible in real time, banks can now rely on continuous insights (vs. outdated ones) and this is redefining some key functions such as credit management.
This is why the three key ingredients for effective innovation in trade finance are: transaction data, machine learning and trading platforms. Specialisation drives success.
Blockchain is also a technology which aims to modernise trade finance, but it remains to be proven, and it will take years to attract the majority of trade banks.
Q. What companies are involved in the transformation and how are they each affected?
Trade finance is a wide and complex eco-system. One must identify the very segment or function that each particular innovation is targeting. To assist that task, we created a chart to map the various finechs onto the eco-system [see below]. ITFA has gathered close to 20 fintechs focusing on data and trade finance innovations. Most of them are highly specialised and some of them are working together (e.g., INTIX and Tradeteq on ML-based transaction-level credit scoring). Some of those fintechs are acting as software providers (e.g., INTIX, Traydstream) that banks can use independently of the technologies used by their counterparties whereas other fintechs operate community-centric trading platforms (e.g., Tradeteq, LiquidX, TradeAssets) so counterparties use a common technology platform to communicate and make deals. Most of the top transaction banks are now working with several of those fintechs (and other fintechs beyond ITFA). Banks have set-up multi-bank consortiums to re-invent some industry-level practices. Examples include Marco Polo (based on R3 and TradeIX) as well as TFD Initiative (based on Tradeteq). Whilst many of the initial consortiums were designed around blockchain, some are not, such as Trade Information Network (TIN) and TFD Initiative.
Q. Are there skill gaps impeding the pace of progress?
The emergence of new technologies significantly accelerated financial innovation. Technology has a large impact on how we interact and transact. This requires capital market participants to continuously learn and develop in order to stay competitive in a much more connected world. I don’t think that we suffer from a skill gap but young professionals have to be prepared to learn and develop their skills on an ongoing basis. There is often value in combining different disciplines such as for example applying advanced statistical approaches to trade finance in order to better assess the underlying risks. There are usually too many specialists who are good at one or the other discipline while there are seldom enough specialists operating in-between disciplines. Luckily, companies are focusing a lot more on training and development. Also, access to leading university courses has become a reality thanks to MOCC platforms, often at no cost.
Q. Will fintech lead to more or fewer jobs, and will these jobs be different from today’s jobs?
Machines can make our processes more efficient but need to be developed and maintained. Machines are only tools and don’t replace any person-to-person interaction. Jobs in the finance industry will continue to shift and therefore require ongoing training and development but I don’t think there will be less humans required. Financial technology can even create new jobs outside of finance. For example Tradeteq’s efficient trade finance distribution infrastructure enables banks to provide improved financing access to its clients and therefore helps to create corporate jobs all over the world.
Q. What is the macroeconomic impact of greater trade finance efficiency?
Digitising trade finance is influencing business models and strategies for banks and their clients. There is increased collaboration between various types of players coming from logistics, insurance, tech, banking, capital markets. This is primarily due to increased operational convenience and cost reduction, which enable banks to better serve SMEs and stimulate their growth. The World Trade Organization (WTO) estimated a few years ago that technological progress will have the largest impact on GDP levels by 2035, accounting for 9% higher or lower GDP levels in developed countries. In emerging markets the variation is even greater – up to 20% higher/lower GDP in Brazil and 55% in China. When the cost of processing a Letter of Credit (LC) decreases, so too does the entire cost of trade finance – which enables financial inclusion. The ease of process also facilitates customs clearance procedures – allowing goods to move through supply chains more easily and reach consumers faster. The more the trade finance industry can alleviate concerns about digitisation the faster it will happen. No single institution can fully digitise alone. Collaboration between banks, corporates, and other industry players via specialised digital platforms will be the determining factor in the pace at which the trade finance industry shifts to paperless trade.
Q. How can young professionals get into trade finance specific fintech? Is there room for entrepreneurship in this increasingly crowded field?
There has never been a better time for young professionals to work as finance entrepreneurs. Many more technologies will be looking for a financial market use case. Access to equity financing is in principle open to anybody with a good idea and a convincing execution strategy. It doesn’t always require the setup of a new company in order to work as an entrepreneur. Some large institutions are operators of in-house incubators which allow teams to implement new concepts. Anybody interested to work within a specific fintech company should just reach-out to the respective company. The chances are high that the applicant will get an invitation for a chat. Access to decision makers is usually good and hiring processes are efficient.