Can automation transform trade finance?

Enno-Burghard Weitzel, Commerzbank: transformative change in trade finance is coming

When it comes to embracing technology, trade finance has often lagged behind other core banking services. But this may soon change.

Commerzbank’s Enno-Burghard Weitzel, head of product management trade services, explains how the automation of selected compliance pre-checks in trade finance could provide benefits for both bank and corporate clients.

Trade finance processing can leave banks between a rock and hard place. Regulators’ demands for watertight accuracy can introduce greater operational pressures, due to larger volumes and an ever more complex trade environment. Compounding the issue is trade finance’s paper- and manual-intensive traditions, though in recent years significant progress has been made with respect to digitalisation.

Thankfully, the green shoots of change are now emerging in trade finance processing. Commerzbank, for example, is looking to automate selected parts of its compliance pre-checks for trade finance transactions – providing reinforcement to the so-called “first line of defence” in the bank’s business operations, and optimising risk controls. We anticipate this being a transformative change for the industry.

Increased trade volumes, increased scrutiny

This project comes at a critical time: trade volumes might be rising, but banks are now more exposed to diverse and nuanced regulation by virtue of such activity – not to mention the pressures of confirming the integrity of the trade finance documentation.

Banks must also navigate know your customer (KYC), know your customer’s customer (KYCC) and anti-money laundering (AML) protocols. Given the scale of the task at hand, manual processes have become impractical.

Why is this? In its simplest terms, a trade finance transaction comprises risk controls, document checking and client communication processes. Within risk controls alone, banks must take multiple steps to confirm whether a transaction meets financial crime, compliance and credit and reputational risk checks. And, to give some idea of the practical complexities at hand: a single transaction requires approximately 100 pages of documentation from as many as 30 parties.

Change for the better

One might expect costs to increase and transaction processing times to lengthen should banks not take note of the “higher volumes, higher scrutiny” dilemma. Yet this needn’t be the case, thanks to the regulatory technology – regtech – advancements.

Regtech solutions specifically designed for trade finance processes include using optical character recognition and progressive machine learning that can pull data from physical documents, recognise patterns and flag deviations. In a regulatory-heavy environment, this heightened level of risk mitigation is invaluable. The machine learning element brings a new dimension in that the software is constantly updating its identification capabilities based on prior experience. And to balance cost and efficiency, application programming interfaces (APIs) can connect existing processing infrastructure utilised by banks and ensure audit trails can satisfy reporting requirements, seamlessly integrating the old and the new.

Certainly, automated compliance checks, executed selectively, can also have a positive impact on trade finance as a means of risk management. That said, they should only be utilised in the banks’ “first line of defence”.

Given how extensive the due diligence needs to be, banks are required to screen all affiliated parties regardless of the extent of their involvement. The information provided is convoluted, meaning that computed processes are not yet advanced or intuitive enough to carry out subsequent downstream checks.

Embracing this change, Commerzbank recently began a pilot phase to automate its AML processes, with a plan to roll it out more broadly in 2019. By 2020, the aim is to have automated around 80% of selected compliance pre-checks for trade finance transactions.

Staying ahead of the curve

The move towards digitalisation of trade finance processing not only improves internal risk management systems; it helps to meet regulatory requirements more efficiently. The lack of standardisation across banks and jurisdictions has been a long-standing affliction of global trading processes. And understandably so; with four billion paper trading documents in circulation at any one time, manual standardisation would be a gargantuan and almost impossible task. But universal uptake of digital improvements could help overcome these disparities inherent in the trade ecosystem, and bridge the myriad systems and interfaces.

Remaining agile in a regulatory-intensive environment, while also staying ahead of the curve in the face of such fast-moving technological advancements, may seem daunting for some. We have found the sparing use of strategic partnerships, when appropriate, can help to give an innovative edge. This forward vision is something we hope that regulators, fellow banks and our clients can embark on with us – towards a faster yet equally secure trade environment of tomorrow.