Innovation

Navigating the Labyrinth: BAFT’s Updated Playbook on Correspondent Banking Relationships

Correspondent banking relationships (CBRs) are the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets.

Via Trade Finance Global by Deepesh Patel

Correspondent banking relationships (CBRs) are the linchpin of international trade and finance, enabling cross-border transactions and providing a gateway to foreign financial markets. However, these relationships have come under scrutiny in recent years, with a decline in CBRs observed in many parts of the world.

This decline has raised concerns about financial exclusion and the rising costs of trade finance, issues that have only gained urgency in the face of evolving regulatory landscapes and technological advancements.

The playbook serves as a roadmap for respondent banks navigating international anti-money laundering and combating the financing of terrorism (AML/CFT) standards.

BAFT (Bankers Association for Finance and Trade) has released an updated version of its Respondent’s Playbook for Obtaining and Maintaining a Correspondent Banking Relationship in this complex environment.

This update, a successor to the 2019 guidance document, incorporates current regulatory changes and introduces a new section on ISO 20022 migration.

Sweet Symbiosis: Correspondent and Respondent Banking

In CBRs, one correspondent bank holds deposits and offers payments and other services to another bank, referred to as the respondent. Typically, respondent banks are smaller entities, often located in emerging markets, that rely on their correspondents for international transactions.

This symbiotic relationship is essential for the functioning of global trade, yet it is fraught with complexities, particularly in compliance and risk management.

De-risking – A Double-edged Sword?

While risk management is the cornerstone of any financial institution, the strategy of de-risking or terminating CBRs to avoid risk has had unintended consequences.

Financial exclusion, particularly in emerging markets, and the resultant increase in trade finance costs have raised ethical and economic concerns. De-risking has effectively hampered global trade and development, creating a ripple effect that extends beyond the banking sector. Here, industry standards, such as those set by the Wolfsberg Group, become particularly relevant.

This association of thirteen global banks has been instrumental in developing frameworks for managing financial crime risks, offering a layer of uniformity in an otherwise fragmented landscape.

Factors Contributing to the Decline in CBRs

Several factors have contributed to the decline in CBRs, including:

Increased Regulatory Scrutiny: Correspondent banks are subject to strict regulatory requirements, particularly with AML/CFT compliance. Compliance costs have risen significantly in recent years, making it more difficult for some banks to maintain correspondent banking relationships.
De-risking: Some correspondent banks have adopted a de-risking strategy, which involves terminating CBRs with banks that are perceived to be high-risk. This has been particularly common with banks in emerging markets.
Technological Advancements: Fintech companies are developing new solutions for cross-border payments, which could reduce the need for correspondent banking relationships.

Fintech companies are playing an increasing role in the cross-border payments landscape. Some fintech companies are developing alternative solutions for respondent banks, such as providing access to global payment networks or offering digital escrow services.

While fintech companies could help address some of the challenges faced by respondent banks, it is essential to note that they are also subject to regulatory scrutiny. Additionally, fintech companies may need help to provide the full range of services that correspondent banks offer, such as trade finance and cash management.

Updating the 2019 Playbook

BAFT’s original playbook, released in 2019, was a timely intervention. It provided respondent banks with actionable insights and guidelines on maintaining correspondent banking relationships, particularly in the face of stringent AML/CFT regulations.

The document was a comprehensive guide covering everything from establishing new relationships to the intricacies of compliance.

Regulatory landscapes are not static; they evolve in response to emerging risks and economic realities. Four years later, the updated playbook, the Respondent’s Playbook 2.0, reflects these changes.

It incorporates current regulatory shifts and introduces a new section on ISO 20022 migration, an international standard for electronic data interchange between financial institutions. This update is not merely an addendum but a recalibration designed to equip respondent banks for the challenges ahead.

ISO 20022 Migration

One of the critical updates in the 2023 playbook is the inclusion of a section on ISO 20022, a standard set to revolutionize the way financial messages are transmitted across the globe. ISO 20022 is a new international standard for electronic data interchange between financial institutions. It is set to revolutionize how financial messages are transmitted globally.

The adoption of ISO 20022 is not just a technical upgrade but a strategic move that will enhance the efficiency and transparency of international transactions.

Respondent banks should start planning for ISO 20022 migration now, as the standard is expected to be widely adopted in the coming years.

The benefits of ISO 20022 for respondent banks include:

Enhanced efficiency and transparency: ISO 20022 uses a common data language to streamline cross-border payments and reduce the risk of errors.
Reduced costs: ISO 20022 will help reduce cross-border payment costs by eliminating the need for multiple data conversions.
Improved compliance: ISO 20022 will help respondent banks comply with international AML/CFT regulations.

The challenges of ISO 20022 migration for respondent banks include:

Technical complexity: ISO 20022 is a complex standard, and migrating to ISO 20022 will require significant investment in technology and resources.
Time and cost: Migrating to ISO 20022 will be time-consuming and costly.
Coordination with correspondent banks: Respondent banks must work closely with their correspondent banks to ensure they are both ready to migrate to ISO 20022.

The playbook also details compliance practices, providing both correspondent and respondent banks with a toolkit to navigate the complexities of international finance and regulatory compliance.

The future of correspondent banking relationships is still being determined. However, respondent banks must adapt to the changing landscape to remain competitive.

The BAFT Respondent’s Playbook is a valuable resource for respondent banks, guiding how to obtain and maintain correspondent banking relationships in compliance with international AML/CFT standards.

It addresses the ‘what’ and the ‘why’, offering insights into the rationale behind best practices and regulatory requirements. In doing so, it provides banks with the tools to adapt and thrive in an environment of constant change. The playbook serves as a timely reminder that in the fast-evolving world of international finance, staying ahead is not just about keeping pace with change but anticipating it.

The BAFT Respondent’s Playbook 2.0 can be read here.

Roundtable: What Keeps the BAFT Global Trade Industry Council Up at Night?

SIBOS 2023, held this year in Toronto, allowed BAFT’s Global Trade Industry Council to come together with Trade Finance Global to discuss industry trends and issues.

Via Trade Finance Global

At SIBOS 2023, Trade Finance Global (TFG) spoke with trade industry leaders: Avanee Gokhale, Global Lead for Trade Strategy at SWIFT; Anirudha Panse, Managing Director & Head of Trade at First Abu Dhabi Bank; Marie-Laure Gastellu, Global Head of Trade at Societe Generale; Gwynne Master, Global Head of Working Capital Solutions at Lloyds Bank; Scott Stevenson, Senior Vice President of Trade at BAFT; and Tod Burwell, President & CEO at BAFT.

This roundtable discussion with the BAFT Global Trade Industry Council (GTIC) revolved around the macro trends in global trade and working capital, the results from the Asian Development Bank’s (ADB) 2023 Trade Finance Gaps, Growth and Jobs survey, correspondent banking and de-risking challenges, and the prospect of digitalization.

Macro Trends in Global Trade and Working Capital

In the ever-changing landscape of global trade and working capital, several macro trends and shifting priorities, which reflect the evolving challenges and opportunities facing trade finance professionals, are worth noting.

Firstly, there is a growing emphasis on understanding the intricacies of cross-border trade, as it directly impacts payments.

Approximately 50% of cross-border payments are driven by trade, making it imperative to comprehend associated risks, business flows, and the diverse actors involved.

This complexity is further compounded by the fragmented nature of the trade space, with multiple platforms, rulebooks, and processes spanning physical and financial supply chains across various jurisdictions and geographies.

While technology plays a significant role in streamlining these processes, it is not enough on its own.

Gokhale said, “A key strategy from a Swift perspective is to support a future-ready ecosystem that is anchored in standards and promotes interoperability and digitisation.”

In parallel, the landscape of working capital is experiencing notable shifts. Sustainability has become a core focus, with commitments to allocate substantial funds over the next decade.

In regions like the Middle East, diversifying away from oil-based to knowledge-based economies and incorporating sustainability and inclusive financing are top priorities, reflecting a general shift in the market’s demands.

Panse said, “The market has become far more savvy now. A few years ago, most of the Middle Eastern corporates were very happy doing their trade financing on the back of a letter of credit, but that is changing more and more to open account.”

In regulatory matters, electronic trade documents and various financial crime regulations influence trade and working capital solutions.

Collaboration, innovation, and adherence to standards are essential in addressing these regulatory changes effectively.

The emergence of environmental, social, and governance (ESG) regulations, in particular, underscores the need for clear standards, data capture, and reporting.

Gastellu said, “As of today, it’s not clear what we have to report on as banks. We are all doing our own reporting, but we are really lacking industry standards ensuring that we all report according to the same criteria and we definitively need some clarification on that to drive transparency.”

Master added, “We do not want to see everybody inventing their own wheels. Just like AML/KYC, ESG carbon reporting presents a great opportunity to collaborate and establish clear regulatory guardrails.”

Industry players must collaborate with regulators, auditors, rating agencies, and investors to ensure meaningful progress in ESG compliance and measurement.

Addressing the $2.5 Trillion Trade Finance Gap

The Asian Development Bank’s 2023 Trade Finance Gap, Growth, and Jobs Survey, released last month, shows that the trade finance gap has widened to $2.5 trillion, up from its previous $1.7 trillion.

However, the widening nature of the gap does not change the nature of the roadmap to try and solve it.

Burwell said, “We looked at this question with the World Trade Board, and what we came up with was there were fundamentally five key building blocks to addressing it.

One was digital infrastructure, one was data infrastructure, one was legal infrastructure, one was new funding sources, and then one was technical capacity.”

Digital infrastructure involves creating digital platforms and solutions that streamline trade processes, making it easier for businesses, especially small and medium-sized enterprises (SMEs), to participate in international trade.

Panse said, “Banks’ mandate from their shareholders is to grow assets and increase revenues. Banks actually like the SME business given the returns on capital as well as the absolute NIMs this segment provides. Many banks like FAB are actively lending to SMEs and thus are actually helping address this gap. However, the problem comes in when you don’t have enough information about the SMEs”

This is where data infrastructure plays a vital role. Through enhanced data standards and interoperability, firms exchange information and documents seamlessly, building a data footprint that can help them get financing down the road.

Standardization efforts, led by organizations like the International Chamber of Commerce (ICC) and SSIFT, aim to improve data quality and accessibility for all participants, including SMEs.

Burwell added, “Large global banks tend not to be the ones best placed to go after some of these markets that are most starved. The large global banks oftentimes depend on the smaller local banks to do that level of origination. But there’s a gap in many of these smaller local banks with the technical capabilities and the data capabilities and the rest of that.”

Building technical capacity is a long-term strategy focusing on industry education and skill development.

It includes training stakeholders who may not fully understand the complexities of trade finance, ensuring they can leverage digitization and data-driven solutions effectively.

This can be across all areas of the industry, from banks through to the smallest prospective trader.

Master said, “We started the journey, focusing on helping the little company, the SME, with their biggest pain points. Our focus was on education and process simplification. We began with the Lloyds Bank International Trade Portal, open to all companies in the UK, not just our own clients, and at no cost because we want businesses to learn and to experience a more friction-free trade journey. We then introduced digital solutions to make trade simpler, faster, safer, and more sustainable. At the end of the day, it’s all about helping Britain trade to help Britain prosper.”

Correspondent Banking and De-risking Challenges

Trade finance confronts significant challenges, primarily linked to the declining number of correspondent banking relationships and the practice of de-risking.

Stevenson said, “To a great extent, this is being driven by reputational risk. At one point in time, the concern was really more of a regulatory risk or a credit risk. But that’s really been taken off the table with the concern about sanctions, with the concern about counterparties, the issue of reputational risk.”

Unlike financial or credit risk, reputational damage can be enduring and challenging to recover from, making banks increasingly cautious about their trade activities.

The fear of sanctions and the complexity of international trade transactions contribute to derisking.

Banks are reluctant to engage in transactions that might indirectly involve sanctioned entities or nations, and the intricate nature of global trade makes it challenging to ensure full compliance with sanctions rules.

Enhanced transparency is seen as a potential solution to address these challenges. However, sharing sensitive transaction data among banks raises privacy and ownership concerns since the data belongs to the participating banks.

Gokhale said, “While a lot of data might be on Swift, we don’t own that data, it belongs to the banks, and we are not able to access or share it freely. This makes it a much bigger problem than Swift can tackle alone.”

Finding ways to share relevant data while upholding privacy and confidentiality is an ongoing dilemma. Some regions have seen collaborative networks among banks emerge.

These networks aim to share information about trade transactions anonymously to build confidence and reduce perceived risks.

Such initiatives can enhance access to trade finance, particularly for SMEs, and promote transparency, but are not a perfect solution.

Panse said, when asked about his views on Trade Risk Distribution, “Many Banks tend to hold assets than distributing them actively. They would only look to distribute the assets if there is mandate from their internal credit teams, or they are hitting their capacity or capital constraints internally. In other cases, the participant banks are not able to buy the offered assets as they may not have relationship with the buyer or are constrained by internal return hurdles.”

Digitalization Won’t Succeed Without Standards

Trade digitalization holds immense promise for addressing the trade finance gap, but it also requires a multi-faceted approach. Gastellu said, “While technology is key, I believe standardization is even more important.”

Without clear standards, the benefits of technology adoption can be limited.

Standardization fosters interoperability, enabling various stakeholders to exchange trusted data seamlessly. This reduces the risk of errors and enhances transparency and efficiency across the trade finance ecosystem.

While technology plays a pivotal role, it’s not the sole solution, and it must go hand in hand with legal harmonization and financial inclusion.

Ensuring that digital transactions are legally recognized and hold the same weight as paper-based ones is crucial, and achieving this equality in the eyes of the law requires regulatory support and collaboration between governments, industry bodies, and financial institutions.

Financial inclusion is another key objective, especially in emerging markets where digitisation can significantly expand access to financial services.

Stevenson said, “Look at Safaricom in Africa. They have over 100,000 farmers on their phones conducting banking and conducting market analysis, and the farmers are being lent to based on that. They’re putting the banks at risk because the banks don’t want to take these farmers on as clients, but Safaricom thinks this is a great business. There’s a whole technology gap that can be jumped in terms of bringing in more people into the financial systems.”

Bridging the financial inclusion gap requires collaboration between traditional financial institutions and innovative digital service providers.

The roundtable at Sibos 2023 in Toronto illuminated the complex issues that the global trade industry must navigate.

Echoing the sentiments expressed during the Sibos plenary opening speech, Canada stands as a traditional gathering place for many nations, including the Mississaugas, Anishinaabe, Ojibwe tribes, and Wendat people.

This spirit of gathering and collaboration serves as a metaphor for the industry’s future path.

Just as Toronto embodied dynamism and diversity, the future of trade digitalisation hinges on creating an ecosystem where technology and regulation converge to enhance transparency, efficiency, and financial inclusion.

In these uncertain times, the industry has the opportunity to coalesce into an economic force for good, fostering collaboration and partnership for the greater good.

Navigating the Future of Digital Payments: Efficiency, Security, and Compliance

In an era marked by technological advancement and rapid digitization, the landscape of financial transactions has undergone a transformative shift. Traditional modes of payment, such as checks and physical currency, have given way to the convenience and efficiency of digital payments.

By Deepa Sinha, Vice President of Payments and Financial Crime, BAFT via Trade Finance Global

Automated Clearing House (ACH), wire transfers, and credit cards have become the cornerstones of modern commerce, enabling seamless transactions across borders and time zones. However, as these digital payment methods flourish, industry stakeholders are increasingly cognizant of the inherent risks that come hand-in-hand with this progress.

The Digital Advantage: Efficiency and Accessibility

Digital payments have revolutionized the way businesses and consumers conduct transactions, offering unparalleled convenience and speed. ACH transfers allow for the automatic movement of funds between accounts, streamlining processes like payroll and bill payments.

Wire transfers expedite international transactions, eliminating the time-consuming intermediaries of traditional cross-border commerce. Credit cards, with their widespread acceptance and instant payment capabilities, have become the go-to choice for in-store and online purchases.

Beyond the convenience, these digital methods have democratised financial access. Small businesses can now compete on a global scale, reaching customers beyond their local markets. Consumers benefit from the flexibility to manage their finances, make purchases, and pay bills with a few clicks. However, these benefits come intertwined with potential risks that necessitate careful consideration.

Navigating the Risks: Security and Fraud

The rise of digital payments has also given rise to an array of cybersecurity challenges. With transactions occurring in the virtual realm, the potential for cyberattacks, data breaches, and fraud has grown exponentially.

While security breaches predominately occur with merchants connected to the network rather than the payment systems themselves, malicious actors are constantly seeking vulnerabilities in payment systems to gain unauthorized access to sensitive information, leading to financial loss and reputational damage for both businesses and consumers.

ACH transactions, while efficient, can be susceptible to account takeovers and unauthorized withdrawals. Wire transfers, particularly in international contexts, may be subject to fraudulent instructions that divert funds to the wrong destinations.

Credit card fraud remains a persistent concern, with cardholder information being compromised via retailer breaches. As these risks evolve, industry stakeholders must adopt comprehensive security measures to safeguard digital transactions.

The Role of Regulations and Compliance

Recognizing the critical need to address these challenges, regulatory bodies have implemented measures to protect digital payment ecosystems. The Payment Card Industry Data Security Standard (PCI DSS) provides robust requirements for safeguarding credit and debit card data, requiring encryption, regular security assessments, and compliance reporting.

A lack of PCI compliance by non-bank entities (major retailers, most prominently) has been the proximate cause of major data breaches, demonstrating that a secure ecosystem relies on compliance by all data handlers.

The EMVCo (Europay, Mastercard, and Visa Consortium)’s global card and mobile payment security standards are a major step forward in securing new payment types and have reduced payments fraud worldwide. The new EMV Secure Remote Commerce (SRC) standard is increasingly found online, where it’s called “Click to Pay” and leverages a combination of methods to secure card-not-present transactions.

The Bank Secrecy Act and Anti-Money Laundering regulations impose robust due diligence practices on financial institutions, mitigating the potential misuse of digital payment platforms for illicit activities.

Yet, achieving compliance is not a one-size-fits-all solution. Industry participants must tailor their security protocols to their specific operational landscapes. Robust authentication mechanisms, multi-factor identification, adoption of the latest standards from bodies like the PCI Council and EMVCo, and real-time transaction monitoring are among the strategies that can fortify digital payment platforms against threats.

Uneven regulations between banks and non-banking financial institutions across the global payments industry are a problem that needs to be addressed. The BAFT Global Payments Industry Council, comprised of senior bankers in global payments, is publishing a collaborative white paper titled “Uneven Regulations in Payments”, which is a model code for how to remedy the uneven payments landscape.

It addresses the uneven regulations’ four themes and their implications:

Regulatory Oversight,
Extension to Sponsorship – Indirect Scheme Participation,
Consistency of KYC/CDD Requirements,
Permissibility of Cross-Border Activity.

The overarching principle should be to avoid ambiguity or “silent” rules, which will then lead to different interpretations and difficult enforcement. The paper will be published later this year.

Collaboration and Innovation as Defenders

As the digital payment landscape continues to evolve, collaboration and innovation emerge as vital strategies for managing risks. Industry stakeholders must come together to share insights, best practices, and emerging threat intelligence.

Financial institutions, retailers, fintech startups, cybersecurity experts, and regulatory bodies must forge partnerships to create a united front against cyber threats.

Furthermore, embracing technological advancements such as artificial intelligence (AI) and machine learning can empower payment platforms to detect anomalies and patterns that indicate fraudulent activities. Real-time fraud detection algorithms can provide an additional layer of security, swiftly identifying and blocking suspicious transactions.

No Pain No Gain

The ongoing digital payment revolution offers a host of benefits, enabling businesses and consumers to transact with unprecedented ease. However, these advantages are accompanied by inherent risks that require strategic vigilance and action.

Security breaches, fraud, and compliance challenges underscore the need for comprehensive risk management strategies. By implementing robust security measures, adhering to regulations, fostering collaboration, and leveraging innovative technologies, the industry can navigate the intricate landscape of digital payments and usher in an era of secure and seamless transactions.

BAFT Launches Advanced Trade Finance Certificate

WASHINGTON — BAFT, the leading global financial services association for international transaction banking, today announced the launch of its new Certificate in Advanced Trade Finance (CATF) which will offer an in-depth overview of the trade finance business, supply chain finance, cross-border risk, and liquidity solutions. This is a level II certificate, tailored to those with more than three years of trade finance experience.

This on-demand course, available through BAFT’s Learning Management System, will cover 11 modules that focus on a range of advanced trade finance topics, including:

Managing and mitigating emerging market and other cross-border risks;
Understanding the links between supply chain finance and procurement;
Understanding inventory finance;
Secondary markets, insurance and asset distribution in trade and supply chain finance;
Advanced financial crimes, compliance and fraud in supply chain finance;
Digital trade and trade financing;
Best practices in trade and supply chain finance operations;
ESG and sustainable trade finance;
Deep-tier supply chain finance and addressing the trade finance gap;
Nonbank providers of trade and supply chain finance; and
Trade finance and supply chain finance from the corporate and commercial practitioners’ point of view.

“BAFT is dedicated to promoting best practices in international transaction banking and serving as a trusted authority within the industry,” said Scott Stevenson, Senior Vice President of Trade for BAFT. “CATF reflects this commitment by offering a curriculum that is both relevant and up-to-date, exceptional in quality of content and delivery, and ensures participants are well prepared to navigate the complexities of the global trade landscape.”

The courses will be led by Craig Weeks, an independent banking consultant with more than 30 years of experience in trade finance, supply chain, and transacting banking operations, and Alexander Malaket, a consultant in international trade, trade financing, trade-related international development and sustainability/ESG.

The course will take between 12 to 15 hours of study to complete and participants must pass a final assessment to be certified.

Learn more about the new Certificate in Advanced Trade Finance and contact [email protected] with any inquiries.

BAFT and CGI 2022 State of Trade Technology Survey Results

A Clearer Picture After the COVID-19 Pandemic?

BAFT and CGI conducted their third annual trade technology survey at the end of 2022. As banks and the global trade industry return to a more stable state with less direct challenges from the COVID-19 pandemic, CGI and BAFT requested input surrounding technology priorities and investments within financial institutions’ trade organizations.

What’s Impacting Trade Finance Today?

The past year saw the consolidation of Fintechs in the trade space, with banks taking a more focused and outcome-oriented approach to incorporating new technologies into their operations. This has been observed with the closures of Serai, We.Trade, and TradeLens, all blockchain consortia or networks which ceased operations in 2022. Based on the survey participants’ feedback, investments in innovation appear to compete for limited resources at trade banks, including environmental, social and governance (ESG) initiatives, digitization, compliance, supply chain finance (SCF) growth and automation.

Investing in Innovation – The Top Technology Investments Over the Next Five Years

Last year, API services and ESG solutions were the investments that stood out as the most impactful among survey respondents. However, this year’s survey indicates a continued focus on the foundational aspects of trade back-office and trade portal modernization, as well as intelligent process automation (machine learning, natural language processing, artificial intelligence) investments.

Back and front office modernization is crucial for maintaining efficiency on the back end and a positive user experience for customers on the front end. CGI helps clients utilize modernized technologies to drive efficiencies through automated workflows and imaging between the customer and the bank, streamlined portal usability and processing services that remove work from the corporate back office. In addition, these core components will enable end-to-end digitization by providing API capabilities to banks. These elements are fundamental, and with their presence, banks will be hampered from a future capability and product offering perspective.

IPA investments like machine learning and AI have the potential to improve the efficiency and accuracy of processes by automating manual work traditionally done by employees. Over time, this will result in decreased human intervention and errors and allow employees to focus more on value-add tasks.

Greatest Barriers to Innovation

This year’s survey indicated that resource limitations, competing internal priorities and budget were the most significant barriers to embracing innovation. The impact of these barriers has shifted since our 2021 survey, with resource limitation jumping to the top of the list.

Trade banks struggle to prioritize competing investments, including ESG initiatives, digitization, compliance, SCF growth and automation. This challenge isn’t unique to banks or the trade finance industry, as many sectors are being asked to do more with less within an uncertain economic climate. Because of the lack of resources, it’s no surprise that technology investment was a top challenge for banks. The concern with regulatory landscapes and compliance is also still ever-present. The trend towards digitization, heavily influenced by the pandemic, was thought to help combat regulatory challenges and reduce the impact. But will that same push toward modernization continue as we settle into our new normal?

Fintech Collaboration

A middling level of satisfaction with fintech engagement has continued in this year’s survey. The top types of fintech engagements were SCF platforms and digital document platforms.

The shift towards SCF began last year, with banks expecting only 50% of their revenue to come from traditional trade business. SCF platforms were the most demanded type of fintech engagement because of the digitization benefits they deliver.

SCF platforms offer a tangible and easy-to-understand solution for bankers, so it’s no surprise they are still growing in demand. They also deliver digitization benefits, including improved UX for clients.

Change in ESG Impact

ESG initiatives first emerged in last year’s survey, emphasizing investment in environmental sustainability. There was interest from both corporates and banks, although there were no formalized incentives for implementing initiatives.

While this year’s survey indicates that ESG is still growing, there has been little impact on the trade finance business. Since 2021, corporate clients’ interest in utilizing ESG products has decreased by 11.7%, and only 10.1% of participants are executing impactful ESG initiatives. At the same time, 23.2% have implemented ESG initiatives but aren’t seeing an impact on their trade business.

Insights You Can Act On

As we move to a new normal post-pandemic, it is interesting to see where the industry and clients are looking to invest in the future. CGI and BAFT conduct this survey annually to encourage connectivity to external fintech partners and provide valuable insights into the trade finance industry. We also use these insights to deliver better solutions to meet our client’s needs.

For more information on the topics discussed in this blog and insights into the trade finance industry, download the BAFT and CGI State of Trade Technology Survey – 2022 Results here.

From Discussions to the Real Deal: The Digitalization of Trade Finance

Advancements in technology have contributed to an acceleration in the trade finance industry’s digitization efforts, but the reality is that many processes are still done manually and with paper. When will we see critical change in digitizing trade finance?

Via Contour

Advancements in technology, from legal entity identifiers (LEI) to digital trade finance platforms, have contributed to an acceleration in the trade finance industry’s digitization efforts. The pandemic and subsequent lockdowns were a big push factor for many to jump on the digital bandwagon, but the reality is that many trade finance processes are still done manually and with paper.

When will we see critical change in digitizing trade finance? We define that moment as when all participants – banks and their clients, are part of a wider digital network.

“I think it is in this decade – five to seven years is reasonable,” commented Tod Burwell, President & CEO of BAFT (Bankers Association for Finance and Trade), in a recent Contour podcast.

Burwell noted that governments are starting to drive the push towards digitalization through incentives and penalties. He cited deep tier supply chain financing as an example of when policymakers can spur action and activity.

“The more we start to see real examples of success as a function of digitizing, the more it will increase the rate at which we see other organizations adopting it,” he said.

Driving Change in Standards and Interoperability

In June 2022, BAFT, which is the leading international transaction banking association, released a whitepaper “Digitizing Trade Finance: Now and the Future”. The report highlighted the inefficiencies of the global trade system, where roughly 30% of time is spent on processing documents. As a result, $150 billion is estimated to be lost annually to the manual activities of trade finance operations.

The whitepaper concluded that the two major obstacles standing in the way of more digital adoption are interoperability and standards or legal frameworks.

“Those are the two huge pieces that we’re trying to solve for as an industry,” said Burwell.

There are steps made in the right direction to drive change in these areas. Burwell gave the example of the Model Law on Electronic Transferable Records (MLETR), proposed by the United Nations Commission on International Trade Law (UNCITRAL) which has been adopted in seven to eight countries.

“There has been a huge push to try to drive change in the legal framework, in order to allow for data and digital documents to be legally acceptable and legally binding in the context of digital trade,” he added.

BAFT is helping its members, which include banks, technology companies and advisory firms, navigate the obstacles and opportunities that trade digitization presents. It created the Distributed Ledger Payment Commitment (DLPC) as a useful standard to address issues on interoperability. On the broader scale, Burwell added that this is where the ICC Digital Standards Initiative (DSI) comes in.

Solving for Interoperability Through Partnerships

Digital trade finance solutions like Contour are addressing the issue of interoperability by forging partnerships and integrating with other solutions providers.

“We work with bank bank-office systems that manage trade and risk, and we bring our transaction data into those systems,” said Carl Wegner, CEO of Contour.

The fintech’s recent tie-up with Finastra, a bank solutions provider, demonstrates interoperability at its best, as it integrates both solutions – removing friction and simplifying the process for bank operators and their clients.

“The banks’ staff do not need to log in to Contour and can manage their digital Letter of Credit workflows as part of their normal transaction process,” he described.

With the collective power of organizations trying to work towards digitalization, Burwell believes the industry will get there sooner than he personally thinks it would.

Sustaining the Future of Digital Trade

Contour has led the way for more efficient, streamlined and paperless trade finance. It is a platform that creates opportunities for everyone in the trade ecosystem.

This is where sustainability and digital trade solutions intersect. At its core, digitalization and sustainability are the two topics that BAFT is engaged in with their members and what Burwell consistently hears is “achieving sustainability is not possible without digitalisation”.

While Burwell observes that the primary purpose of an organization’s investment in technology is to improve efficiencies or reduce fraud, he fully believes that “sustainability is another fundamental reason why organizations are making that investment in technology”.

However, ESG priorities should not just focus on the environment but also about society and governance. Small and medium-sized enterprises (SMEs) are a big part of the “S” in ESG and a big part of closing the trade finance gap is ensuring that all technological solutions are within the reach of everyone.

“Often, the smaller banks, regional banks and emerging markets banks are best placed to serve that SME population, but they’re not the early adopters of this technology,” Burwell noted. “I think we’re in a place right now where we’re trying to meet those two.”

Wegner emphasized the need to have an SME model to allow them to participate as well.

“Everyone wins when you have more data to exchange and follow,” said Wegner.

The future of trade digitization is now, but this has to happen in a way that is inclusive. SMEs play a big role in many economies, especially in the emerging world. The World Bank estimates that they represent about 90% of businesses and more than 50% of employment worldwide. Improving SMEs’ access to finance is what will make a difference in narrowing the trade finance gap.

To listen to the full podcast featuring Tod Burwell, click the link here.

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