The FinTech Friction (And Opportunity) In Global Trade

Although business lending requires the aggregation of data from a multitude of sources, there is typically only one financial institution managing the process. Trade finance and the facilitation of trade transactions, however, require complex coordination between businesses, their service providers and their financial institutions to ensure that jobs are complete and goods are moved before any money changes hands.

Communication is key to any relationship, but when data and documents are shared via phone and email into proprietary systems, information can be locked behind silos instead of readily available to the business partners who need it.

According to Mitigram Chief Executive Officer Milena Torciano, this challenge is only getting harder thanks to heightening anti-money laundering (AML) and know your customer (KYC) requirements, as well as open banking and PSD2’s reach into the corporate banking sector.

“Trade finance … is a vast, $6.5 [trillion] to $8 trillion market in annual bank-intermediated flows that still run on email,” she told PYMNTS in a recent interview. “There is no digital exchange in trade and no central repository of data. There is no Bloomberg of trade.”

The consequences of this current landscape spread from the front- to back-office of financial institutions.

On the front-office side, Torciano pointed to the reliance on email to share information and respond to each other, leaving each institution to manually record that data, increasing the risk of error. Manual data entry means limited analytics capabilities, resulting in lackluster underwriting and risk mitigation that hampers price visibility for both corporate traders and financial institutions, she added.

Meanwhile, in the back office, reliance on proprietary systems means corporates that are working with multiple banks have to connect to individual platforms at each interaction.

Torciano noted that this lack of efficiency is seen in the consumer banking space as well, with Open Banking and PSD2 regulatory efforts opening up potential for a more holistic end-user experience — a shift that is spreading into the corporate banking sphere, she said, as corporates expect “a transparent, streamlined and efficient way to hedge, fund and distribute their risks in cross-border trade.”

Considering FinTech

Open banking and PSD2 also swung the doors wide open for third-party FinTechs to integrate into banking systems in pursuit of a better end-user experience. Corporate banking is also increasingly exposed to this industry change as well, and Torciano agreed that collaboration with FinTech is essential to addressing some of these challenges of data aggregating and sharing. No single financial institution could step in and offer the unified interface necessary to get everyone on the same page, she said; a third-party FinTech is key to filling this need.

However financial institutions haven’t necessarily been quick to embrace that connectivity.

Historically, a significant challenge in FinTech participation in this space has been “banks’ fundamental unwillingness to change,” said Torciano. That unwillingness was understandable, too, she said, thanks to the highly-controlled and regulated data management and processing practices to which banks must adhere.

While there may have been mistrust and skepticism at first, Torciano said that today, traditional financial institutions recognize the importance of adapting to changing client demands for digitization — “especially when it comes from their top corporate clients.”

Digitization of bills of lading, bills of exchange, promissory notes and other documents common in global trade have also supported the case for FinTech participation as innovators begin to digitize and automate various aspects of trading processes.

Innovators today are also looking at the big picture of global trade and the monumental challenge of connecting banks, FinTechs, businesses and other players onto a unified platform to share and access data in a secure fashion. Blockchain is often the buzzword when discussing how to tackle this problem, but Torciano warned that the nuances not only in back-office operating platforms, but in regulations, administrative processes, and even cultural differences mean blockchain isn’t necessarily the easy answer.

“In most cases, it will be hard to reach a mutually-agreed framework which will be set above local laws, tax systems, cultural practices, etc., and require the entire system in the near to medium-term future,” she said.

Mitigram, which offers a platform to hedge trade risk and connect commodity traders, corporates and banks, is instead taking a short-to-medium-term approach to addressing trade and trade finance friction, with technologies like natural language processing tools able to enhance functionality of existing apps and processes.

Transforming global trade cannot be done overnight. While banks and corporates consider how to streamline data sharing, the sector is also balancing stringent data security requirements as well as risk mitigation efforts that will shape the path of technological innovation in this arena. And while FinTech has stepped in to address both process inefficiencies as well as geopolitical and regulatory risk exposure, Torciano said FinTech itself can sometimes pose a risk — particularly as non-bank financial firms step in to fill the trade finance gap.

“These FinTechs are not regulated in the same way as banks, and if the trend [of shadow banking] continues, we could consider a bubble gradually materializing with a sudden squeeze of the liquidity — especially for trade finance — with a potentially significant, negative impact on the global economy,” she warned.