AI-Powered Due Diligence: Revolutionising Commodity Finance

The commodity finance sector is undergoing a revolutionary transformation through the integration of Artificial Intelligence (AI) in due diligence processes, fundamentally reshaping how financial institutions approach risk assessment, fraud detection, and operational efficiency. In Efides AG, rather than replacing human expertise, AI enhances it by automating time-consuming tasks, allowing finance professionals to focus on more strategic, high-value activities. AI-powered systems streamline document analysis, improve real-time risk monitoring, and provide accurate predictive modeling, enabling better-informed decision-making and reducing exposure to fraud. This synergy between AI capabilities and human judgment empowers risk managers to leverage their expertise effectively, driving innovation and fostering a more robust and efficient commodity finance ecosystem. This week, I have the privilege of co-authoring an article with Orhan Gunes , Founder & Managing Director of TradeQraft AG

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The Challenge in Commodity Finance

?The commodity finance sector is grappling with challenges that significantly impact medium-sized transactions. Due diligence processes have become increasingly complex and costly for banks, making these deals less economically viable. As a result, around 50% of medium-sized transactions are rejected, with banks often shifting their focus to larger deals from established corporates. This is because the fixed costs of conducting due diligence on a $3 million transaction are usually similar to that of a $100 million deal, making the latter more attractive from a cost-benefit perspective. Consequently, many medium-sized traders are left underfinanced, creating a gap in the market.

?The cancellation of medium-sized trades has far-reaching consequences throughout the supply chain. For instance, perishable goods can deteriorate while awaiting new financing or buyers, while non-perishable commodities may be sold hastily in local markets at reduced prices, resulting in significant economic losses. These disruptions can also lead to shortages in destination markets, driving up prices and food insecurity, especially in import-dependent regions, leading to social unrest and instability.

?Artificial Intelligence (AI) offers a transformative solution to the challenges facing the commodity finance sector. By leveraging AI-powered tools, financial institutions can streamline the due diligence process, significantly reducing complexity and rejection rates through faster, more accurate risk assessments. This enhanced efficiency has the potential to facilitate smoother trade flows and bolster stability in global commodity markets. AI's capabilities, including automated document analysis and sophisticated fraud detection, not only boost operational efficiency but also increase the probability of transaction approvals. Consequently, this ensures that essential commodities are more likely to reach their intended destinations, supporting global supply chains and economic stability. By embracing AI technology, the commodity finance sector can overcome current bottlenecks, making medium-sized transactions more viable and contributing to a more robust and inclusive global trade ecosystem.

?The integration of AI into commodity finance processes can be a smooth and collaborative effort, involving technologists, financial institutions, and regulators. By embracing these technological advancements, the sector can build a more resilient and sustainable global trade ecosystem. This AI-driven revolution in commodity finance has the potential to not only enhance profitability but also create a more stable and equitable global market. The benefits of this transformation extend beyond commodity traders and banks, positively impacting wider economies and communities worldwide. As AI continues to evolve and integrate into the industry, it promises to streamline operations, improve risk management, and foster greater financial inclusion, ultimately contributing to a more robust and efficient global trade landscape.

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How AI can help?

?Here’s how AI can help financial institutions and commodity trading companies on their workflows and application of data for their business objectives;

1. Data Analysis: AI can process large volumes of data quickly, identifying patterns and anomalies that may indicate risks or opportunities. With the current quality of work, this functionality is being achieved at a level exceeding human capacity.
2. Predictive Analytics: Using historical data, AI can forecast market trends and price fluctuations, helping stakeholders make informed decisions. This one is essential for commodity trading companies and commodity finance portfolio managing executives.
3. Regulatory Compliance Automation: AI systems can monitor and ensure compliance with changing regulations by automating reporting and risk assessment processes.
4. Counterparty Risk Assessment: Machine learning algorithms can evaluate creditworthiness and financial health by analysing various metrics and indicators in real time.
5. Supply Chain Optimisation: AI can enhance visibility into supply chains, tracking commodities from production to delivery and identifying potential disruption
6. Natural Language Processing (NLP): NLP tools can analyse news articles, reports, and social media to assess geopolitical risks and market sentiments.
7. Fraud Detection: AI systems can flag suspicious transactions or behaviours by analysing historical transaction data and detecting deviations from the norm.
8. Environmental Impact Assessment: AI can evaluate a company's environmental practices and sustainability efforts, helping investors make responsible choices.
9. Cultural Insights: AI chatbots can provide localised insights by communicating in different languages and understanding cultural nuances, assisting in negotiations.
10. Integration with Blockchain: Combining AI with blockchain technology can enhance transparency and traceability throughout the commodity trading process, reducing fraud risk.

By leveraging these technologies, companies engaged in commodity finance can enhance their due diligence processes, mitigate risks, and make more informed decisions which is the key to success.

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AI-Powered Due Diligence: Revolutionising Commodity Finance

Artificial Intelligence (AI) is transforming the commodity finance sector, particularly by overhauling the due diligence process including counterparty, transaction and compliance risk assessment. The traditional approach to due diligence is labor-intensive, costly, and often results in a significant rejection rate for medium-sized commodity finance transactions, with nearly 50% of these deals being turned down due to the high costs and complexity involved. AI technology offers a solution that not only reduces costs but also boosts efficiency and risk management capabilities, making it a game-changer for the industry.

Key Benefits of AI in Commodity Finance Due Diligence:

1. Automated Document Analysis: AI can process and analyse large volumes of documents, such as contracts and regulatory paperwork, at a speed and accuracy unattainable by human analysts. This reduces the time required for due diligence and lowers associated costs.
2. Pattern Recognition & Fraud Detection: Machine learning algorithms identify irregularities in trading patterns and supply chain activities, flagging potential risks like price fluctuations or fraudulent behavior that might otherwise go unnoticed. AI is a powerful tool to access and analyse more comprehensive ESG data to prevent greenwashing.
3. Real-Time Risk Assessment: In a market as volatile as commodities, AI systems continuously monitor and update risk assessments, enabling financial institutions to make informed decisions faster.
4. Predictive Analytics: AI uses historical data and real time data to predict future market trends, helping institutions anticipate disruptions such as price volatility or geopolitical risks that could affect trade and trade finance risks.
5. Regulatory Compliance Monitoring: With regulations constantly evolving across global markets, AI ensures that transactions adhere to current legal requirements, reducing the risk of non-compliance and legal penalties.
6. Intelligent Contract Review: AI tools can review contracts, identifying risks, obligations, and opportunities that human reviewers might overlook. This is especially critical in commodity finance, where contracts are often complex and involve multiple jurisdictions.

By leveraging these AI-driven tools, banks can significantly reduce the complexity and costs of due diligence and make medium-sized transactions more viable. This approach not only benefits financial institutions but also ensures that global trade flows more smoothly, mitigating the disruptions often caused by the rejection of such deals.

The adoption of AI in commodity finance has the potential to reshape the industry by enhancing operational efficiency, reducing risk, and ensuring a more resilient and inclusive global trade ecosystem. As these technologies continue to evolve, the future of commodity finance will be more dynamic, data-driven, and capable of meeting the challenges of global trade in the 21st century.

?This shift is more than just about improving bottom lines—it’s about creating a stable, sustainable framework that benefits economies and communities worldwide.

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Real-World Applications

?Real-world AI applications such as Efides.io and TradeQraft in commodity finance are already transforming the industry, with banks and financial institutions leveraging advanced technologies to revolutionise their operations, risk management, and decision-making processes. Efides is enhancing creditworthiness assessments by automating document processing, data validation and risk assessment processes providing more nuanced and reliable credit risk evaluations. Simultaneously, Efideses red flags enable real-time fraud detection, machine learning?is identifying unusual patterns in transaction data, flagging document discrepancies, and recognising suspicious behaviour across multiple transactions. On the other hand, TradeQraft has developed a methodology to assess transactional rating model, financial rating model and client KYC rating models with the help of AI to standardise them all and put them on a scale. Both Efides and TradeQraft are also focusing on ESG data analysis in light of upcoming regulations, allowing a higher level of transparency for commodity traders and banks and preventing greenwashing.

?Efides is launching proprietary IP and AI-based root cause analysis to gain deeper insights into financial behaviours like revenue growth, enabling more accurate predictive models for future performance. The company is also transforming market risk evaluation through real-time analysis of global news and social media, price movement predictions, and market scenario simulations. Additionally, Efides employs AI for regulatory compliance, complex contract analysis, and customer behaviour assessment. These innovations are not just enhancing existing processes but fundamentally reshaping risk assessment, transaction monitoring, and decision-making in commodity finance. Importantly, Efides is designed to support rather than replace bank trade finance teams, allowing professionals to shift their focus from data collection to more valuable risk assessment tasks and scale up the business. As AI technology advances, we anticipate even more sophisticated applications that will continue to revolutionise commodity finance and trade, with Efides at the forefront of this transformation.

?Finally, TradeQraft has elements of innovation in order to build, transform and validate existing data to fit into needs of lenders and eliminate various cumbersome and inaccurate assessment workflows within institutional financiers’ organisations.

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Facts and Figures

?General trends and insights related to the commodity finance sector sheds lights to interesting facts and figures. ?Some relevant statistics and trends that have been observed:

1. Market Size: The global commodity finance market is expected to grow at a CAGR (compound annual growth rate) of about 5% from 2021 to 2028.
2. Commodity Price Volatility: According to the World Bank, commodity prices can fluctuate significantly, with increases or decreases of up to 20% occurring within a single year, depending on market conditions.
3. Counterparty Risk: A report by McKinsey indicated that about 60% of financial institutions see counterparty risk as a significant challenge in commodity trading.
4. Adoption of AI: A survey conducted by Deloitte revealed that around 83% of executives believe that AI technologies will be critical for improving decision-making processes in their organisations over the next five years.
5. Compliance Costs: According to Thomson Reuters, the average cost of compliance for financial institutions is around USD 4 million annually among thousands of market players, highlighting the need for automation and efficiency in due diligence processes.
6. Fraud Detection: It's estimated that global financial fraud costs businesses around USD 5 trillion each year, prompting a greater reliance on AI-driven solutions for prevention and detection.
7. Sustainability Impact: A survey by PwC indicated that over 80% of consumers are more likely to support companies committed to sustainable practices, affecting investment decisions in the commodity sector.

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The Road Ahead

The road ahead for AI in commodity finance promises a landscape of unprecedented sophistication and efficiency. As AI technology continues to evolve, we can anticipate groundbreaking advancements that will reshape the industry. The integration of AI with other technologies such as IoT sensors and blockchain holds immense potential for enhancing transparency and security in transactions, enabling real-time tracking of commodities and providing real-time ESG data. Future AI systems may suggest optimal financing structures based on specific transaction characteristics, considering historical performance, market conditions, and risk profiles. We are seeing the emergence of semi-autonomous risk management systems, advancements in natural language processing for better document analysis, and the integration of quantum computing for more complex financial modeling.

?AI could also enable highly personalised financial products, enhance geopolitical risk assessment, and play a crucial role in promoting sustainable practices in commodity finance. However, this evolution will bring challenges, including regulatory hurdles and ethical considerations. The successful implementation of these advanced AI applications will require ongoing collaboration between technologists, finance professionals, regulators, and policymakers. Ultimately, the future of AI in commodity finance is not just about technological advancement; it's about creating a more resilient, inclusive, and sustainable global trade ecosystem.

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Conclusion

AI-powered due diligence is not just a futuristic concept; it's a present reality that's rapidly transforming commodity finance. By addressing the longstanding challenges of efficiency, cost, and risk management, AI is opening up new possibilities for growth and innovation in the sector. Financial institutions that embrace this technology will likely find themselves at a significant competitive advantage, able to process more transactions with greater confidence and reduced risk.

As we move forward, the successful integration of AI in commodity finance will require a collaborative effort between technologists, finance professionals, and regulators. By working together, we can ensure that this powerful technology is used responsibly and effectively, ultimately benefiting the entire commodity finance ecosystem.

?Efides and TradeQraft believe in cooperation and mutual efforts on innovation to create efficiency in the world of innovation within the commodity finance industry.

?The future of commodity finance is here, and it's powered by AI. Are you ready to embrace this revolution?

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#CommodityFinance #AI #Innovation #RiskManagement #GlobalTrade #FinTech #Compliance #SupplyChain #MachineLearning #Technology #ESG #DigitalTransformation #Commodity #RegTech #food Dr. Ari Aaltonen Orhan Gunes Efides.io TradeQraft World Trade Organization

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