Artificial Intelligence Platforms Will Drive The Next Phase Of Trade Finance Growth

Trade finance refers to products and financial instruments used to facilitate the export and import of trade and commerce—and, thereby, the smooth conduct of business. Some of the most popular instruments in trade finance are letters of credit (LC), bank guarantees (BG), documentary collections and remittances.

Essentially, these instruments have one primary function: enabling parties to the trade to make a transaction and mitigate the associated risks related to supply and payment.

Trade finance drives the global economy. This segment will only grow in the future, notwithstanding temporary setbacks like the Covid-19 pandemic or geopolitical conflicts.

While trade finance is growing, processing trade finance-related documents pose real problems. Scrutinizing and vetting multiple documents is costly, time-consuming and error-prone. Large banks spend between $25 million and $42 million annually on risk, compliance, sanctions and anti-money laundering (AML) tasks.

Complying with the numerous regulatory standards across several countries, subsidiaries and branches is tedious. Though the advent of fintech and digitalization has solved the problem to some extent, these complexities have remained. Many countries, including G7 nations, have committed to digitalizing international trade. Customers, too, want a quick turnaround: the completion of all trade finance-related processing within the same day.

Because of digital transformation's larger acceptance across industries, banks and financing entities are looking to transform their trade finance functions. The Covid-19 pandemic saw an acceleration in adopting new-generation trade finance processing platforms. This is also due to the increase in global trade volumes across nations, multinationals, domestic companies and, in particular, the vast micro, small and medium-sized enterprises (MSMEs) that play a crucial role in global trade. A study by World Bank indicated that 65 million MSMEs were credit constrained.

Progress on these issues could be faster. Many banks and enterprises still rely on traditional tools. Even today, much documentation work in corporate banking and trade finance is done manually, which leaves it prone to errors and regulatory compliance.

Recently, innovations such as blockchain, artificial intelligence (AI), machine learning (ML), the internet of things, natural language processing (NLP) and advanced optical character recognition (OCR) have emerged in the space. These developments are a win-win for all: the banks, providers of technology and the customers.

New AI-driven trade finance solutions enable banking customers, financial institutions and enterprises to easily manage their complex documentation and stiff regulatory requirements through advanced data processing and analytics capabilities in a fully secured environment. The solutions scan, process, classify and extract structured and unstructured data from documents in various file formats. Modern trade finance processing products can help users improve their efficiency by reducing manual efforts.

These solutions enable bankers to scrutinize documents used in bank guarantees, letters of credit, remittances, collections and many other documents. New platforms analyze vast volumes of data in real time. Such AI-driven technologies also help meet the environment, social and governance (ESG) requirements. They can help reduce the use of natural resources such as paper, computing power and electricity.

The success of any technology or strategy is in its effective execution. Institutions should look for a solution provider with good domain expertise and technological prowess. The provider should already assist multiple global banks, institutions and enterprises with proven technology in the domain, which can help shorten the learning curve when it comes to implementation. The technology could be a one-time investment, along with annual support and licenses, or it could work as a subscription-based model.

During implementation, organizations must remember that AI solutions are not a destination. They're a journey. AI continues to improve over time with more and more data. At the start, if your data is limited, the accuracy of the AI solutions could also be limited. In such a case, you need to feed it more and more data and allow it to grow over time. This may not be possible for organizations with very little data to work with.

The trade finance software market is estimated to grow to around $3 billion , so it's not going anywhere any time soon. Now is the time for organizations to start considering trade finance software and vetting solutions that can help them digitalize their processes and grow alongside the industry.

(This article of mine was originally published in Forbes as a Forbes Technology Council post)