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The business challenge of fintech in trade finance

23 November, 2022Ouida Taaffe
Shipping containers from above

Technology is gaining ground in trade finance, particularly to help with compliance. It’s reducing costs and saving banks and businesses money. But making the most of it requires a change in mindset, reports Ouida Taaffe.

After the global financial crisis of 2007/08, the regulatory demands on banks hit a sharp upward curve.

A European Commission study found compliance costs in its sample rose from an average 0.63% of bank operating costs in 2009, to 2.6% in 2019.

“Some banks had to increase the number of staff in their compliance teams by massive amounts,” says Marc J Smith, the Founder and Director of Conpend.

Conpend uses artificial intelligence (AI) to automate many of the manual tasks in documentary trade finance, loan documentation and know-your-customer compliance (KYC). “We thought there had to be a better way.”

Smith says the firm has “a vision of straight-through processing for trade”.

“We’ve seen an evolution on banks’ needs. At first it was just about being compliant. That’s still the cornerstone, but discussions of cost are dominant and that means cutting processing times.”

How technology can save money

Cost savings can be significant. Smith says the technology enabled one firm to handle 40% more business without hiring any new staff and that some have seen savings of 30%.

“The caveat is that we’re just an enabler. The banks need to organise themselves to use the technology, which is a business change problem,” says Smith.

Banks find that even well-trained staff can have surprising habits.

The benefits banks ultimately get from the technology, Smith says, come down to managing the business change. By extension, the biggest technology challenge for Conpend, says CEO Torben Sauer, “has been building an intuitive user interface”.

“Using the system means a change in the way people think,” says Sauer. “The system can find much more than a human being can. The current mindset can be to check all of those hundreds of things, regardless of whether the system says they are OK.”

Smith says making the most of the software is like using cruise control on a car. It reduces cognitive load, but the driver has to be willing to accept it.

Sanctions and compliance

But if banks are going to rely on the technology to stay compliant, its output needs to reflect the latest regulations and sanctions. How does Conpend stay up to date?

“We subscribe to a constant stream of push notifications,” says Smith. “A lot is manually screened for relevance and the turnaround to amending the ‘golden copy’ is very short.”

Banks can avoid being over compliant if they want, Sauer says, though there’s almost a knee-jerk ‘we must be compliant’ reaction. The technology can also take banks beyond the essentials of compliance.

“We’re able to give customers a very powerful way to gain insight into things they may not have known how to look for,” Sauer says.

In the case of sanctions against Russia, for example, which came out of the blue, clients could avoid just searching for ‘Russia’. They had ready-made scripts to help them and the technology used artificial intelligence (AI), machine learning (ML) and deep learning to unearth more than a human checker could.

To train the AI and ML, the system uses federated learning. That allows banks that use that option to update their AI and ML models without handing over data, while still benefitting from the greater depth of a collaborative approach.

Trade and sustainability

Regulations are, of course, not a fixed target and sustainable trade is increasingly on the wish list of regulators and legislators.

Germany, for example, adopted the Supply Chain Due Diligence Act (SDDA) in 2021, which comes with potential fines of up to 2% of annual turnover. France introduced a Corporate Duty of Vigilance Law (DoV) in 2017. It doesn’t come with fines, but it does allow “interested parties”, such as NGOs, to launch civil claims for damages.

What will that push for sustainable supply chains mean for firms like Conpend?

Conpend’s customers increasingly include corporates, and some banks offer aspects of the technology as a service to clients.

“We’re becoming more involved in conversations around sustainability,” says Smith. “Some customers are heavily involved in it.”