Rethinking Trade Finance Digitisation


As the use of digital technology becomes more common in the trade finance industry, banks and corporations are reassessing their priorities for implementing new technology. Contour, a trade finance network that aims to simplify complex trade finance processes and promote paperless trade, is leading the discussion.

Since its launch in 2020, Contour has attracted over 130 members. The company, which is owned by banks and uses blockchain technology, connects corporations with financial institutions and trading partners on a decentralized network. Its primary goal has been to digitize the letter of credit process.

In this Industry Perspective, Joshua Kroeker, Chief Product Officer at Contour, explains how the digitization of trade finance is evolving and what the industry should focus on to achieve sustainable growth.

Is trade finance digitization the ultimate goal for the industry?

According to Joshua Kroeker, Chief Product Officer at Contour, the excitement surrounding new technologies like blockchain a few years ago may have overshadowed the bigger picture of what the industry wanted to achieve. Now, there is a growing need to understand the end goal of technology adoption.

Kroeker identifies three possible categories of goals that can guide the adoption of technology. The first is cost reduction, which involves using technology to remove time and friction from transactions and streamline manual processes. The second is improving compliance and risk procedures through greater transparency and visibility. The third is promoting growth in the trade finance industry by reducing barriers to entry and including smaller businesses in emerging markets.

While any one solution can contribute to partial improvements in all three categories, Kroeker stresses the importance of having a primary goal to remain focused. The goal should be aligned with the organization's broader objectives and promote sustainable growth in the industry.

How is Contour approaching digitization in 2023?

According to Joshua Kroeker, Chief Product Officer at Contour, the company's primary focus is on promoting sustainable growth in trade finance. Specifically, Contour aims to reduce the cost of trade finance so that banks can support a wider range of customers, from multinational corporations to small and medium-sized enterprises (SMEs). Supporting emerging markets and SMEs is crucial, as these areas are expected to drive significant growth in the industry.

To achieve this goal, Contour is working on creating a community of banks that are committed to growing their business in emerging markets and supporting SMEs. The company is also exploring the possibility of risk distribution partnerships to make trade with emerging markets easier.

The letter of credit is an important product for Contour, as it provides confidence and risk mitigation in situations where one of the parties involved may not have a global reputation or is in a new relationship. Therefore, Contour is focused on simplifying and improving the letter of credit product, with plans to eventually expand to other areas of trade finance.

Overall, the company's objective is to make trade finance more accessible and affordable for a wider range of customers while promoting sustainable growth in the industry.

How will these priorities contribute to achieving sustainable growth in the trade finance industry?

Kroeker explains that there is no single solution that can address all digitisation goals in the complex trade finance industry. Rather, the industry needs to take a holistic approach and identify the combination of solutions and processes required to achieve sustainable growth. This entails integrating new systems and processes into existing ones gradually over time. Kroeker warns against waiting for a perfect solution, as this will result in the proliferation of small digital platforms instead of a global solution with the scale needed to deliver value propositions. The trade finance solution needs scale before it can start to deliver value propositions.

Regarding the best practices for banks, Kroeker advises them to consider their goals, the importance of letters of credit, and how they can enhance their business proposition through digitisation. He emphasizes that Contour is working with banks to understand how their solution can enhance their proposition at scale, not just with a few corporate clients. It is a mutual journey that must be taken together.

In order to maximize the benefits of being on Contour's network, what are the next steps after a bank joins?

Kroeker suggests that banks need to activate their membership by offering this new digital proposition to their corporate clients. One option is to onboard their customers directly to Contour without the clients needing to separately contract with Contour. The second option is to use more traditional referrals, email invites, and other more passive engagement solutions. Kroeker's preference is the former as it simplifies the onboarding process.

The second step is to determine how corporate clients will interact with Contour. Banks need to decide whether to integrate the offering into an existing corporate channel or set it up as a completely standalone solution. Contour is happy to support either of these options, but it's recommended that banks plan how a new solution can be integrated, whether through APIs or a simple single-sign-on.

The third step is setting goals. Banks should set internal KPIs to maintain focus within the organization over a longer period. This can deliver lasting improvements to their business beyond the celebration of the first transaction or joining announcement.

How important is interoperability for banks, and how does Contour fit into this picture?

According to Kroeker, interoperability is crucial, but it needs to be defined properly. He defines it as the seamless and efficient flow of data between multiple solutions. Although many banks and corporates believe that interoperability is a problem for technology platforms to solve, Kroeker argues that it is the responsibility of individual banks and corporations to drive it.

For instance, if banks want to join multiple digital platforms such as an electronic bill of lading platform, a trade finance network, and another platform for reducing fraud risk, they need to build integrations to all three systems to ensure data flows seamlessly into and out of their internal systems. To achieve this, many banks are investing in middle layers of technology to reduce costs and connect their internal systems to external parties. However, this takes time and investment.

The next phase of interoperability can only occur once the first step is achieved, and that is between multiple external participants themselves. In this phase, a transaction can flow from one external platform to an internal platform and then some of the data back out to another external platform. To achieve this level of interoperability, common data and identity standards like the legal entity identifier are essential. Contour prioritizes these standards and believes that by adopting common standards in data, process, and identity, the industry can achieve seamless and efficient data flow across the trade ecosystem. This will bring about enormous benefits, but it requires collaboration and investment.

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