I recall the first time I heard blockchain discussed in the context of transaction banking. It was at an event held in a converted bank vault at the National Bank of Canada. This venue was apropos, as it had become a meeting space due to decreased demand for physical currency deposits.
A speaker described the use of Bitcoin to purchase goods in Europe without going through a bank for the transaction. The real value, he said, was not the use of Bitcoin as a currency, but rather the potential use of blockchain as a de-centralized mechanism for transaction settlement.
This same conversation played out across the banking spectrum, and we saw a swarm of new banking technologies emerge, along with the formation of the blockchain technology consortium, R3—all dedicated to the advancement of distributed ledger technology (DLT). Overnight, it felt like the zeitgeist of transaction banking, including trade and payments, had suddenly changed. Previously, the focus of almost every banking conference had been on regulatory and compliance issues; now the focus was suddenly on product and technology innovation.
Five years have passed and while DLT held the initial spotlight, other technologies gained traction, including intelligent process automation, machine learning, artificial intelligence, and natural language processing. We use these technologies now to manage physical documents and automate processes. End-to-end document exchange solutions, particularly those that include electronic bills of lading, have emerged to force a digitization-first pathway for trade. Consortia have been formed related to traditional trade, supply chain finance, commodity finance and asset distribution.
With all of these advancements and opportunities, where are we today? How far along the path are banks in implementing digitization solutions, and what are they planning to do in the near and long term? CGI and BAFT conducted a survey of more than 200 financial institutions to assess their current focus areas and progress.
In this blog, I address the current priorities and challenges of transaction banks, along with forces shaping their future.
Driving growth and efficiencies in the face of compliance and technology challenges
Survey results show that traditional trade is still a robust revenue producer driving 63.7% of volumes for banks versus 13.7% in structured trade and 19.8% in supply chain finance. In the next five years, banks will likely increase their supply chain finance business to just more than 30% of their volumes. This shift reflects what has been going on within trade banks for some time; and the flat growth in SWIFT traditional trade volumes supports it.
The top reported challenges in achieving this transition to supply chain finance growth relate to regulatory compliance, legal mandates and technology investment. Given the regulatory and compliance environment in recent decades, this is not surprising. With the correct strategic choices and program management, banks can control the risks related to these items.
In terms of important technology investments, intelligent process automation and APIs top the list. Banks have been keen to increase operational efficiency for some time. The opportunities of intelligent process automation, when combined with a global pandemic that makes digitization an imperative, drive new technologies. These technologies, in turn, support straight-through processing while augmenting the amount of work a single operations employee can do.
While internal efficiency is critical, it also is impossible to ignore the rapidly changing landscape of external channels to which banks must connect. Part of this relates to their own corporate customer touchpoints (e.g., mobile, corporate portal, trade portal, etc.), but it also reflects third-party platforms (e.g., B2B networks, bank consortia), along with FinTech supply chain finance providers.
With the sheer volume of burgeoning channels, strategies to “be where your customer needs you to be” require flexible and agile integration. APIs provide the necessary strategy and methodology to orchestrate this.
How innovation, collaboration and FinTechs are shaping the industry
Banks have clearly embraced innovation, with 71.3% of survey respondents stating they are more innovative today than they were 12 months ago. Interestingly, the biggest inhibitors to innovation are resource and budget constraints. This is where opportunities with FinTechs become critical. FinTechs have more flexibility to integrate innovation into their offerings and can help banks deliver value back to corporate customers.
Survey results highlight the importance of FinTech collaboration, with 34.9% of respondents saying is it “Very Important,” while 52% say engagement is “Somewhat Important.” Banks themselves appear to be driving this collaboration rather than their corporate customers, with only 40.9% of banks reporting increased demand to work with FinTechs from their customers. Unsurprisingly, the FinTechs currently in use tend to be in the supply chain finance or collaboration space. In terms of satisfaction with FinTech partners, most respondents (53.1%) report a score of 3 on a scale of 1 (Lowest) to 5 (Highest).
The largest number of respondents said they actively participate in the Trade Information Network or plan to join it. Respondents also indicate they actively participate in Marco Polo, we.trade, Contour, and Komgo. It will be of interest to track participation in these networks as they move to full-scale production. Will the market support this many networks based on the value each delivers, or will we see a narrower set of platforms as the most powerful use cases rise to the top?
The global pandemic has had a profound impact on digitization efforts, with 83.5% of survey respondents indicating an acceleration of these initiatives. In particular, banks have embraced e-signature enhancements, with 37.4% accelerating them.
Straight-through processing also is accelerating, followed closely by electronic bills of lading and intelligent process automation initiatives. These initiatives align with the emphasis on operational efficiency in the wake of the pandemic, particularly with respect to processes that were impossible to perform in a remote environment.
What lies ahead considering this data? First, new networks and consortia will continue to play an important role in how banks engage with their corporate customers. It is imperative that banks strategically identify channels that are important to customers and integrate systems appropriately to deliver a seamless customer experience. To make this change, an API architecture that can shift based on changing priorities is required. This will allow banks to grow their supply chain finance business in an increasingly complex world, whether the network they interact with is blockchain-based or based on a more traditional database structure.
While new networks and business growth are both important, the global pandemic and current economic environment have placed a clear emphasis on efficiency. Banks should consider reviewing their internal processes and integrate automation into existing workflows to achieve the straight-through processing they need.