Trade finance frauds will motivate banks to adopt distributed digital ledger technologies in 2018.
By Shiv Kumar Bhasin
Trade finance by banks and other financial institutions is a vital function in international commerce, as it provides delivery and payment assurance to buyers and sellers, and it helps close the gap in trade cycle funding for these parties. The growth and sustenance of international trade market depends on easy availability and robustness of financing mechanisms. For this reason, trade finance is often described as the fuel for global commerce.
Corporate and commercial banks need to re-think their strategies in delivering trade and payment services. How do they integrate their enterprise to ensure connectivity between business processes, channels, people and technology? How do they centralise and optimise branch operations in order to prevent data silos and deliver a single customer truth? Other pain points include effort required for counterparty due diligence and contractual compliance processes.
Trade flows are increasingly digitised. In the digitisation era, financial services organisations are piloting trade finance processes using next wave of innovations, such as blockchain, to bring process efficiencies and reduce the fraud risks significantly due to its non-repudiation features.
Still a lot of legacy banks are using technologies with lot of frictions like manual interventions owing to disconnected vital systems in trade as core banking, trade finance, treasury and SWIFT payment /trade messaging systems.
First of all, before sending any trade/payment message in the SWIFT system, all front office systems must have a real-time automated interface with core banking system (CBS) for making accounting entries. Post successful accounting entry in CBS, SWIFT messaging interface should be invoked to transmit trade or payment message. And before sending such transaction in CBS, front office application should have multiple levels of authorisations (maker/checker) processes.
All SWIFT messages going from any of the banking system should have real-time messaging (persistent MQ) interface to SWIFT alliance gateway of the financial institution. All acknowledgements and responses from SWIFT alliance gateway should also be captured online by the SWIFT message invoking system. The cost of implementing these interfaces is not very high at all. Apart from mitigating fraud risks due to manual interventions, etc, it removes business process inefficiencies in trades.
Any SWIFT message repair activities must be carried through SWIFT client at the centralised processing centre. If there is a change in financial fields in this message, message should be suspended in SWIFT client.
Transaction reversal should be done in CBS and the entire life cycle from front office system should be repeated. There must be multiple levels of authorisation for making any change in SWIFT message using SWIFT client. Branches should use front office application for SWIFT processing with no SWIFT message repair capability. Similar to Nostro reconciliation of cross-border payments, trade data reconciliation among SWIFT messaging gateway, core banking system and front office systems must be carried out.
The trade finance industry has emerged as a key focus area for realising the efficiencies of blockchain technology. Blockchain has the potential to disrupt the trade landscape by making it easier to reduce disputes and frauds to provide delivery and payment certainty, enable transparency of trade asset movement, and facilitate the flow of trade receivables. The result: increased collaboration, automation and oversight in trade transactions.
There has always been a culture of competitiveness and challenges in banks working together on largescale projects or involving more than a handful of banks. There is no common platform for banks to screen transactions financed by other banks due to confidentiality concerns, which becomes a possibility that customers may capitalise on this information sharing gap to obtain financing from multiple banks using the same invoice.
Blockchain technology will change the face of banking if banks can come together around a common joint platform. Trade finance frauds will motivate banks to adopt distributed digital ledger technologies in 2018.
[“Source-economictimes.indiatimes”]
