Digitizing Guarantees – Step by Step

The USD 18 trillion trade market is projected to rebound by the end of 2021 and banks are set to witness an uptick in demand. 

As per ICC Global Survey on Trade Finance - 2020, 83% of global banks have a digitalization strategy for trade finance, and 34% plan to spend on technology solutions in the next 2-5 years.

Digital channels being the gateway for customers, online trade platforms are the most common implementation, with 55% of banks investing in digital channels. 

Investments in end-to-end trade processing - like Optical Character Recognition (OCR), Application Programming Interface (APIs), e-Bill of Lading - fade in comparison. This is highlighted because documentary trade which constitutes a significant 52% of the trade finance revenue, continues to be paper-heavy and labor-intensive, with just 8% of documentary trade processed without manual intervention. 

A digital facelift to back office processing

Pandemic highlighted the digital maturity gap between the customer and the bank back-office. While the customer channels led the digital maturity curve, the back-office lagged. The banks had not yet enabled remote working at their back office. Back-office for most banks runs on legacy systems that cannot be accessed remotely in an effective manner. 

The customers found it challenging to execute dependent branch transactions like applications for LC due to the absence of staff or no digital channels to conduct transactions digitally.

They incurred demurrage charges due to shipments stuck at port. Non-arrival of original documents and no branch staff to receive a fax and issue shipping guarantee exacerbated the problem.

Banks and their customers realize the need for end-to-end digitalization. Though business continuity and operational risk are the key drivers behind this realization, the impact on operational efficiency and, by extension, the cost cannot be overstated.

The approach could start with one product, process, or a sub-process and then extend to other products and processes. 

As an example, let’s look at the steps involved in the issuance of a bank guarantee.

1. Guarantees Text Vetting 
   • A critical step that can have legal implications for the parties involved
   • Most time-consuming activity in the guarantee issuance
   • Multi-stakeholder communication within and outside the bank to agree on the guarantee text
   • Mostly done on emails/calls
      
2. Application
   • Requires visit to the bank, paper documents, physical signatures
   • Local/Regional banks find portals cost and time prohibitive, with implementation costs ranging from USD 2 million - 5 million
   • Banks that have portals integrate it into workflow systems for manual processing
      
3. Pre-checks
   • Limit availability, Customer existence, KYC status, Guarantees text checks
   • Labor intensive checks involving multiple stakeholders – trade advisor, limit management, front-office, relationship manager
   • Back-and-forth communication on emails/calls
   • Manual hand-off to processing
      
4. Processing & Delivery
   • Manual data entry and verification
   • Print and deliver through Mail

There is an opportunity to bring in the paradigm shift in the way the guarantee is issued today. 

Technology can help bridge gaps in trade processing digitization

Adopting technologies like digital collaboration brings together multiple stakeholders on one interactive platform that expedites stakeholder agreement, cuts down the back-and-forth communication, and improves turnaround time. 

As per ICC, digital documents are finding acceptance across jurisdictions today; Electronic document exchange platforms like Bolero, with an established legal framework called Bolero Rulebook, have facilitated the parties to exchange documents securely. ICC has widespread support and pushes governments/regulatory bodies to form and amend trade documents’ digitalization.

Digital documents combined with digital signatures and trade portals reduce the time and cost associated with guarantee applications.

Transformation of pre-checks and processing steps to APIs and AI/NLP only bring down the number of manual interventions and the associated cost and result in error reduction.

Thus, straight-through processing of guarantees has definite potential to reduce the processing cost and human errors and bring down the turnaround time significantly.

The applicability of the technology tools may not be uniform across banks, products, processes, and jurisdictions. A careful, tool-driven understanding of the processes and the variants therein would help identify the inefficiencies and the applicability of a solution – it might turn out to be process reengineering without the use of technology. 

Helping you stay a step ahead 

Virtusa has decades of experience managing and transforming multi-country trade finance for some of the world’s largest banks. We have built accelerators, frameworks, and partnerships along the way. 

Leveraging our process and technology experience, we propose a “4I” approach to a hassle-free guarantee transformation. 

• Identify – Process mapping workshops and tool-based process mining to identify the current process steps
• Investigate – deep dive into each process step to understanding the variations, complexities, and inefficiencies
• Invigorate – Suggest and implement technology interventions or process changes or no changes
• Improve – Monitor the impact of interventions and fine-tune

Let’s transform guarantees, one step at a time.

References:

• ICC Global Trade Survey 2020UNCTAD – Key Statistics and Trends in International Trade 2020
• UNCTAD – Global Trade Update, May 2021
• WTO Statistics 2020