How Technology is Reducing Risk and Compliance Costs Associated...

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How Technology is Reducing Risk and Compliance Costs Associated with Trade Finance

CFO Tech Outlook | Tuesday, April 26, 2022

Banks are critical in supporting international trade by giving their clientele a diverse range of services.

FREMONT, CA: Supply chain finance entails distributing short-term financing to improve the buyer's and seller's working capital. Trade finance entails lending money to assist commodity trading or collaborating with export credit bureaus to provide riskier financing. In both circumstances, these services are subject to many compliance assessments.

As a result, many importers and exporters rely on these financial intermediaries to mitigate risk.

However, with growing uncertainty surrounding trading ties in recent years due to rising tariffs and geopolitical and financial volatility, managing trade financing has become substantially more difficult.

Additionally, rising costs of providing trade credit, combined with increased regulatory scrutiny, are weighing on banks' prospects for expansion in trade finance.

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In search of efficiency

Throughout an average trade transaction, several compliance checks are performed, each of which incurs costs. On average, a large trade finance bank spends between US$25 million and US$42 million per year on risk, compliance, sanctions, and anti-money laundering (AML) activities — all without boosting its business.

These jobs are made possible by the continuous usage of paper to record millions of transactions. Although most banks recognize that utilizing paper is inefficient and time-consuming, the industry's transition to automation has been gradual, with few viable options appropriately deployed.

Additionally, the highly complicated and spread nature of trade finance is highly vulnerable to financial crime. Each year, an estimated US$1 trillion in financial crime proceeds pass through the trade channels of the US$9.1 trillion business. This not only jeopardizes the global economy but also results in financial institutions suffering financial and reputational damage.

To solve these critical issues, trade finance banks must alter their manual compliance processes and existing detection mechanisms for combating illicit trade finance activity. Here, technology plays a crucial role.

Increased automation, in conjunction with artificial intelligence (AI) and machine learning (ML), can assist trade finance in lowering overall operational costs and enhancing the client experience.

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