Banks Building global highway for digital trade

GOVERNMENTS led by those in Singapore and Hong Kong are helping drive widespread support for a global move towards digital trade. And that will help, because it is not technology that has been slowing progress, says Michael Lim, ANZ’s Head of Trade and Supply Chain. Agreements on the commercial issues of digital trade need to be forged across all participants in the supply chain process.
In future trade, Lim sees distributed ledger technology (DLT), a key component of Blockchain, helping reduce fraud and creating  new efficiencies, with artificial intelligence playing an increasing role in the process . . .

THE BANKING INDUSTRY is seeing “the greatest momentum” yet to embrace technology and move away from paper-based transactions.
Michael Lim, Head of Trade & Supply Chain with ANZ Bank, believes proactive regulators, backed by their governments — in particular, those of Singapore and Hong Kong ­— are contributing to this momentum.
“As part of its national goal to become a fintech hub,” says Lim, “the Singapore Government is supporting creation of a digital trade finance platform to provide a single window for Government services in trade.” (see page 8)
The Hong Kong Monetary Authority (HKMA), meanwhile, has developed a distributed ledger technology proof of concept (prototype) for open account trade finance. (see page 8)
In Australia, the initiative is coming from the private sector. Lim says the Export Council of Australia, banks and large industry players are behind a push to digitalise financial services.
With the momentum that is now under way, Lim believes it is possible that, in three to five years, there will be “material digitalised trade flows”. “Paper will still exist,” he told ATI, “but more transactions will migrate to digital platforms.”
And it won’t take another 20 years, he laughs, referring to the slow take-up of electronic transactions in trade.
Banks, Lim says, have been talking about the dematerialisation of paper for at least 20 years. He names bills of lading as one example ­— the majority of transactions in bills of lading today are still paper-based.
Globally, the industry has electronic systems, such as the Bolero Multi-Bank Trade Finance application, or the SWIFT Trade Services Utility (TSU). “These are true forms of electronic trade,” says Lim. “(But) they haven’t generated scale.
“And it hasn’t been the technology that is holding back digitisation of trade. It is more the commercial issues of getting all participants in the transaction aligned.
“If you think about the number of parties involved in a trade transaction, it involves Government departments like customs, freight forwarders, shippers, inspection agents, and, finally, buyers and sellers across different countries.
“Getting all of them focussed on agreeing a standard has been the biggest challenge in eliminating paper.”
So the focus has been to look for manageable projects. ANZ has identified the bank guarantee as one product that lends itself to digitalisation.
“We chose the bank guarantees project because it genuinely solves a problem for our customers,” says Lim.
“Secondly, there are a smaller number of players involved — the landlord, the tenant and the bank.”
The property sector is one that has been looking for an alternative to paper guarantees, Lim says.
Presently, large landlords with thousands of tenants are faced with a mountain of paper guarantees. To ensure that these paper guarantees are up-to-date, landlords (and tenants) have to keep up with changes in leasing terms -- not to even mention problems of storage, loss or misplacement of paper instruments.
Enter a solution offered by distributed ledger, or blockchain, as it is more commonly known.  
Blockchain  technology increases efficiency firstly by removing the physical problem of storage and updating of paper guarantees.
With blockchain, Lim says, different parties contribute information which is stored in “blocks”.  Once a guarantee is issued, the bank, the landlord and the tenant each contribute information to the block.
In more technical language, the nature of blockchain allows encryption of information which cannot be easily changed or falsified.  
Once shared on the ledger, this information becomes the single source of truth for the existence and status of a contract between the parties.
In April this year, ANZ, Westpac, IBM, and Scentre Group (Australia’s largest shopping centre owner), co-operated to move bank guarantees to distributed ledger.
“We all knew that to be successful it had to be a multibank solution,” says Lim. “Customers did not want an ANZ solution, they wanted an industry solution. So we asked Westpac to partner with us and work on it collectively.”
Ultimately, he says, the system will need to be adopted industry-wide. Says Lim: “This can’t be an ANZ or Westpac product. It has got to be an industry initiative, and, to do that, we have got to have the buy-in and involvement of the broader industry.”
For now, the priority is to ensure that the working group can take the project through to a commercial pilot with the inclusion of additional customers and banks. When there is “enough scale and weight”, it will hopefully become an industry initiative.
The end game is to totally do away with paper guarantees. But Lim says it will take several stages to get there.
“When we get this up and running for the property sector, it will be transferrable to other sectors,” he told ATI. “For example, we can take the product to Government departments.  
“Think of all the guarantees, tenders, environmental bonds and financial and performance guarantees that are issued to Government.”
The value of the distributed ledger, Lim says, is broad adoption. “The more extensively it is used, and the bigger the network, the more valuable it is for everyone.”
The retail sector is also investigating use of  distributed ledger coupled with the internet of things (IoT).The benefit, says Lim, is that, at any time, a retailer can see where the goods are, whether in the warehouse, on a truck, and so on.  
Information is added to the block at every point of the supply chain and that information is “confirmed” by the next party in the supply chain.
“Let’s say, a retailer finds that strawberries are going bad when they hit the shelves,” says Lim.
“The retailer can see all the data from the supplier, trucking company, the distribution centre, the warehouse — allowing the supermarket to track down the problem.”
The point is, says Lim, that with distributed ledger, the retailer can see exactly where the delay is in the supply chain.
With food security at front of mind, distributed ledger technology has the potential to give total visibility of the supply chain, and, with it, an ability to make decisions, to take actions, and to identify blockages or inefficiencies.
“From a consumer perspective, there is interest in using distributed ledger technology to monitor the provenance of the underlying goods.”
Ultimately, he says, the object is to adopt distributed ledger technology to global trade transactions.
Lim envisages that a start could be made by segmenting markets, like Singapore-Australia trade, and focussing on a specific sector with specific players. “In doing that”, he says, “you will have manageable projects supported by proactive regulators and large motivated customers.”
In trade finance, he says, the adoption of distributed ledger stops fraud, like double invoicing and multiple claims, while at the same time creating efficiencies for customers by eliminating paper.
“From a bank’s perspective, it makes it more secure for us to lend money. We can look at the supply chain, see where the goods are, who owns the goods, their value, the titles to those goods and when those titles are shifted. It gives a lot of transparency to a transaction.”
On the issue of security, Lim says a strength of distributed ledger is the cross-confirmation of information by the chain of users within a particular block.
While distributed ledger is one technology that will transform trade, within the banks themselves the rise of robotic process automation (RPA) and machine learning have relieved employees of the tedium of repetitive data entry work, he says.
ANZ teams at its Processing Hub in Bangalore, India, have written software programmes to automate more than 100 processes.
“We are now working with a number of external suppliers to test their machine-learning algorithms (artificial intelligence in layman’s language),” he says.
“We have brought in a few different firms and have given them a different process each to test their software.
“We can use these “learning” algorithms for certain tasks that may require simple human judgment – for example, where we have a bundle of papers which require us to identify the parties, ship, addresses and various items, to screen for money laundering and sanctions.
“We have been testing a solution that can read a non-standard PDF document to identify the information and populate our systems.”
Lim says the machine is faster and will potentially reduce turnaround times for customers.
“This is a simple example of machine learning, which can be used in much more sophisticated ways, such as working with data analytics to provide customer insights or identify suspicious transactions and financial crime.”
Effectively, says Lim, this is about supplementing internal bank data with external data — for example, commodity or exchange prices or public information about company ownership.
He explains: “AI technology enables the systems to crunch all that data and identify relationships that may provide business insights for ourselves and our customers.
“It also means, from a financial crime perspective, that AI can be used to identify hidden networks, transfer pricing anomalies between entities, and suspect trade transactions.”
Lim believes some global banks are well advanced in using AI.  “We are well into executing on a project with very promising results, and we are preparing to take it to commercialisation in certain aspects of our business,” he says.