AI transformation of the global trade ecosystem is underway
Ask the public about Artificial Intelligence (AI) and its application in our lives and some people immediately jump to dystopian, doomsday scenarios where robots have taken over the world. While this has made a good plot for Hollywood, the reality is rather different. What many don't realise is that AI and its subset, machine learning, already forms a central part of our day-to-day lives.
Those new products that Amazon suggested you add to your shopping cart? AI. That gripping TV series you watched on Netflix via an automated recommendation? AI. That self-driving Tesla car you crave to take for a spin (or rather, takes you for a spin)? Yes, you guessed it – its AI!
Today, there’s not a single industry that is not being re-shaped by technology in one form or another. Until recently, however, there was one noteworthy exception to this: global trade. Fortunately, that too is slowly changing.
The financial mechanism that underpins global trade – trade finance – is a centuries-old industry that remains largely paper-based and reliant on manual processes. This USD15 trillion a year industry is now being influenced by a new wave of technological innovation, including AI.
The role of AI in trade finance
AI generally refers to the use of computers and computer-aided systems to help people make decisions or make decisions for them. It usually relies on large volumes of data or sophisticated models to help understand the best ways to make sense of all the information and draw intelligence.
In trade finance, AI is particularly helpful in analysing quantitative data, as there are usually many repetitive small transactions. The nature of trade finance means that there is a lot of non-traditional data at our disposal. This means that when banks and other trade finance providers need to assess the risks of funding a transaction between a business and its counterparty, AI-driven models can be a very efficient tool for data analysis and reveal intelligence and risks.
Crucially, this goes far beyond the traditional credit scoring process, which is often outdated and remains reliant on a small number of historical accounting entries – a major barrier and prevents many small companies from accessing trade finance. In fact, the current short
fall between what banks can lend and what businesses need was around USD1.5 trillion even before the COVID-19 pandemic, 10% of global trading activity!
Transforming the credit scoring process for SMEs
AI can help to tackle this shortfall by creating more accurate credit scoring models that offer deeper levels of intelligence to inform a trade finance provider’s decision. This can include analysing a company’s payment history, measuring the risks of funding a specific transaction when dealing with different counterparties, identifying supply chain risks and benchmarking them against their peer group.
Trade finance providers can use this information to communicate more effectively with their SME clients. This creates more trust between them and establishes better business relationships. For SMEs, this opens up trade finance access for companies that would otherwise not have that access and helps to reduce the trade finance gap.
Tech will continue to shape the future of trade
The adoption of AI is just one of a series of technological advancements that will transform the global trade ecosystem over the next decade. From blockchain-based systems to real-time anti-money laundering and fraud alerts, this industry is in the early stages of a radical transformation.
The timing is not coincidental; these advances are largely driven by a new generation of fintechs that have emerged in recent years. For example, we have seen the industry work together to create a new infrastructure to help banks distribute trade finance assets to other investors in a transparent and standardised format.
The creation of the infrastructure is only possible due to improvements in modern technology and integration across the trade ecosystem in co-operation with banks, insurers and other long-standing industry participants.
That is industry-wide collaboration at its best. Together, they are re-shaping global trade as we know it.
By Michael Boguslavsky, Head of AI at Tradeteq