The Future of Trade Finance and Cross Border Payments

By Kenan Maciel, Director of Strategy, Lab49

FinTech has transformed domestic banking and payments. Innovations like mobile banking, instant transfers, and digital wallets have enhanced the consumer banking experience.

However, in commercial banking, areas such as trade finance and cross-border payments lag, marred by inefficiencies poised for disruption. Embracing digitisation offers a clear route toward a more streamlined experience.

Manual processes and Regulatory complexity

Despite contributing an estimated $32 trillion in global economic output, trade finance still heavily relies on manual, paper-based documentation such as letters of credit and bills of lading. This outdated approach leads to inefficiencies, delays, and increased costs. Businesses are often left grappling with the time-consuming task of verifying and processing these documents, which slows down transactions and negatively impacts productivity.

Regulatory complexities add further challenges to cross-border payments involving different currencies. Most domestic payment systems are disconnected, so banks communicate with partner institutions to credit accounts in one jurisdiction and then debit the same amount in the other. Several correspondent banks are involved in the chain for less common currency transfers, and each intermediary stage involves more financial crime screening processes, adding time and cost.

Overcoming challenges through innovation

Digitisation offers significant transformative potential for a more efficient commercial banking system. For example, linking domestic faster payment systems is one avenue for innovation. These systems, which enable near-instantaneous transfers within domestic borders, can be connected to facilitate quicker cross-border transactions. Singapore has linked its PayNow system with India’s Unified Payments Interface (UPI) and Thailand’s PromptPay system. As a result, transfers take just minutes rather than days using just a mobile number.

While these linkages have had a positive impact, they have been mostly bilateral. Overcoming the hurdles of linking multiple systems—such as coordinating various stakeholders and standardising technical protocols—requires a common framework, like ISO 20022.

Under ISO 20022, financial institutions must change the payment messages they send and receive from the legacy MT (message type) format to the new MX (message type XML) format. This addresses a critical issue also relevant for trade finance: moving away from unstructured data fields, where the lack of standardisation meant more manual processes, rejected messages, investigations and delayed payments.

Movements to better data standards are increasingly necessary due to new laws, such as the SEPA Instant Payments Regulation, which will make Verification of Payee (VoP) mandatory for all EU banks. VoP requires that banks check the name of the payee provided by the payer against the name registered on the payee’s bank account before processing a transaction. This ensures that payments are accurately directed to the intended recipient, reducing the risk of fraud and errors in electronic payments.

The future banking landscape

What’s more, consistency means this data can be used for every kind of financial business transaction, including emerging technology like Central Bank Digital Currencies (CBDCs). CBDCs are a fully digital representation of national currencies, and there are several ongoing initiatives by the IMF, BIS and SWIFT to design an interoperable system to take advantage of the greater efficiency, reduced costs, and enhanced security offered by conducting cross-border payments on the blockchain or other distributed ledger technology. The failure of platforms like Contour, Marco Polo Network, and we.trade to sustain themselves despite initial promise underscores the importance of interoperability to take advantage of these evolving technologies.

The challenges in trade finance and cross-border payments offer significant opportunities to continue the success of FinTech in domestic banking and payments. By embracing technological innovations such as linked faster payment systems, standardised digital data, ISO 20022 compliant systems, VoP, and DLT, the financial industry can create a more efficient, transparent, and inclusive system.

As global digital literacy and supply chains continue to expand, it’s crucial for banks seeking to maintain competitiveness to stay ahead of these shifts and form strategic partnerships with FinTech firms. By developing more flexible business models and leveraging the expertise of FinTech specialists, these institutions can better navigate the changing financial landscape and capitalise on new opportunities. Given the advances in technology and standardisation of messaging, the only remaining barrier will be the harmonisation of regulatory regimes.