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Insuring Global Trade and Investment

Commodity Finance: Adding Value in the Digital Era

Commodity finance is in a phase of major transition, driven by six mega-trends:

    • The shift to a circular economy, impacting the appetite for commodities.
    • Re-fragmentation of trade, creating new risks, whether political, regulatory or operational (fraud-related).
    • Reduced appetite from many banking players to invest in the business (particularly in terms of operational risk management).
    • The creation of consortia, led by banks or by major commodity traders, leveraging new technologies (blockchain in particular) to solve complexity/transparency/cost issues.
    • Consolidation of services under a single service platform to facilitate trade, including trading houses, financial institutions, analytics software providers and back-end technology services.
    • Leapfrog-style innovation in existing business processes through introduction of disruptive, emerging technologies such as distributed ledgers/blockchain and blockchain as a service (BaaS).

In this context, digitalizing commodity finance can bring value in multiple ways, including improved cost efficiency, new business growth, and enhanced risk control.

Leveraging the rule of thumb of Pierre Nanterme, the Accenture CEO who sadly left us last year, I believe that digital can have three major impacts on commodity finance. Pierre’s rule was to invest 60% of his efforts and budget in transforming a business for efficiency - to generate budget to invest in growth - 25% of his effort in growing existing businesses, and 15% in growing new businesses.

How would that apply to commodity finance?

  1. Regarding cost efficiency, we are now in the second phase of digitization. While the first phase focused on process efficiency - through robotic process automation (RPA) and optical character recognition (OCR) in particular - the second phase leverages data analytics and AI (and AI-enhanced RPA). A third phase is now emerging, leveraging blockchain to streamline the middle and back-office and reinvent their role, refocusing either towards customer care and/or marketing or towards risk management.
  2. Regarding existing business growth, I am convinced that digitization will offer banks the opportunity to expand their relationships with new players in the commodity market, by refining their understanding of their needs as well as their risk profile. Since 2018, banks and commodity finance players have been investing in expanding their outreach, either individually through partnerships or through the creation of holistic platforms.  The value in expanding relationships to standardize information exchange among formerly siloed entities is clear. Building a trusted network reduces risk and overhead.
  3. A good example of such a platform is Komgo, which targets industry challenges such as Know Your Customer (KYC) discrepancies and the creation of digital letters of credit. Such platforms help interoperability between banks and other players along the entire value chain.
  4. Finally, in a world of open banking, digitization will facilitate the banks’ shift from a vertical product-driven relationship to a platform play in the commodity trade ecosystem.  Transformation to a horizontal platform play has both cost reduction and revenue impacts for banks and other industry players. The first products launched by commodity trade ecosystems have focused exclusively on cost reduction, targeting industry pain points such as operational inefficiencies in document flow and automation.

As such, as platforms gain traction and industry players collaborate more closely, we will see new product offerings stretching beyond existing bank offerings, addressing end-user needs in a consolidated package.

You can meet Cecile and hear her discussing commodity finance digitization at ExCred Commodities on September 17. Passes are available here. Complimentary places are available for commodity traders and producers.