Trade finance is an attractive business for banks, but the market is changing. If banks are to remain competitive, they will need to step up, innovating their trade finance client offerings and investing in their people, process and technology capabilities.
The Promise of Blockchain in Trade Finance
The promise of blockchain is that it may have ability to streamline the trade finance process. A blockchain is a data structure that allows the creation of a digital ledger of transactions that can be distributed amongst a digital network by using cryptography. This way, each participant on the network can securely amend that ledger without the need for a central authority.
Because a blockchain is updated quickly by each participant on the network to reflect the most recent transaction, it removes the need for multiple copies of the same document of information stored on numerous databases across various entities. For example, with a traditional trade finance system, the importer, exporter, shipper, banks, etc., must all maintain their own database for all the documents related to a transaction (the letter of credit, bill of lading, invoices, etc.). Each of these databases must be constantly reconciled against each other, and if there is an error in one document, corrective steps must then be taken to determine which (if any) copy of the document is correct.
A single blockchain can embody all of the necessary information in one digital document, which is updated nearly instantly, and viewable by all members on the network at the same time. Among the best of blockchain’s advantages are the speeding up of transaction settlement time (which currently takes days), increasing transparency between all parties, and unlocking capital that would otherwise be tied up waiting to be transferred between parties in the transaction.
There are several companies that have already begun investing in, and developing test programs, which utilize blockchain in trade finance and receivables finance.
Use cases for cryptotechnologies in trade finance
The possibilities for cryptotechnologies in the trade finance space are intriguing. But spurring adoption requires much more than recognising that today’s processes are lacking and identifying potential technologies that can improve the industry. Banks, corporates, and other industry market participants need concrete use cases in order to develop a business case to push the adoption of cryptotechnologies. Two areas in which cryptotechnologies have the potential to bring rapid benefits to the industry are in the transfer of trade information and financing.
Enablers for trade finance use cases
The use of cryptotechnologies to facilitate the exchange of trade data and financing can help improve trade finance services offered by banks to their corporate clients. But there are additional enablers that can further enhance these services. The use of smart contracts and the development of instant payment infrastructures are two such enablers that can help maximise the benefits for banks and corporates using distributed ledgers in trade finance.
Smart contracts The transparency of events along the supply chain via cryptotechnologies is itself a major enabler of faster payment and improved financing, increased efficiency, reduced risk of fraud, and lower costs. Exchanging information related to these events in a distributed ledger facilitates trigger events that need to take place for goods to arrive at their final destination and for suppliers to receive payment. But the capability of cryptotechnologies to facilitate these trigger events does not end with the mere exchange of information along a supply chain.
Instant payment infrastructures The development of instant payment infrastructures is another key enabler that will add speed and efficiency to trade transactions. Almost 20 countries around the world have already implemented instant payment infrastructures, and major markets such as Australia, the United States, and the Eurozone9 are in the process of developing and testing instant payment systems. With the ability to send and receive domestic payments within seconds, the movement of money triggered by events along the supply chain can proceed more rapidly, which means that shipping companies, customs offices, and sellers have quicker access to funds. Instant payments can also enable both buyers and sellers to obtain funding from their banks faster than they do today, which can lead to a further optimisation of working capital and unlock