Blockchain’s potential to change the face of trade finance

Of all the learnings from the pandemic, the realisation that digital transformation is no longer a choice is perhaps one of the largest – and global trade is no exception to this.

The case for digitising trade finance goes beyond better efficiency and lower costs

Recent challenges across the industry, such as the Suez Canal crisis and disruption to the supply chain at the height of the pandemic, have made the case for change stronger than ever.

There’s an obvious need for universally adopted, digital platforms and standards in trade.

Among the new technologies fit to deliver, blockchain could be the most effective platform because of its ability to drive collaboration on common, decentralised networks.

Sizing up the challenge

Trade finance is one of the most critical processes underpinning global trade, but today’s processes are anything but digital.

Take Letters of Credit (LCs) for example, a key trade finance instrument that provides risk mitigation and finance to traders around the world.

A bank, at the request of their customer, will promise to pay a supplier on the presentation of evidence that they shipped goods the buyer purchased.

This evidence, by a large margin, remains paper-based and stuffed into courier bags. Invoices, packing lists, insurance documents, and many others are printed, signed, stamped, and hand couriered to the bank that issued the credit.

They are checked, double-checked, and determined to be compliant or have discrepancies. This whole process takes at least a week, and even more importantly requires paper to be printed in offices and staff to be present to send and receive them.

Technology to help digitise these processes has only succeeded at a very small scale to date, and the reason is there is no standard connectivity between banks and corporates for trade finance-related communication and data sharing.

As a result, information sharing is ineffective, often resulting in paper documents being hand couriered to each party as the only common way of trusted communication, and in some cases, asset transfer through original documents of title (i.e. ownership over the goods onboard a shipping vessel).

The multiple parties involved – importers, exporters, banks, shippers, insurers, and so on – all need to be on a common network so that data flow between each party can take place quickly and seamlessly.

This is where blockchain is most effective as it allows every participant to collaborate on a common network – synchronising data across all transactions, giving buyers and sellers instant access and real-time visibility of their transactions.

A technology fit for purpose

While other emerging technologies in use across trade finance, such as machine learning and natural language processing, can drive benefits for specific processes, they are only useful if they can be delivered to banks and corporate participants across the world.

This requires infrastructure in the form of a common network, or else these benefits will only ever reach a small handful of users. This is what decentralised technologies like blockchain are creating – collaborative, common, and trusted networks where new applications and ideas can thrive on a global scale.

Some 80 to 90% of global trade relies on trade finance. With so much data flowing through the industry, privacy and autonomy must be at the heart of any digital network.

Blockchain not only enables collaboration, but gives each participant privacy and control over their own data, allowing them to choose how and when they plan to share it with other trading partners with a clear and auditable data trail – without sharing any data to unrelated parties in the network.

There are many benefits to corporates and banks – the end-to-end processing time is significantly faster, enabling businesses to boost operational efficiency and free up their cash flow, while banks will reap the benefits of paperless trade finance while improving their operational and credit risk management.

Fostering financial inclusion

The case for digitising trade finance goes far beyond the obvious benefits of increased efficiency and lower costs. With businesses recognising the importance of pursuing Environmental, Social and Governance (ESG) criteria, they need tangible ways to incorporate sustainability into their growth strategy.

The current trade finance gap, or the amount of requested trade finance that is rejected, is estimated at $1.5 trillion globally. Half of this is in developing countries in Asia and Africa, with small and medium-sized enterprises suffering the most.

If international trade was underpinned by a common decentralised network, then smaller businesses and emerging economies would have greater access to trade finance.

Committing to opening up access to working capital for all is a practical way to commit to sustainable finance.

The impetus presented by the pandemic to digitise must not be missed, and trade finance is changing for good. For this change to be effective, the various parties in trade finance must embark on change collectively, and blockchain is the obvious choice to deliver.

About the author

Carl Wegner is CEO of Contour. Prior to this, he served as the managing director for Asia at R3, managing director and head of global transaction banking for Greater China at Deutsche Bank, and managing director of transaction banking for Standard Chartered Bank in Taiwan.