How trade finance will benefit from blockchain

Blockchain technology is dominating the news around the world. It seems that a constant list of projects and pilots have been battling to be noticed, while the digital transformation is developing day by day. While blockchain is being used in multiple different use cases ranging from manufacturing, healthcare to real estate or government application, one of the main industries benefiting from this technology is trade finance.

When considering that trade finance is widely seen as the fuel for global commerce, it’s not difficult to spot why this market is dominating many discussions about the opportunities of blockchain technology. However, the sustainability of the $40 trillion in current trade finance volume depends on the availability and efficiency of financing solutions.

Trade finance is focusing on injecting liquidity and mitigating credit risk in both domestic and international trade transactions. Trade finance usually involves a seller or exporter of goods and services, a buying organization or importer and various intermediaries such as banks and financial institutions and service providers. Sellers and buyers are constantly looking to improve their working capital and cash flow, while reducing the risk of supply chain disruptions.

Unfortunately, the current trade finance sector is inefficient and not scalable based on the current, underlying technology. The systems currently used by banks and their corporate clients to manage trade and working capital finance are siloed, highly manual, causing a lack of visibility, and overhead costs.

These disconnected and aging systems place hard limits on the ability to create and scale new offerings easily, expand to more geographies and take advantage of advanced technologies.

Old and paper-based processes from our analog past are in desperate need of upgrading. Blockchain plays a large role in this transition and in the introduction of new digitalized solutions. The primary benefits of blockchain technology in trade finance can be summarized as efficiency, traceability, auditability, transparency, and security.

Efficiency – Transactions are completed directly between the relevant parties with no intermediary and with digitized information. In addition, with blockchain the parties can operate smart contracts, which can automatically trigger commercial actions. This allows to dramatically streamline trade finance processes, thereby cutting costs and increasing the transactions speed.

Traceability – With blockchain technology users can track goods and asset and where they are currently residing. Also, related asset information can be relayed to or from the new owner for possible action. This allows new financing opportunity and can improve perfection of interest on trade assets.

Auditability – Each trade finance transaction is recorded sequentially and indefinitely. This provides an indelible audit trail for the life of the trade asset as well as better verification of assets authenticity and reduction of compliance costs.

Transparency – Blockchain technology can record multiple details of the transactions against the commercial agreements to improve further trust. This allows to reduce risk and offers more options for financing trade.

Security – Each transaction is verified within the trade network using independently verified cryptography. As a result, the authenticity of information can be assured allowing share trade related data securely between different financial institutions.

Progression of blockchain implementations within the trade finance sector has picked up rapidly during the last 12 months. We will see more new developments with many programs going into productions and live financing facilities very soon. One trade finance initiative leveraging blockchain technology, which lately gained a lot of attention is the Marco Polo Network. It is one of the fastest growing trade and working capital finance networks and a joint undertaking between technology firms TradeIX and R3 as well as over a dozen of banks such as ING, Commerzbank, BNP Paribas, Anglo-Gulf Trade Bank, NatWest, Natixis, Bangkok Bank, Standard Chartered Bank, OP Group, SMBC, DNB, Danske Bank, and LBBW.

The Marco Polo Network also includes constituents of the wider trade ecosystem such as Enterprise Resource Planning (ERP) providers (Oracle, SAP) and logistics companies. It leverages the Corda blockchain technology from R3 and is planning to go live with corporate clients in the coming months.

This year will be crucial for the trade finance industry and blockchain technology with many ongoing projects going into productions and new strategic partnerships and innovations being developed. Keep your eyes peeled in 2019!

About the author: Oliver Belin, CMO, TradeIX

Oliver has over 15 years of experience in supply chain finance and account receivable finance solutions. He has worked for numerous leading organizations in trade finance and had key roles with PrimeRevenue, GSCF and Sumitomo Bank. In 2008, he founded Swiss Commercial Capital, a company specialized in trade finance solutions, which was successfully sold to Macquarie Bank in 2011. Oliver is the co-author of the book Supply Chain Finance Solutions and a frequent speaker on this topic.