For trade finance, a sector long dependent on antiquated processes, blockchain has the potential to completely revolutionise the status quo. In 10 years, the trade finance sector will be unrecognisable. The operating model for our has changed only marginally over the last century, but today, is going through an unprecedented transformation.
Because of its cross-jurisdicational nature, international trade is heavily intermediated. This is done predominantly by banks that help to facilitate transactions and provide the financing behind them, but also by insurers, customs officials and other market participants.
The need for transformation in trade finance
Many of the processes and technologies underpinning trade finance have not been modernised in decades. The result is that that transactions continue to rely on paper-heavy processing, unsuitable for the current digital age. Traditional technology required corporates to log into multiple portals and juggle relationships and documentation for each shipment. In addition, businesses must navigate the growing threat of cyber-attacks, changing regulations, and ever-changing sanctions lists. Despite this complexity, cumbersome and time-consuming paper-based exchanges are still commonplace.
Take, for example, invoice financing. While a common activity, managing invoice payments and terms can be slow and inefficient for companies and their trading partners. They must navigate different currencies and jurisdictions, each with unique requirements in terms of contract terms and payments.
By digitising these manual processes and superseding aging legacy systems, blockchain could have a real impact on reducing the costs, risks and delays to participants involved in trade finance. If applied effectively, the technology has the potential to unlock what the Asian Development Bank has identified as a potential $1.5 trillion opportunity in global trade finance. Companies of all sizes will benefit from better visibility into trading relationships and easier access to financing options, beyond point-to-point relationships, to a global network of trading parties.
The promise of blockchain
Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. While the rollout has been more gradual than some of the more over-enthusiastic predictions, many see it as a brilliant innovation capable of remedying a lot of the operational pain-points perturbing financial services. As such, there is growing debate about how blockchain can provide solutions to solve many of the problems facing trade financing.
One such solution is real time visibility, which is available via permissioned access to authorised network users, and gives buyers and sellers unprecedented transparency into the status of their transactions. This single source of truth and use of smart contracts could remove a number of inefficiencies in the paper-heavy processes that exist in trade finance, such as negotiations of letters of credit. In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process.
Another problem trade finance applications face is how to make the experience seamless for the corporates that use them. A large corporate might have six different banking relationships that each require a bespoke connection from their Enterprise Resource Planning (ERP) back-office system to the bank’s platform, and then onto the bank’s own back-office system. Blockchain can be deployed in such a way as to work around this. For example, Trade IX and R3’s project Marco Polo has built a native Netsuite app that directly pulls data from a Netsuite Cloud ERP system. For the corporate, that means that they continue to use their ERP as before, and instead of building another bespoke bridge, just download an app which pulls data out directly.
The next steps and stumbling blocks
In order to move towards a truly digitised and connected ecosystem for trade finance, mass adoption on a global scale is essential. This elusive network effect can only be achieved if technology players prioritise forward-thinking and inclusive integration solutions that lower the barriers to entry for all types of companies involved in the trading process.
If only a handful of firms adopt a blockchain solution for invoice financing, for example, the solution is useless if one company needs to trade with another that is outside this circle of early adopters. All the other benefits of blockchain such as speed, efficiency and lower costs mean nothing if you cannot use the platform to connect with the necessary counterparties.
Like any piece of enterprise technology, blockchain will be most useful when used in conjunction with existing systems. The reality is that most businesses are not digitally native and so will continue to rely on legacy systems – all to different extents – in the near future.
The key to unlocking blockchain’s true potential, therefore, is not to try and oust these but to make sure the technology fits into the right places, with minimal cost and disruption to a firm’s day-to-day business. Put simply, integration holds the single most important key to rewiring the $8 trillion global trade finance market.
Alisa Di Caprio is Head of Trade and Supply Chain at R3.