Trade financing facilitates financial institutions to provide credit facilities to ensure the guarantee of exchanging goods. It is a centuries-old industry that has not experienced a significant transformation with the growth of global trade flows. In 2015 alone, the trade finance market capitalization was more than USD 10 trillion. However, it is time to revamp the working of trade finance by incorporating blockchain solutions in trade finance. It can boost efficiencies, lower the cost base, and create new revenue opportunities, such as forming new models of credit and funding guarantees to back the trade. Let’s assess the challenges the trade finance industry faces today and how blockchain in trade finance can redefine its future.
Trade finance by financial institutions like banks is a crucial function in international commerce. It provides delivery and payment guarantees to buyers and sellers involved in a trade. Additionally, it closes the trade cycle funding gap for these parties.
The growth and sustenance of the international trade market rely on financing mechanisms’ easy availability and robustness. However, trade participants can be vulnerable to business risks and uncertainties stemming from several factors.
Those factors include process inefficiencies and variations in trade regulations and requirements across geographies. Additionally, operational and logistical complexities arising due to the involvement of numerous entities are another factor.
In a recent survey by the International Chamber of Commerce, reports showed an increasing trend in litigation and fraud related to trade financing over the last few years. Other pain points include:
These obstacles can increase both risk and costs for banks as well as buyers and sellers involved in the process. It leads to unfavorable financing terms, especially for small businesses.
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Blockchain applications have the potential to streamline various trade finance processes.
A blockchain is a data structure that enables the creation of a digital ledger storing all transactions. It is distributed across a digital network with cryptographic mechanisms. Consequently, it enables each participant in the network to securely update that ledger without the need for a central authority.
Each participant on a network updates a blockchain ledger in real-time to reflect the most recent transaction. Thereby, it eliminates the need for multiple copies of the information document stored on numerous databases across various entities.
For instance, in a traditional trade finance system, importers, exporters, shippers, banks, etc., maintain their separate databases for all the documents related to a transaction such as the letter of credit, bills of lading, invoices, etc. It requires each of these databases to be constantly reconciled against each other. If there is an error in one document, it gets difficult to take corrective steps to determine the false copy.
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Blockchain trade finance can encompass all the necessary information in one digital chain of blocks consisting of information documents. The chain is updated almost in real-time, and accessible by all members of the network at the same time.
Blockchain advantages include speeding up transaction settlement time, establishing transparency across all parties, unlocking capital opportunities, and more.
Regulators get a real-time view of essential documents and information for enforcement and AML activities.
Blockchain smart contract solutions automatically execute contract terms between parties with accuracy and efficiency. As blockchain underpins smart contract technology, there’s no need for correspondent banks or additional transaction fees.
Stakeholders can review and approve financial documents linked and accessible through blockchain in real-time. It reduces the time to initiate shipment.
Stakeholders get a real-time and transparent view of subsequent short-term financing by accessing invoices on a blockchain.
Banks facilitating trade finance through blockchain can eliminate the need to have a trusted intermediary in place to assume the risk.
They can access and track bills of lading through blockchain and thus, eliminate double spending risks.
As parties meet the specified terms in a smart contract by blockchain technology, its status gets updated on blockchain in real-time. It reduces the time and headcount needed to track and monitor the delivery of shipments.
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Blockchain-enabled trade networks can prove beneficial for all stakeholders. The technology can significantly reduce friction from logistical and operational inefficiencies and streamline them across the entire trade finance value chain.
In the short term, it can become instrumental in augmenting business processes by reducing redundancies, establishing transparency, and increasing efficiencies. The longer-term application of blockchain technology in trade finance can be more profound.
They can lead to essential changes or complete redesigning of existing processes. Though blockchain’s potential for disruption is immense, multiple obstacles need to be overcome.
At Oodles, we help you realize the promise of blockchain in trade finance can be realized. We develop applications with careful strategic considerations and design decisions for production deployment. We make use of the most suitable blockchain platforms to address challenges of platform applicability, scalability, and interoperability.
If you require blockchain developers for your project, then our developers can assist you. Contact us today to avail yourself of our services.