Within global trade, there are a lot of moving parts. There are regulatory agencies, customs officers, exporters, importers, shippers, port workers, and financiers. While there has been explosive growth in global trade, the bottom line of exchange -the money- hasn’t been updated and improved upon in the last decade or so. The money constructs behind international challenges of raw materials, finished goods, and commodities is a 10 trillion dollar industry known as trade financing. All of the parties that work to verify key points along the supply chain ultimately impact or are impacted by the process of trade financing. If any of the trade entities make a mistake or cause delay, there is the potential for voiding a transaction. A condition that could cost a company precious capital.
Moving Toward Efficiency
In spite of the tech improvement made in many industries, trade financing is still heavily reliant on paper-based transactions. There is a long paper trail and time-consuming process of document exchanges and verification that accompany global transactions. Often times, the process takes between five and ten days to complete, but this is not a guarantee. Without digitized and electronic processing, manual verification on the numerous documents is still needed, and there is a higher risk of fraud and miscommunication. From the perspective of the financier and the financing entity, this process is inefficient and costly from the perspective of time-sensitive needs. There is significant human effort involved, and the end result can be problems for the financing party if the documents are delayed, misplaced, or altered during the process of verification.
A Global Crisis
Experiencing a day in the delivery of documents affects more than the financing party. Without their needed funds or the disbursement of financing, the company is unable to either buy or sell necessary goods. The exporter may experience a delay in the final payment issuance, as multiple agencies along the supply chain aren’t able to verify the arrival of physical goods to the importer in accordance with agreed-upon contract terms. Serious problems of fraud can also occur, where the same order of goods is financed several times through different banks that do no share information. There are some cases where trade documents are forged in order to obtain fraudulent financing. The ripple effect of these activities could severely cripple a global economy if enough companies become causalities to crime and lost capital.
Offering Tech as a Solution
Although some financiers, such as GBTI Bank, have made the move toward digitized transactions, there is still room for growth in the financing sector. Within the last few years, blockchain technology has emerged as a potential solution facing the problems within trade financing. This digital transaction opportunity could replace the need for paper documentation and bring security and trust back to the financing process. It would improve the transparency of the supply chain process and severely reduce processing times for sensitive and high-valued documents. Because of the embedded safety measures, blockchain transactions will also minimize the risk of manipulation of documents or processes by participating members. It can decrease the pressure and reliance on third-party financiers by giving peer-to-peer interactions more efficacy in direct trading between banking institutions. Here is a short example of how blockchain could be used with trade financing.
Example: An importer and exporter come to terms on an exchange of goods. Once the purchase is done, the agreement is devised and a Blockchain Smart contract (electronic rather than paper) is shared with the import bank. The import bank can review the agreement and devise the terms of credit in real-time. The contract is shared with the export bank, which then reviews and approves the obligation, and the Smart contract will cover the terms and conditions. Upon these exchanges, a Blockchain-based letter of credit is issued to be verified and accepted by the exporter, and the shipment of goods will take place. All of this is still being done electronically, saving days and weeks of time. Once the inspection of goods is completed by third parties in the exporting country, all parties involved provide digital authorization and approval of the goods to the Smart contract, providing instant tracking for the status of the shipment. Upon the importer’s receipt of the goods, a digital acknowledgment can be made within the Smart contract, initiating the payment and providing a faster disbursement of funds. Blockchain will issue the payment between the parties through the Smart contract.
Blockchain technology and platforms have already been tested and integrated into several global finance areas. There have been a number of pilot operations that have been started by several international banks within the blockchain area. However, expansion is being sought to include more banks, third-party service providers, credit insurers, and logistic firms. There are so many entities that are a part of the supply chain than full integration will take some time. However, the collaborative nature of the Blockchain platform offer the potential to create an open-sourced trade finance network that is efficient, cost-effective, and secure.