Trade finance and blockchain technology seem to be made for each other, yet the relationship needs help to get it started. Alisa DiCaprio, Head of Trade and Supply Chain, R3, explains what has to happen and why.
The trade finance arena is going through a period of unprecedented change. Digital solutions and innovative technologies have now matured to the point where they are finally transforming this sector into a more streamlined, cost-effective, and digitally efficient place to do business for all participants.
Enterprise blockchain is perhaps the most promising and appropriate technology to enable this journey. Trade is inherently a decentralised system, and the decentralised nature of blockchain makes it a perfect fit for trade finance. For the first time, the industry is getting behind this new technology and moving it into real-world deployment at record pace.
With the industry experiencing a period of reflect and reset like never before, how are participants benefitting from this change?
Many of the processes and technologies underpinning trade finance have not been modernised in decades, from paper-heavy processing to juggling between multiple portals and documentation for each shipment.
These inefficiencies in trade finance mean that nearly $1.5tr. of in-demand capital across the industry is rejected by banks, according to the Asian Development Bank, with some 60% of banks expecting this figure to increase over the next two years. Developing markets that rely heavily on access to trade can be severely hindered through trade finance’s outdated processes.
By digitising these manual processes, such as invoice financing, and superseding ageing legacy systems, blockchain can have a real impact on reducing the costs, risks and delays to participants involved in trade finance.
Decentralised global network
Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. That said, there is growing debate about how blockchain can provide decentralised solutions for 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.
In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process.
For trade finance to truly capitalise upon the digital revolution, 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, the benefits such as speed, efficiency and lower costs mean nothing, as there won’t be enough counterparties to connect with.
Marco Polo is a key example of a solution built for its market. The Marco Polo Network has developed a solution for post-shipment trade financing using the TiX platform. Powered by the distributed platform from TradeIX and R3’s Corda blockchain technology, Marco Polo enables end-to-end, real-time, seamless connectivity between trade participants. This eliminates the data silos, which prevent free flow of information causing inefficiencies and discrepancies.
However, the reality is that most businesses are not fully 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 to 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 $8tr. global trade finance market and solving the$1.5tr. shortfall.