Almost since the dawn of civilization, there has been trade finance. The roots of early forms of trade finance, can be dated as early as the beginning of modern civilization, more than a thousand years ago. The current trade finance market is substantial, with $8 trillion currently financed and a further potential $40 trillion on corporate balance sheets. Trade finance has been provided primarily by financial institutions, unchanged for years, with many manual processes based on old-legacy systems that are expensive and costly to update.
Most financing facilities are still bilateral or based on tripartite relationships between a supplier, a buyer and a financial institution mitigating credit risk and offering funding to the trading parties. Such structures are mostly managed manually or through antiquated systems, which are not scalable and result in higher operational costs. Therefore, traditional trade finance facilities are mainly focused on top-tier corporates and their key trading partners, involving large transactional volumes. Two decades ago, new Fintech companies started to emerge, offering different types of trade finance solutions and applications, which improved how trade finance was managed and delivered. Today, some of these applications include thousands of suppliers and buyers and multiple funders. The introduction of cloud-based technology, efficient means of communication as well as economies of scale have resulted in increased scalability, a reduction in the cost of manual processes, all of which have made trade finance more available for a larger number of participants in the trade ecosystem. Currently, there are approximately 30 large destination applications focusing on open account trade finance with each of them competing for more trading partners and financial institutions.
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As a result, many corporates have to work with 20 or more platforms, logging into different systems, performing due diligence on the applications, legal agreements and different processes, together with uploading their confidential trade data to third-party applications. Banks offering financing through these destination applications have to rely on the data integrity and security of these systems and need to integrate and operationalize with a multitude of different applications from third parties. This process can take months of due diligence and in many cases, the bank is still processing the data separately on their side because of a lack of trust and risk.
Blockchain technology can provide enormous benefits to solve these challenges in trade finance. It can be used for the basic services that are essential in trade finance. At its core, blockchain relies on a decentralized, digitalized ledger model, which by its nature is more robust and secure than the proprietary, centralized models which are currently used in the trade ecosystem. This creates a safer, more reliable system at a much lower cost. Blockchain technology creates a viable, decentralized record of transactions – the distributed ledger – which allows the substitution of a single master database. As a consequence, blockchain leads to radical simplification and cost reduction for large parts of transactions in trade finance, whilst making it more secure and reliable. It keeps an immutable record of all the transactions, back to the originating point of a transaction, also known as the provenance, which is essential in trade finance as it allows financial institutions to review all transaction steps and reduce the risk of fraud. Blockchain also offers a far better means of establishing and proving identity than present day systems. By providing unique, non-forgeable identities for assets, along with an inviolable record of their ownership, blockchain greatly simplifies the direct transfer of trade assets and increases confidence in their provenance. This can lead to additional financing services based on trade of physical goods.
Using the elements and benefits of blockchain described above, existing financial infrastructure can be retooled and new business models deployed to radically improve trade finance solutions and generate new revenue streams. In addition, blockchain allows near real-time settlement for trade finance transactions, which reduces counterparty risk, frees up working capital and reduces transaction costs. It also allows new service level models in which trading partners in effect become the keepers of their own accounts. This could give them not only more security, but much more freedom in choosing funders and technology providers.
With industry-wide collaboration platforms like the R3 consortium, the stage has been set for the cooperation necessary to bring out the full potential of blockchain technology as quickly as possible. One company working with R3 and making strides in the trade finance market is TradeIX. The company is rewiring the thousand-year-old trade finance ecosystem by providing a connected and secured platform infrastructure for corporates, financial institutions, and B2B networks through standard communication channels (APIs) and leveraging blockchain technology.
The race to make history, drive efficiency gains and scalable solutions in trade finance is on. This development puts trade finance at the heart of new blockchain applications.
Oliver Belin is a thought leader in Supply Chain Finance. Currently, he is the CMO of TradeIX, the world's first open Trade Finance Platform leveraging flexible communication standards (API’s) and blockchain technology to connect seamlessly all involved parties in Trade Finance. During his career, he worked for leading institutions in Supply Chain Finance, such as GSCF and Sumitomo Mitsui Banking Corp. and PrimeRevenue where he was responsible for setting up and managing several trade finance programs for multinational clients and financial institutions. In 2008, Oliver founded Swiss Commercial Capital, a company specialized in trade finance solutions, which was recently acquired by Macquarie Bank. In 2011, he released the book Supply Chain Finance Solutions, published by Springer.