The introduction of new technologies is reshaping the industry, leading to a new era of digital trade finance. In this article we discuss the benefits of digitalisation and its impact on the future of trade finance.
For hundreds of years, trade finance has been essential for both domestic and cross-border trade flows. Currently, these transactions are responsible for a significant portion of global trade – 80-90 percent of global trade relies on some type of trade finance. In essence, every time goods or services are exchanged and sold across the border, there is some form of trade finance involved.
One of the critical problems in trade finance is the sheer volume of paper-based documents on which the information flow is based on. Many forms of trade finance such as Letter of Credits have not gone paperless and yet still rely on semi-automated and antiquated processes that are based around the physicality of the written word. Besides, these paper-based documents are prone to fraud because of the number of parties involved and the complexity in trade finance transactions.
More recently, service providers, financial institutions, and their corporate clients are seeking to streamline processes, reduce transaction time and cost, as well as mitigate fraud risk by replacing the flow of paper with digital data flows and leveraging various technologies. This adoption has led to the term digital trade finance. The digitalization is driving down the cost of trade finance transactions and increases the transparency for all parties involved. This can result in reduced credit risk, enhanced cash flow forecasting, and better allocation of working capital. By providing a global electronic counterpart made up of many interconnecting and intelligent networks, the trade finance market can become digital. By doing so, digital trade finance has the potential to be offered by a larger funding pool and to a much broader market, including SMEs.
However, the shift to digital has been very slow. The reason for the limited adoption is evident: Trade finance transactions involve multiple parties, trading parties, financial institutions, credit insurers, shipping companies, customs and other services providers, all located in various jurisdictions and all of whom must adopt to digital trade finance solutions.
New Technology & Digital Trade Finance
The good news is that with the introduction of new technology such as blockchain and APIs, we can now more easily link digital processes across the different parties involved in trade. Applying new technologies in trade finance is not new, however, the pace of innovation in this area during the last year is something which has never been seen before.
Technologies such as blockchain have the ability to streamline the trade finance process and increase the speed and adoption of digitizing trade finance. With blockchain, trade participants can create a digital ledger of transactions that is distributed amongst a digital network. On the network, each permissioned member can securely amend the digital ledger. The blockchain embodies all the necessary information in one digital document, which is updated and viewable by all participants on the network almost instantly.
Digital Trade Finance Networks
Today, blockchain is being already used to simplify trade practices and replace manual and paper-intensive processes in trade finance. One example is Marco Polo, one of the largest trade finance networks in trade finance with over 30 financial institutions and tested by over 20 leading corporates including Daimler and MAN. The global network focuses on open account financing offered through a distributed trade finance platform. By connecting a critical mass of numerous parties in the trade ecosystem, it gives the much-needed digitalization of trade finance a real possibility. In the coming years, we will see how the journey towards machine-to-machine trade finance is evolving and how many corporates, banks and third-party service providers are catching up and moving to mass adoption in one of the largest global financial markets.