Blockchain-Enabled Trade Finance Innovation

Trade finance is the lifeblood of international trade as it enables transactions between buyers and sellers across the globe. Besides credit, trade finance offers a payment guarantee, and insurance required to enable transactions in a way that would satisfy all parties. However, antiquated processes limp many trade finance systems, resulting in compliance, operational, and transparency challenges along with higher costs. Apart from this, a huge volume of paper documents makes up for a considerable amount of the information flow resulting in declining efficiency.

To mitigate these challenges and increase efficiency, banks and other financial institutions are looking for a robust solution that can do away with the challenges of the traditional system. Blockchain for Banks promises to revolutionize the financial services and traditional banking sector by equipping the trade finance industry and the supply chain players with a greater degree of transparency, speed of operations, and security.

However, a key success criterion is a full unity and connectivity among its users. In fact, for building effective Blockchain applications, organizations require identifying the actual data needs of the supply chain for designing active smart contracts and developing a minimum valuable product (MVP).

Pain Points of Today’s Trade Finance Processes

• Manual Creation of Contract: The financial agreement provided by the importer is manually reviewed by the import bank and sends the same to the correspondent bank.
• Invoice Factoring: The use of invoices by exporters to achieve short-term financing from different banks adds extra risk in case goods delivery fails.
• Delayed Timeline: The numerous checks made by intermediaries at multiple communication points delay the shipment of goods.
• Duplicate Bills of Lading: Banks fail to verify the authenticity of bills of lading that financed several times.
• Multiple Version of Truth: Since, financial docs are sent from one entity to the other, challenges regarding version control exist and need to be dealt with.
• Delayed Payment: Since funds delivered to the importer have to go through verification by multiple intermediaries as agreed before making payment of funds to the bank, payment gets delayed immensely.

Blockchain as a Solution for Trade Finance

• Real-time Review: Since documents uploaded on Blockchain are reviewed and authenticated in real-time, shipment of goods is initiated on time.
• Transparent Factoring: Blockchain offers a transparent view into short-term financing that follows the invoices accessed on Blockchain.
• Disintermediation: Financial organizations enabling trade finance through Blockchain don’t require the need for a trusted intermediary to do away with the inherent risks thereby eliminating the need for middlemen or correspondent banks.
• Reduced Risks: The risk of double spending is eliminated when bills of lading are tracked via Blockchain.
• Execution of Decentralized Contract: When terms of the contract have been fulfilled the status regarding the same is updated on Blockchain. This reduces the time and headcount necessary to monitor goods delivery.
• Automated Transaction: The smart contract functionality of Blockchain allows the execution of contract terms thereby eliminating the need for intermediaries and extra transaction fees.
• Regulatory Compliance: Since regulators get a real-time view of the necessary documents to aid in enforcement and AML activities, regulatory compliance is ensured.

Quick Wrap-up:

In a nutshell, it can be inferred that a Blockchain in trade finance sector can help drive efficiencies, reduce costs, and open new opportunities for generating revenue. This will pave way for improved economic growth and a competitive edge for financial institutions.

#dltledger is a blockchain technology solution company in the region with our regional offices in USA, UK, France, Germany, Belgium, Holland, Dubai, South Africa, Singapore, China, India, Indonesia, Thailand.