Two years of the pandemic and recent military conflicts have radically altered the future of cross-border trade and the supply chain. Companies have begun to realize that threats like these are no longer uncommon, and to improve agility and resiliency, many have taken significant steps to mitigate future supply chain disruptions by enhancing their digital capabilities.
However, a key component in the supply chain network is still lagging behind in modernization. The need for the trade finance industry to revisit its old ways of operating has never been more critical in today’s corporate banking landscape. As digitization sweeps across industries, speed has become a non-negotiable requirement for companies to be deemed worthy of a customer’s time.
The global supply chain is pivoting towards digital reinforcement processes due to the demands of companies for greater efficiency, transparency and fast transactions to meet the expectations of their own customers. As the lifeblood of the supply chain, trade finance can no longer afford to remain mired in reams of paper documents and must urgently modernize to keep up with the changing landscape of cross-border trade.
The drawbacks of being stuck in the past
Trade finance is one of the oldest sectors in the world and has historically been very paper and labor intensive. Unfortunately, with advances in automation and the demand for a faster flow of communication, the traditional trade finance system is quickly becoming unworkable. A cross-border trading ecosystem is a complex one involving multiple parties with tons of documents exchanging hands with each other at every point.
If banks continue down the path of labor-intensive, manual ways of handling trade finance, the result is likely to be more process inefficiencies, increased costs, delays in credit screening, data privacy concerns, and, worst of all, an infinite susceptibility to fraud. While fraud is not new to the trade finance landscape, the resulting losses are always astronomical.
The most serious form of fraud banks face in the supply chain is duplicate trade financing. This happens when an invoice is funded multiple times and has plagued the industry for a long time. One of the most prominent recent cases involved Hin Leong, a Singaporean oil trading companywhich led to more than 20 banks incurring losses of around US$3.85 billion.
The occurrence of duplicate trade finance fraud can be attributed to a lack of visibility and transparency, making it difficult for financial institutions to collaborate, resulting in an inability to share critical data in a timely manner. As competition intensifies, especially with the rise of fintech companies, financial institutions cannot afford to be constantly on the wrong side of such bad practices.
The Blockchain Way Forward
Considering the challenges of the traditional system facing trade finance, the way forward is to quickly start modernization with the use of blockchain. Adopting blockchain will help alleviate many of the current concerns and risks in trade finance. In the flow of a supply chain, large volumes of documentation exchange hands, including product, shipment, and transaction details. In a centralized system, the timely communication of a large amount of information is really difficult. Processes take days or even months to complete in an era where information is demanded by the hour or even by the minute.
When trade finance is done on a decentralized blockchain, all transactions are recorded in a database and subsequently distributed to various relevant venues and stakeholders. This enables immutability of information, better compliance, better traceability of activities, and long-term cost and risk reductions. Blockchain also enables greater overall transparency and faster transaction tracking, visible only to authorized members of the network, leading to greater trust among supply chain participants.
Leveraging the full potential of blockchain
In a cross-border trade scenario, the interactions involve multiple parties, such as import and export companies, logistics services, banks, and insurance companies. It requires all participants to accept the impact digitization will have on trade finance, show a strong commitment to the cause, and make conscious efforts to align with blockchain finance execution.
To set the standards, financial institutions and large organizations must lead the way with blockchain adoption and in turn assert their influence on the rest of the network to follow suit. This could also potentially help increase the urgency for laws and regulations to be made to support or enforce the use of blockchain technology in the overall supply chain process.
(The author is Mr. Farooq Siddiqi, CEO, #dltledgers and the views expressed in this article are his own)