Ashutosh Kumar May 10, 2020 0

Benefits of Blockchain in Trade Finance

While blockchain is already being used by many industries ranging from manufacturing, healthcare to real estate, or government application, one of the main industries that can benefit from this technology is trade finance. In this article, we will learn about trade finance, inefficiencies within the trade finance industry, and how utilizing blockchain can benefit trade finance.

Here are the primary benefits of utilizing Blockchain in trade finance:

Efficiency

Traceability

Transparency

Auditability

Security

What is Trade Finance?

To those people who do not belong to the financial domain, the term Trade Finance will be a new term for them. I will try to explain it in the simplest form. Trade Finance in its simplest form can be seen as the financial transactions of both domestic and international trade that take place between a seller and a buyer facilitated by intermediaries such as banks and financial institutions. These trade finance transactions generally include lending, issuing letters of credit, factoring, export credit, and insurance. 80–90% of ongoing trade between various countries depends on trade finance and thus these transactions make up an enormous portion of global trade. Whenever there is an import or export of goods among borders there is trade finance involved. It involves a vast number of activities and also faces many difficulties. One of the major issues that are involved with trade finance transactions is to deal with a large volume of paper documents. Dealing with these documents creates an even more complex trade network.

How do Current Trade Finance functions?

Trade finance could be understood by the following example. Let's assume that there is a company named MHW in India and this company wants to import a certain number of goods from a supplier company that is located in the United States. Let's name this supplier company as SSI. Now to import the goods the company MHW needs to pay for the goods, but it wants to make sure that the goods should arrive as ordered and thus is hesitating in processing the payment. Now on the same hand, the exporter is also hesitant to ship the goods, without being certain that the payment will arrive for the goods they supply.

Now at this step, the banks get involved to solve the issues faced by the importer and exporter company. The importer's bank issues a letter of credit to the exporter via the exporter's bank and promises to pay the required amount once the exporter bank provides the valid documents proving the ordered goods have been loaded to the ship or any other means of transport. Thus the involved banks ensure that the trust is being built between the importer and exporter parties by holding the money for each party.

Challenges in current Trade Finance Process

The above process is going on for over a hundred years which involves a vast amount of physical paperwork. The systems currently used by banks and their corporate clients to manage trade transactions is highly manual, causing a lack of visibility, and overhead costs.

UNSTRUCTURED DATA – All the Trade Documents consist of enormous data sets which are unstructured.

VOLUME OF PHYSICAL DOCUMENTS – 400 to 500 transactions per day with each containing 20 sub documents

LARGE COMPLIANCE CHECKS – On an Average 32 compliance checks existing in multiple documents

ERODING MANUAL ACCURACY - Steady rise in volume of errors leading to poor risk compliance

Old and paper-based processes from the current trade finance process are in desperate need of upgrading. Blockchain technology plays a large role in the introduction of new digitalized solutions for Trade Finance Process.

Blockchain technology in Trade Finance

Blockchain Trade Finance procedure:

Receiving and classification of trade documents.

Extraction of data from the recorded documents.

Generation of valid reports for cross-documentation and transactions.

Automatically validating the data between documents and generated reports is done.

Document scrutiny is performed adhering to various rules and regulations.