Trade Finance includes financial products and instruments that are used by companies to facilitate international commerce and trade. Various intermediaries such as financial institutions and banks facilitate these transactions by financing the trade. Trade finance is evolving and it is becoming important to focus on short term and long-term incremental improvements to processes and longer-term innovations such as blockchain and others.
Trade transactions are still dominated by paper
Trade processes can be challenging and managing these uncertainties are complex and cumbersome. The vast majority of documentation associated with trade such as invoices, bills, inspection certificates remains paper-based. Trade has become a larger part of the global economy and trade routes have lengthened.
- For companies involved in trade, a high volume of paper is challenging. Transporting and storing relevant information is difficult and it increases turnaround times and costs.
- Complexities and burdens have been amplified by stringent regulatory environments with rules which require a good amount of information about parties involved in the trade.
- For example, banks are prohibited from facilitating trade with countries facing sanctions. Paper-based documentation makes it challenging to achieve effective sanctions screening.
Applying existing technologies to old processes
By adopting OCR, machine learning and neural language processing will lower the probability of errors in trade-related documentation. This will result in fewer turnaround times, efficiency would be increased and controls would be improved. These technologies will result in increased transaction volumes and lower costs for clients.
- Moreover, digitizing trade information will allow a document that has until now been physically shipped to be consolidated to a single electronic file. Turnaround times will be less, efficiency increased, and controls improved.
The Emergence of Blockchain in trade finance
Many new technologies have emerged in recent years that offer benefits for trade finance. The most common among these is blockchain. Among recent technologies, Blockchain uses a distributed ledger that records all transactions in an encoded format to maintain secured data.
- Blockchain is an ideal technology for trade finance which involves exporters, importers, and their respective banks.
At the moment, the number of individual and fin-tech companies are working on trade finance related blockchain solutions. Each country has its own form of regulations on trade as do the individual banks. These rules are constantly and quickly changing.
In the future, it is possible that blockchain information related to trading could be integrated directly into a company’s ledger, eliminating additional manual processes and increasing efficiency further. Links to companies or authorities maintaining current information is key. The ability to be constantly compliant is vital. Regulators are increasingly expecting a reporting structure that informs them quickly that the parties are in compliance.
Any industry with a high amount of paper documentation and manual processing leads to high fraud. The route to success in digitalizing Trade Finance is to mirror the existing trade flows electronically and constantly checking where the trade and the finance is at any point of the journey
Nowadays, banks don’t have a monopoly on innovative financial services technology. It is therefore important for banks to collaborate with partners, including other banks and fin techs. This will help customers to gain the full benefit of new technological developments while trade finance is evolving.