The growth of the trade finance market heavily depends on the robustness and easy availability of financial mechanisms. Trade finance is widely considered to be the fuel of global commerce. However, there is an unpleasant truth that currently trade finance deals with a lot of inefficiencies. Not to mention the extreme vulnerability to fraudulent trading.
Our typical way of depending on the paper-based system is in dire need of a change. It’s high time we moved on to more controlled and digitized solutions to ensure the safety of trillions dollar worth of industry.
With the introduction of blockchain technology, many financial institutions are now wondering how it would influence the trade finance sector. Needless to say, blockchain has proved its worth more than one occasion, and it reduces the problems in this niche too.
That’s why today we will explore the inefficiencies of the trade finance along with whether trade finance blockchain is capable of handling the load.
So, let’s begin!
Table of Contents
Chapter-1: What Is Trade Finance?
Let’s start with the basics. Trade finance is the financial products and instruments the companies use to facilitate commerce and international trade. Trade finance actually makes it more convenient for importers and exporters to conduct business using trade.
However, the whole concept of Trade finance is much boarder category, as it’s an umbrella term. Typically it covers many financial models and products that companies or banks use to make the transactions for trade feasible.
So, in short, basic three concepts sum it up –
- Financial products and instruments the companies use to facilitate commerce and international trade.
- Importer and exporter use it to make their business more convenient through trade.
- Reduces the risk of global trade using reconciliation of the needs of exporters and importers.
Trade Finance: Fundamentals And Issues Infographic
Understanding Trade Finance
The main target of trade finance is to use a third-party for the transactions. What it does is that it removes the payment risks and also the supply risks. Trade finance gives the receivable or the payment of the agreement with the importer. However, the exporter has to credit the payment in order to fulfill the agreements in the first place.
Usually, there are numerous parties in the trade finance ecosystem. They are –
- Trade finance organizations
- Export credit companies and service providers
But you need to understand that the process of trade finance is quite different than usual financing or credit issuances. Furthermore, general financing is mainly for maintaining liquidity or solvency. However, trade financing might not always indicate if a buyer is out of liquidity or funds.
Instead, trade finance is a shield from the international risk factors such as issues of non-payment, currency fluctuations, the creditworthiness of any of the party’s involved, and political instability.
Financial Instruments for the Trade Finance
We have already discussed that there are some financial instruments in trade finance to make everything go smoothly. Usually, these are the main instruments –
- Banks lend lines of credit to help the exporter and the importer to make the deal.
- Letters of credit is an important factor as it reduces the risk of global trade. Moreover, using this the seller will know that the buyer can guarantee the payment they agreed upon. However, the buyer is also protected with it because it would not release the funds unless every agreement on the LC is met. Furthermore, both party needs to honor the agreements they had in order to make the trade go through.
- Factoring is a system where the companies will get a percentage from the accounts receivable or in simple terms a percentage of the payment.
- Working capital or export credit can be offered to the exporters.
- The exporter and importer can insure the shipment and the delivery of the products. It also protects the seller from any buyer that isn’t paying up.
In reality, international trade did exist from a very long time, but trade finance takes it to a whole other level. Moreover, using trade finance, the international trading community is growing, and it’s one of the important parts of our economy. According to the World Trade Organization, over 80-90 percent of international trade depends on trade finance.
Does it Actually Reduce the Risk?
Trade finance does reduce the risk of the international trading process according to the needs of importer and exporter. In an ideal case, the exporter would want the importer to pay up the money upfront to reduce the risk of payment. But the importer could take the shipment and not pay for the products or goods.
On the other hand, even if the importer does pay up upfront, the exporter could take the money and not ship the goods to them.
A common solution for this problem is the importer’s bank to offer a letter of credit to the exporter’s bank. Furthermore, this will enable the exporter to know that the importer will pay up once the trading is done. But for that the exporter would need to show proof of the shipment, it’s kind of like a bill of lading.
Moreover, the letter of credit will guarantee that when the importer’s bank gets proof of the shipment of products, it will release the payment. However, both of the parties need to meet all the terms and conditions.
Using the letter of credit, the importer’s bank would be responsible for paying the exporter. However, the bank also needs to make sure that their customer (importer) can really honor the payment perfectly. So, trade finance in a way ensures a form of trust between both parties and makes sure they can trade without any hassles.
Moreover, the system helps both parties to enjoy many financial benefits and mostly tailor those only for them. They can also use multiple products to help the transaction go smoothly.
Are There Any Other Benefits of Trade Finance?
So, it reduces the risk of payment and shipment but does it offer anything more than this? Well, trade finance is one of the most important tools for companies, and they use it to boost their revenue and efficiency.
There are some other reasons why this sector is truly important for us –
Improves Efficiency of Operation and Cash Flow
Trade finance helps trading companies to boost their efficiency of the business. The less time it takes, the better, right? In most cases, it’s the extension of credits. Furthermore, it will let the companies streamline the process of importing and exporting. Usually, if there’s no trade financing, they won’t trust each other to know that they will receive payment or shipment.
So, when the bank issues the letter of credit, both parties know they are getting what they wanted. So, overall it improves their business efficiency. Moreover, with the steady line of credit, they have good cash flow coming in.
In simple terms, it will shorten the time for payments and even shipments, which allows both parties to run their company without any problems. In reality, it’s a win-win situation for both of them.
Trade finance allows organizations to increase their revenue and business using trade. For example, a company might not be able to seal a deal with an overseas organization due to lack of money or produced goods.
But with the help of export financing they can pay up the bill, and other parties could get the goods they needed for the shipment. As a result, both companies are getting a business that they might not have without the help of trade financing companies.
No Financial Hardship
Believe us when we say that even the big organization face financial hardships in terms of payments. In reality, shipping goods especially large amount of products requires a lot of money. But if they can’t pay up smoothly or fall behind then, they can lose one of their potential customers.
Revolving credit options ensures that the payment gets done in time. Not only that but it also helps them out in times of financial crisis.
Chapter-2: How Does Trade Finance Work?
Let me clarify it with an example if you are still confused with how the whole process works. In the current standard of trade finance, let’s say a company named XYZ in the U.S.A is trying to import a shipment of products forms a suppliers ABC in Japan.
Moreover, here the XYZ company would have to pay for the products, but they are hesitant because they don’t know whether they will get the shipment of products or not. On the other hand, the company ABC is also hesitant to send out the shipment because they don’t know whether the company XYZ will pay up in due time.
Furthermore, in this middle point, the XYZ’s bank issues a letter of credit to the ABC Company via their bank. In the letter, they will propose an agreement of paying up the money once they get documents such as the bill of lading as proof.
Here, the bill of lading means legal documentation stating that the goods are on a cargo ship, or train, or truck. And so, both of the parties are protected with the help of the banks and get their desired money or goods.
The structure is around for over a century and mostly remains like this without any changes. However, the issue with this structure is the enormous pile of paperwork from every party linked with the trade. These parties such as importer, exporter, exporter’s bank, importer’s bank, receiving company, shipping company, insurers, local shippers and many more have to have paperwork’s to confirm their trust.
Every step of the way they would have to verify their accuracy using them.
We’ve talked about trade finance, how it works and you probably have a great idea about it now. But in today’s scene, the system isn’t all positive anymore. Let’s examine how trade finance today looks like.
Today’s Trade Finance Scene: Disruption at Its Bay
Any kind of efficient trade of physical products relies on typically three types of facts – Transparent payment, solid logistics, and credit. Moreover, trade finance actually gets rid of the problems of all these established instruments such as issuing the credit, document transfers or even shipment of goods and lastly execution of the payment.
However, even though the process is quite established still, many companies are facing issues with it. According to them, it’s becoming harder to manage the whole system. But why is that?
To answer the question, we have dive into the roots of the system. In reality, trade finance targets importers and exporters of a specific size. Furthermore, only medium to large enterprises can truly afford the trade finance instruments such as a letter of credit or other payment services from the buyer’s part.
Not to mention the insurers or other shipment company fees. Any company who uses trade finance already knows that a balance of all the instruments actually forms the system.
But change is heading toward the method, disrupting the usual tradition.
Usually, companies deal with seven main issues –
Low Customer Experience
Here, the customers are the exporters and importers and the complex nature of the system makes it hard to keep track of all the parties involved in the trade. Moreover, it requires a lot of coordination from many sources such as banks, insurers, shipping companies, etc. Furthermore, this leads to adverse effects like long waiting time, complicated process, paperwork, low transparency, low level of certainty and many more.
But it doesn’t end only here, many importers have to deal with fake deliveries where the exporter offers the documents, but in reality, they do not ship out the goods. In these cases, even the letter of credit can’t do much.
Increasing Cost Pressure
Creating the letter of credit is a high-cost pressure point for both the clients and the banks. Moreover, if somehow any party files dispute it takes a relatively long time and takes up quite a lot of money. Furthermore, the restricted profile of trade finance customers makes it less scalable. However, if a company builds up a volume of business they might be able to reduce the costing. So, the solution is still not good.
Substantial Regulatory Burden
In terms of international trade, both parties have to maintain all regulations accordingly. But to do that there needs to a middle man or system that can reduce their trust issues. Furthermore, managing geopolitical risks – trade barriers, sanctions, fraud prevention, and the KYC/AML protocols are becoming a mandatory part of trade finance.
In reality, the process mainly drives up more operational overheads along the way.
Product risks are another massive challenge in trade finance. Usually, a seller would have to consider some risk associated with the products. Unfortunately, no one can minimize these or completely left these out.
For example, service obligations agreed on maintenance, or specified performance warranties are few of the probable product risks. Furthermore, the importer needs to check whether the product conditions are right or how much the weather could affect the shipment.
If both parties do not consider these pain points, then they will most likely lead to disputes even after they agreed on the contract from beforehand. Moreover, the seller also has to make sure that they word the contract perfectly and leave nothing out.
Additionally, the exporter would need to keep everything by default so that any changes would include the compensation of the buyer and the seller.
These risks are quite common when it comes to trading. Usually, manufacturing risk is common for products that need to have unique features or are fashioned in a different way. In that case, the seller would have to readjust the end products until they can meet the demand of the buyer. Moreover, it’s a risk that they need to take because they can’t sell these products to other buyer’s weather.
If you are an exporter, you would need to address these risk right in the product planning phase. But if you don’t the buyer might not pay up the due money. On the other hand, if you do consider these risks, then the buyer would be obligated to pay up at that phase of the trade.
To minimize the risks usually, both parties make agreements and fractional payments through the manufacturing, processing and delivering phase. However, at present fraudulent activities make it a risky move too.
Other than risks with the manufacturing process, a great deal of problems just lies ahead. In this phase, you’ll be shipping it to the buyer or buying it from a seller. So, for that, you would need to get a transport and cargo insurance. Usually, standard international policy schemes cover those, but sometimes they can be a burden too.
In case of no insurance, you always have a risk of losing your shipment to an accident or natural disasters.
Furthermore, there’s a debate in this case. Typically it’s not clear which party will insure the shipment. If the seller does it, then they can estimate all the risk factors and get the insurance as they need during their agreement. But in the case of the buyer to do it, it might not be an ideal scenario.
In particular, if the buyer insures some of the cargo shipment and leaves out other possibilities the whole insurance could become invalid. In fact, if they don’t point out which direction the shipment will take the insurance can become invalid.
Nowadays, markets are tough. Furthermore, foreign exchange levels always keep fluctuating. You never know when the prices might go up or down. Moreover, all of these mean that you need to have a strong strategy against currency risks.
Furthermore, governmental influences and regional politics may pressure the market and make it a tight margin point for you.
There are many risk management policies for currencies, but most of them run on a centralized system, and they are easily influenced. Additionally, you could take up some of these policies, but as we can see it might not be enough. Typically, because policies need to be really flexible but they aren’t.
Exchange rate fluctuations can affect any kind of businesses no matter how big or small they are. Furthermore, these risks are really important to consider because it involves a change in cash flow, assets, and liability.
For example, you might see a greater exchange value when you shipped your goods, but when receiving money, the conversion value could fall. And when you are dealing with millions and millions even a drop in cent could lead to big losses.
For that, both parties need to see which currency they are using to make payments and how much volatile that marketplace is. In a fast world, maintaining all these becomes a tough job, and many companies lose profits for that.
So, in short, you are getting a trade finance system that comes with built-in vulnerability. Furthermore, the process is complex, expensive to continue and with limited scope. The business seriously needs a change in scene and reduction in cost.
But how will we that? Let’s see if we can use blockchain for trade finance in this regard.
Chapter-3: Creating a Trust-less Platform for the Trade Finance
Trade finance blockchain will get its true potential is it’s able to meet up with the demands of trading companies along with offering better solutions for them. But for this to happen people needs to reopen closed systems if the banks truly want to utilize the overall market potential.
If they don’t come forward, then newer disruptive payers will start to use the technology and create more solutions. Furthermore, this in term won’t be a great stepping stone for trade finance marketplace. So, to make a meaningful impact it has to offer something more unique or broader in the trade finance blockchain.
Moreover, trade finance blockchain can actually move away from the limited set of clients and offer trading services to any kind of company that can afford the fee. Thus, it won‘t be limited to the only medium to large corporations only.
Trading Needs From an Open Ecosystem
By contrast, blockchain for trade finance can offer a marketplace where any importer or exporter can quickly and easily get access to credits or insurances or other advisory solutions.
But to make it all come true trading needs to run on trade finance blockchain platform. Furthermore, the platform is best suited for the cause because it’s open, transparent and automated and so companies won’t have to rely on trust anymore.
So, what are the needs for trade finance actors from the new platform?
Quick Transactions: The operational team of trade finance needs to have a faster transaction, which will in return reduce the daily overheads. Moreover, it will help them to focus on the experiences to deal with disputes.
Tracking Transactions and Applying for Credit: All the importers and exporters want to apply for credits and make the payment without any hassles. Moreover, they also need to track transaction status in real time.
No Violation: Logistics provider needs to understand the concept of the agreement fully. So, they have to ship the good in a time where no violation of the deal would occur.
Full Transparency: Well, obviously they need a fully transparent process in the overall trading system. This way they can minimize the risks associated with it. We’ll talk about how the role of trade finance blockchain can actually accomplish all these needs.
Can An Open Platform Offer Any Solutions?
A trade finance blockchain platform will be open to all parties, and it will at least offer two significant advantages –
- Self-service Smart Contracts: Trade finance blockchain platform can offer API standards for creating contracts. Furthermore, any exporter or importer can simply build their contracts using the platform or any other website that offers specific trade finance blockchain APIs for contracts — using building blocks or predefined templates to keep everything going easily.
- Conditional Settlement and Payment Gateway: Trade finance blockchain platform allows logistics, financials, bank operators and intermediaries to track and make the payment. Furthermore, it also acts as a payment gateway but follows the rules of the agreement. Moreover, you can use any trade finance blockchain software to adapt to make it a new kind of gateway.
- Transparency: Trade finance blockchain platforms can offer the level of transparency they need to use it in real life events. Furthermore, this will drastically reduce counterfeit products or any other fraudulent activities.
These are some of the few points that the trade finance blockchain can offer to the trade finance. It’s just an envision. However, people nowadays are using blockchain for trade finance.
But with technological advancement, it’s quite common for the platform to offer specific features for a specific type of companies. Furthermore, what we mean is that if you are running an enterprise, you will get solutions for your enterprise needs.
On the other hands, smaller companies don’t have large quantity needs. Moreover, the need for trade financing actually varies from company to company. So, getting a trade finance blockchain only for your specific needs should help out a deal with the situation a bit.
Trade Finance Blockchain to the Rescue
The new digital need for security is rising everywhere. Furthermore, as everything is becoming digitalized everyone wants extreme security for their companies. In this regard, blockchain truly comes to the rescue.
With its new decentralized model, it’s redefining the values of operations and interactions. Moreover, it’s also quite cost-effective. So, why won’t you use it, right?
Three key features of blockchain technology are actually revolutionizing the pain points of trade finance. And with these three characteristics, you can create trade finance blockchain platforms for your needs. Additionally, these are cryptographic security, consensus mechanism, and distributed ledgers system.
Blockchain is full of surprises. It comes with a cryptographic security mechanism that allows everything on the ledger to be immutable and credible. So, when you are storing trade transactions on the ledger system, no one will be able to alter them in any way.
Thus, everything on the ledger will be a credible source of information. With special permissioned access, you can also determine who can see your trade transactions and who can’t.
It means no one party would have full control over the whole network. Everything will get distributed among the parties involved in the process, mainly the consensus process. Furthermore, this helps trade finance blockchain to manage contractual bargains, make the network resilient and get rid of any manipulation.
The consensus mechanism is really important for any trade finance to run smoothly. It allows all the parties involved to agree with the transaction and add it up to the ledger. Furthermore, if you are using any native currencies then you can get rid of the double spend issue, need for reconciliation within the trading issue and fraudulent activities.
In reality, all these features come together and form the foundation of trade finance blockchain. Furthermore, it allows trade finance blockchain to be robust and synergetic. Can it get any better than this?
Check out our guide on Blockchain for Healthcare now!
Blockchain Advantages And How Trade Financing Can Work Using Blockchain Infographic
Chapter-4: What Are The Advantages of Blockchain?
Real-Time Previewing and Reviewing
Any document related to trade finance on the platform can be reviewed to see its authenticity in real-time. When two parties would create the contract, they would have to attach certain documents to make sure that everything is authentic. In order to that, they can directly upload the documents to the trade finance blockchain ledger.
Furthermore, after checking the authenticity and making sure that they are valid, both party can preview these in real time. Moreover, in this way they can reduce a lot of timing as usually both parties bank or financial support takes care of it and sometimes these documents take a lot of time to get processed.
In reality, during the exchange of these documents sometimes fraudulent activities happen. So, you might send out an authentic document, but en-route it might get tampered with. Furthermore, the other party could also tamper with it and claim that you did not send out the authentic papers in the first place. This gives rise to disputes.
However, blockchain for trade finance can take care of the situation quite easily as the platform is secure. Moreover, no one would be able to tamper with it.
Blockchain can offer transparent viewing of the invoices which helps to factor them for short-terms. In reality, this situation occurs when you would need immediate cash to run your business. Invoice factoring is a different kind of financial transaction and a special kind of debtor finance. Furthermore, a company can sell its invoices to a third party company at a discounted pricing.
Obviously, you would have to compromise with the profit of the unpaid invoices; however, you’ll be getting immediate cash flow. Furthermore, mitigating credit risks are one of the major reasons for invoice factoring.
Maybe and exporter is selling good to an importer and give them the correct invoices. In reality, it takes up 30, 60, or even 90 days to confirm the payment. Thus, the exporter could sell the unpaid invoices to a factoring company.
They will give you let’s say 90% of the payment within that day. Moreover, they will later get the payment directly from the importer. As you can see the exporter needs to pay up a fee for that and the fee is the discounted invoices.
What you can do in trade finance for blockchain is to upload or sell your unpaid invoices to the factoring company in the platform. Furthermore, they can check the invoices and make sure they are all unpaid and is of a creditworthy client. After that, they can process the payment, and you’ll get it within the day.
After the shipment is made and the importer receives the goods, they can make the payment to the factoring company and close the contract. So, you would not have to wait after the shipment is made, you can get paid within the day of your shipment or even before that.
No need for going for an intermediary and increase the risk of fraudulence. Instead, banks can safely facilitate trade finance without issues. Usually, in trade finance banks have to trust a middleman to keep contacts with the other party and send out sensitive information.
In reality, the middleman is a strong point of fraudulent activities, and they aren’t trustable. But with blockchain for trade finance, you won’t have to think about that. Moreover, banks can directly now contact with other party’s bank and process all the documents accordingly. The blockchain trade finance platform is highly secured, and it can offer a peer-to-peer connection for that.
No Double Spending
All the bills of lading can be tracked from the blockchain, which eliminates the chance of double spending. In reality, bills of lading need to be checked thoroughly to ensure that you are not paying for more goods than what you ordered. Bills of lading is actually a thorough list of the shipment’s contents. Furthermore, the seller can change the numbers of goods; this can create a double spending scenario.
But with blockchain trade finance platform you will be able to track the bills of lading, and you won’t have to spend more or less than what the original bill is.
Smart Contract Execution
Smart contracts are essential in trade finance blockchain. Furthermore, the contract both parties originally agree to is fully on the platform now. All you’ll need to do is meet your partner from the platform and write a smart contract agreement with predefined rules.
But keeping track of all the rules and fulfilling each one of them is tough. That’s why the status of the smart contract agreement will get updated in real time, which will reduce the paperwork and time. Furthermore, after completing each of the requirements, both parties will get an update of the overall process. This will ensure that both of them know when the trading will be done and in what stage do they stand.
Proof of Ownership
Blockchain can offer proof of ownership and be fully transparent of the location of the shipment. Proof of ownership would come from the exporter that they no longer own the good instead the importer owns them from now on, and they use them as they wish.
However, the proper processing of this legal document becomes quite complicated, mostly in case of international trades. Blockchain for trade finance in this matter can make it much simpler. Furthermore, the change of ownership would take place in the blockchain trade finance platform, and both parties can exchange documents with their signature to seal the deal.
Moreover, after that the importer can use the documents legally, there will be no issues with it.
As we said earlier, there are lots of hurdles in the case of international trading. Furthermore, you could face issue in other countries for something totally legal in your country. Also, the shipment also needs to maintain the laws and regulations while traveling if it would pass through other regions on the way.
Thus, it gives rise to a lot of complexities, and many find it hard to keep track of them. However, with blockchain for trade finance, all the regional regulations can get maintained just from one place. Furthermore, it can also enforce KYC/AML solutions to make it more solid.
Check out our Ultimate Blockchain Cheat Sheet to learn more about blockchain the easy way!
Possible Blockchain Trade Finance Use Case
There are many blockchain trade finance use case. Let’s see what they are, shall we?
Payment Certainty Using Automation Process
Well, traditionally letters of credit actually offer an effective way to reduce the risk of international trading. However, this is proving to be unproductive for that matter. Why?
Because of the higher price point that it comes in. Typically, banks facilitate the settlement and trade flow, and they offer the letters of credit.
Moreover, everything of the letters of credit is based on the documentation, but it doesn’t include the delivery of goods or even the quality of good. Furthermore, sometimes it even does not include technical legal aspects of the contracts.
As a result, the bank phrases out certain points and maintains discretions. In reality, this type of situation gives rise to disputes as many times people misinterpret them. Moreover, errors in terminology requirements make it much worse. Furthermore, for this, goods remain at the delivery location without being claimed.
If any kind of data mismatching occurs between the LC and trade documents payments, get delayed. So, unless the buyer approves it, the seller won’t get it, which is a loss for the seller. Moreover, if the LC is valid for only a short window time and the shipments take longer to process, then it becomes invalid. Therefore, causing more trouble than reducing it.
How Blockchain Trade Finance Use Case Can Help
That’s why in this case, blockchain trade finance use case can really come in handy. With the help of blockchain trade finance use case, you can model the LC as a self-executing smart contract.
Using this method would automate compliance verification according to the trading terms, and it would be secure and faster payment for the seller. You would not have to worry about the payment in case of issues because there won’t be scope for that.
Moreover, automating the process would also mean that any discrepancies rising would get detected from the start. That’s why it’s one of the efficient blockchain trade finance use cases.
Delivery Assurance for Buyers Using Trade Asset Tokenization
Visibility is one of the major keys in terms of trade finance. It’s because buyers would have to know about the timely indications of when they might get the potential shipment of goods. Furthermore, to fulfill their downstream obligations, they need to know about the location of the shipment.
However, in many cases, buyers actually lack this scenario and don’t have a proper insight into the possible delay factors or bad weather outcomes, port congestion, and many other cases until the actual time of delivery. Furthermore, this limits the option to foresee business risks and mitigate those.
Other than these trade documents also come in separately from the shipment. So, even though you got the shipment, you won’t be able to claim it until you get the proper documents for that. Moreover, people can easily forge documents to manipulate certain valuable points, which in term leads to disputes.
Furthermore, it mainly happens due to interactions within the stakeholders, trade procedures, variations in the regulations in countries, and lack of proper security protocols. Thus, you’ll see more and more document frauds between trading companies.
How Blockchain Trade Finance Use Case Can Help
On trade finance blockchain platform, you can easily solve this issue. Furthermore, the blockchain trade finance use case is more than capable of handling delivery issues. You can use the blockchain for trade finance platform to digitize all the trade assets using crypto-tokens. Moreover, you can also use it to denote custody or change the ownership of the bearer alongside the shipment process.
All you’ll have to do is link the transfer between the two trading companies and establish a chain of provenance. Furthermore, any relevant party can also issue the trade documents directly on the blockchain trade finance platform without any hassles.
Moreover, tokenizing assets on the blockchain for trade finance platform offers better risk management option instead of relying on the physical documents. Coupled with the real-time tracking option of the trade finance blockchain they can reduce the risk further as they will know exactly where the shipment is.
Furthermore, if you start using blockchain trade finance use case for exchanging documents such as a bill of lading, you would reduce the hold-up timing of the cargo. Moreover, you’ll also be able to prevent losses due to document manipulation using trade finance blockchain easily.
Reducing Risks and Increasing Revenues through Payment Instrument Digitization
Different trade receivables act as a negotiable instrument for the supplier or even the buyer. Instruments such as drafts, checks, bills of exchange, and notes can get you the security you need. However, you would need to file them in the bank or use other financial institutions for it.
Furthermore, this ensures that you have the funding to make the sale or at least transfer all the instruments using discounts, forfeiting and factoring.
However, in many cases, banks have to deal with a lot of deceivable factors. These are limited availability of the trade information, higher costing of manual screening, and many other factors that make them vulnerable.
As a result, you might face substantial loss such as fake receivable, duplicate financing, costly lawsuits, reputational damage, multi-million dollar fines, etc.
Furthermore, another major pain point in financing is the unavailability of timely trade credits and insufficiency for SMEs. As a result, they receive deferred payment rules from the buyers, but there’s no liquidity to meet up with their capital demands.
Furthermore, the overhead for issuing, transferring, storing and redeeming of the receivable documents make it an inefficient, time-consuming and costly option. So, in the end, you are stuck with an overly slow system for trade financing.
How Blockchain Trade Finance Use Case Can Help
Blockchain trade finance platform can literally help out in this case. In reality, all the payment instruments are actually credit instruments for the trade transaction. So, you can directly issue them on the blockchain trade finance platform as a native asset.
Furthermore, you will also be able to create promissory notes or bills of exchange right on the blockchain trade finance platform between issuing and redeeming companies. If you can directly issue all the payment instruments on the blockchain trade finance platform, then you will get rid of the fraudulent invoicing issue surrounding SMEs.
Moreover, you will also be able to increase the level of liquidity on the blockchain for trade finance platform. This will, in the long run, reduce the level of risks and increase your overall revenue.
Identifying Good Partners through Identity Management
Identity management is one of the important issues of trade finance. Usually, when it comes to international trading, there are hardly any options to meet or verify the company you will be partnering up with.
That’s why in many cases, there are a massive amount of fraudulent activities with the true identity of the company. Many companies claim opportunities that they can’t offer and many share wrong information about their company.
Also, there’s a group of con-companies that pretend to buy or sell goods to companies, but at the end of the trade, they do not pay up or even send the shipment. Also, banks have to fully facilitate trade transactions to cover all the risk of delivery or payment of both parties.
However, with no proper channel for identity management, they sometimes have to deal with massive losses too.
How the Blockchain Trade Finance Platform Can Help
Now with the advancement of the technology blockchain, trade finance platform can offer you identity management system. So, for that, any party who wants to join the network has to prove their identity, and you can preserve those documents on the blockchain for trade finance platform.
Moreover, making sure they are authentic or actually is who they claim to be will be super easy as you will be able to do it in real-time.
Once the creditworthiness of the companies is confirmed, you can ensure that all the history of the documents will be on the blockchain based trade finance platform. Thus, you can manage all of them from one place.
Furthermore, preserving all the identities of companies will also offer a more transparent and effective blockchain based trade finance platform.
Contract and Document Management through Immutable Ledger
As you’ll be dealing with a lot of paperwork in trade finance, it’s quite common for you to manage all the documents and contracts accordingly. Usually, people need to verify certain documents at certain times along the way of trading. Thus, it becomes important that you manage all of them or else even if you make a single error it could cause an issue.
On the other hand, you would have to deal with a lot of legal aspects too. So, any minor issue could lead to lawsuits or large fines. In reality, not many can actually manage all the documents accordingly and also maintain all the rules properly.
How Blockchain Based Trade Finance Platform Can Help
Blockchain-based trade finance platforms can easily manage all your trade-related documents from the network. Furthermore, documents such as regulatory, financial, insurance and commercial all are full proof as you can hash them and make them accessible to relevant parties.
So, everyone will just make changes to the recent version and everything other than that will be immutable.
Usually in blockchain based trade finance platforms will be immutable meaning no one will be able to change anything. However, as it needs to be updated constantly, every user needs to make changes to the recent files. Obviously, for that, you will need certain authorizing access. All the documents would need auditing before getting stored on the ledger.
Furthermore, keeping everything on the immutable channel of the blockchain based trade finance platform ensures a better output every time.
Reduced Transaction Fees with Automated Settlement
As you already know there are numerous players in trade finance. However, not every one of them is necessary for the new trade finance blockchain model.
For instance, banks usually make a settlement and ensure that both parties are getting equal rights. However, these processes or the service the bank offers takes up a lot of time and money.
More specifically letter of credits is few of the financial statements that require a high level of cost. So, in a sense banks are also a medium or middleman in terms of trade financing.
How Trade Finance Blockchain Platform Can Help
The trade finance blockchain model offers a lot of different ways to make the trade. You can use the usual way and do everything on the ledger. In this trade finance blockchain model, you will deal with every single traditional trade finance players.
However, if you and your trade partner have proper trust levels or even confirmed valid identification, not every layer is needed during the trade. You can just execute the contract using smart contract features on the trade finance blockchain platform. That’s why you need to implement blockchain for business.
Furthermore, all you’ll need to do is to set up the rules that you both agree upon and use the native token to make the trade. By doing this, you won’t have to pay up big service fees to any middleman’s. Another possibility is that when you are dealing with stable native assets, they are much more durable than fiat currencies.
So, during cross border payment you won’t have to worry about conversion issues with trade finance blockchain. Moreover, transaction fees in the trade finance blockchain platform are quite small, so it’s a win-win situation for everyone.
Want to know more about Blockchain Transformation? Check out our Blockchain Transformation playbook!
Chapter-5: How Trade Financing Can Work Using Blockchain
Step-1: Use Trade Finance Blockchain Platform to Meet Trading Partners
Let’s start with the very first step. In case of trade financing to go through you would need to meet with other companies to get to an agreement. Furthermore, your selling needs and buying needs would differ from company to company and getting the most suitable partner is the challenge.
Due to the lack of liquidity trading becomes a bit difficult. So, connecting with the right customer isn‘t one of the perks of trading. For example, you may need a shipment of coats, but it needs to be specially made according to your brand. Moreover, to do that you are trading with an overseas company who manufactures coats. However, they aren’t able to modify it according to your needs.
The problem is that it’s not easy to switch to another company when you are in a marketplace without any liquidity. Furthermore, you might not even know about other players that offer a special modification.
However, when it comes to trade finance on blockchain, you can get the liquidity you want for your specific niche. Companies from all around the globe can come together on the platform and choose their best potential trading partner.
More importantly, as everything on the blockchain and trade finance platform is authentic, there’s no chance of any fraudulent company to exist there. Furthermore, this will allow the buyer and seller to use blockchain and trade finance platform to find potential trading partners who are trustable. It will be like a marketplace where there will be a matching engine to match buyers and sellers.
Moreover, everyone will outline their capabilities and requirements to get a better output in trade finance on blockchain.
Step-2: Create a Smart Contract and Initiate an Order
Once you find your potential partner, you will start an agreement with them on the blockchain and trade finance platform. For that, you would need to contact them directly using the peer-to-peer network connection.
Once you know that all the agreements are approved by both parties, you can start to define the rules using smart contracts on the blockchain and trade finance platform. Any trade finance on blockchain platform will offer smart contract features because it’s one of the necessary elements. Furthermore, creating a digital contract on the blockchain and trade finance platform is quite easy.
Moreover, many trade finance on blockchain companies offer templates for setting up the contracts. So, you won’t need technical knowledge to do that either. After that, when both parties view the contract in real time and agree, the buyer will initiate the order.
Step-3: Bank Payment Undertaking Of the Buyer
As you already know by now, both parties bank mainly take care of the payment process of trade finance. So, in the case of trade finance on blockchain, both parties’ banks will also be on the smart contract agreement.
In this way, they will view the contract and the process and then initiate certain steps that need their actions. Furthermore, when smart contract conditions are met, they can settle the payment using the trade finance on blockchain platform. Moreover, the payment will be from the buyer’s bank account to the seller’s bank account.
Step-4: Receivable Financing For the Seller
Usually, trade finance payment takes place within 30, 60 or 90 days. It mostly depends on the shipment timing. Furthermore, the shipments in international trade could take up a lot of time depending on the route.
Moreover, the seller might not have time to wait for that long to get the payment. Instead, they can speed up the process for receivable financing from its bank. How will they do it?
They can sell their invoices to another factoring company and get cash instead, on the blockchain and trade finance platform. Furthermore, the seller’s bank will provide the invoice, and the factoring company will get on the smart contract agreement and pay up the seller.
After that, the factoring company and the buyer will be directly working together on the smart contract using the blockchain and trade finance platform.
Step-5: Shipment and Tracking of Goods
Tracking the process of shipment on the blockchain and trade finance platform is super easy. Additionally, the process is similar to tracking supply chain products. A tracker will let the buyer and seller know exactly where the cargo is. Furthermore, it won’t matter which way the seller is shipping the goods. The tracker will always let them know of the exact location and condition of the goods.
More advanced trade finance on blockchain platforms offers special tracking options. Moreover, they allow you to know certain features such as weather conditions or temperature or the intactness of the goods. Furthermore, you will also be able to track the quality of a product if it’s weather sensitive.
So, once the seller ships the goods, both parties will track the process of the shipment.
Step-6: Buyer Confirms the Trade
Once the buyer gets the shipment and sees the smart contract update, they will contact the shipping company to confirm it. Once every document is proved authentic in the platform, the buyer will confirm the trade in the smart contract.
Furthermore, for confirming the will be an option to click a button to confirm it. In case of any disputes, there will be an option to settle the dispute in the trade finance on blockchain. Moreover, you will get multiple options to choose what type of conflict or complaint you have against the buyer or seller.
After the processing of that, the buyer will then confirm the payment using trade finance on blockchain. However, in the case of different resolution, certain actions will take place.
Step-7: Seller Gets the Payment
The shipment is made, and the buyer confirmed that on the blockchain and trade finance platform. So, the smart contract will automatically initiate the payment for the seller using trade finance on blockchain.
Firstly to do this, the buyer’s bank will debit the amount of money from the account and then send it directly to the seller’s bank account. Secondly, the seller’s bank will confirm the payment on the blockchain and trade finance platform. Lastly, both parties will end the contract as everything went through on point.
Check out our guide on Blockchain for insurance from here!
Blockchain Consortium, Companies And Popular Enterprise Blockchain Platforms For Trade Finance Infographic
Chapter-6: Popular Enterprise Blockchains Suitable For Trade Finance
There are many enterprises implementing blockchain. However, not every one of them is suitable for trade finance niche. Finance is one of the vital use cases of blockchain technology, and many enterprises now offer special solutions for trade finance blockchain platforms.
If you are looking for the best trade finance blockchain companies to fuel your project, then you should definitely check out all options form below. We’ve handpicked the most popular and best suitable enterprise blockchain suitable for trade finance. So, let’s see what they are –
Let’s start with one of the major players in this industry – Hyperledger. Hyperledger is a project of Linux, and it came to be from the year 2016. Furthermore, Hyperledger happens to be a great solution for various kind of industries including trade finance.
Trade finance blockchain companies would definitely find it a fitting match for their project because of the wide integration. At present Hyperledger has more than 185 collaborations in progress. Moreover, with ten different types of projects in the bag, Hyperledger is practically ruling the market.
You’ll be pleased to know that many of their projects support the trade finance niche and offer exclusive features just for that.
What Does It Offer?
Permissioned Blockchain System
The trade finance blockchain technology comes with the permissioned framework. So, when you are joining the network, you would need to verify your identification. Furthermore, you will be able to find your relevant partners easily.
High Scalability with Greater Performance
Trade finance blockchain platforms need to be scalable. Also, they need to cover thousands of transactions within seconds. That’s why Hyperledger offers high scalability with premium quality output.
Need-To-Know Data Availability
Trade finance blockchain platforms have to deal with a lot of sensitive documentation. Furthermore, they would also need to make sure that only the trading partners can see those. For that, Hyperledger offer only need to know data availability in the ledger.
Rich Queries Languages
Hyperledger offers rich query languages, so it would easy for any trading company to search through the database.
Adding up new features in the trade finance blockchain platform would be an easy thing with the modular structure of the network.
Safety Measurement for Sensitive Data
Hyperledger knows that all financial services have to have high-quality security that no one can hack into.
Ethereum Enterprise Alliance
Another great enterprise platform for trade finance blockchain companies is the Ethereum Enterprise Alliance. Ethereum is one of the oldest blockchain technology and the most popular one for that matter on the market. Furthermore, every problem with the bitcoin architecture is non-existence in Ethereum.
Moreover, this platform offers a robust range of functionality for trade finance blockchain companies. However, it’s not solely for financial industries. Due to the demand for high-end enterprise needs, Ethereum formed a consortium with 250+ members. Furthermore, they are a nonprofit permissionless blockchain.
So, you might think that they aren’t best suited for financial causes. However, they offer special restrictive access for parties that need privacy.
What Does It Offer?
Well, first of all, they offer an open source platform for trade finance blockchain platforms.
Trade finance blockchain projects have to deal with the authoritative influence of EEA. It’s because to maintain an open ecosystem there needs to be certain regulations and EEA will maintain that. Moreover, if you point out your guidelines from the start, it would be easier for them to maintain that.
Provide Governmental Support
What can be a better way to launch your trade finance project than to have full Governmental backup? Usually, blockchain platforms deal with law and regulation issues. However, the financial sector needs to be under the law. And EEA offers just that.
No one wants to fall behind, and that’s why EEA will always upgrade their features and add more to the public version of the platform. This way both the private and the public platform benefits. And so will your trade finance blockchain.
Trade finance has to have KYC/AML protocols to know their customers better. With EEA you will get all legal features of like this.
R3’s Corda is one of the commercial blockchain version of the Corda software. Furthermore, the platform is designed to be open source for enterprise users. Needless to say, trade finance blockchain companies should definitely use it.
The best thing about this platform is that it’s mainly for financial sections. Although in recent events there are other implementations as well, still it’s mostly geared for financial sectors. That’s why using it on your trade finance blockchain platform can be the best call.
Corda came to be from the year 2015, and at present has 200+ members in their bag. Furthermore, trade finance blockchain companies can truly use the permissioned type of nature in their projects.
What Does It Offer?
Maybe you are looking for the best blockchain application firewall. Then, Corda is here to save your day. Trade finances need strong protection from document leaks and tampering. Furthermore, with the help of Corda now trade finance blockchain can leverage this awesome firewall to protect their documents.
Another useful feature for the trade finance blockchain projects is the use of an advanced level of encryption. For that they use cryptography; however, this one is far more superiors than any other cryptography in the market. Furthermore, it’s practically impossible for any third party to decode it.
The platform offers high availability for all trade finance blockchain community. It’s up and running 24/7 with the same advanced output.
Monitoring and Recovering Disasters
With the help of R3 Corda, you will be able to monitor your luxury goods location. In case of any disasters, there is a countless way to recover from the platform. Furthermore, there are major tools to even predict such a disaster to avoid it.
From 2012 Ripple has been a top-notch blockchain platform on the market. However back in that time, it was Opencoin. Later in 2015, it rebranded as Ripple. Trade finance blockchain companies would love this platform as their RippleNet connects banks, payment providers, corporations, asset exchanges, etc.
So, if you are looking for any kind financial player, the RippleNet has got your back. Moreover, trade finance blockchain companies would be thrilled to use almost free global transactions too. At present they have more than 100+ organizations working with them.
What Does It Offer?
Discover New Marketplaces
Many financial institutions struggle to find the proper customer and end up getting contracts with fraudulent companies. Not only it’s damaging the reputation of the trade finance companies, but it’s also causing the revenue to shift downward.
To deal with this Ripple is offering new marketplaces from where you can discover potential buyers and sellers.
Ensure More Customers
With the help of a solid platform like Ripple, you will be able to attract more customer to create contracts on the network system. Usually, sellers would be thrilled because they will get payments in a short amount of time using the trade finance blockchain.
Security Protocols and Safety Issues
There are lots of loopholes in the trade finance structure. To make it more full proof Ripple offers best security protocols. To top it all, they offer a special safety feature for the trade finance blockchain platforms.
Simplifying the Process of Payments
Trade finance blockchain platforms always need simplified output from this industry. As the typical nature of trading is quite complex many people face with difficult issues. But with the help of Ripple, no the trade finance blockchain companies can enjoy a simplified process of transactions.
The quorum should be next on the list for trade finance blockchain companies. Furthermore, the trade finance platform is designed to suit high-end outputs with greater speed transactions. Quorum would work best with trade finance as the network architecture is quite suitable for extensive usage.
Moreover, as it’s permissioned which mean, you will have to get private authentication features to enter the platform. Furthermore, this feature really goes hand to hand with the financial industry.
Trade finance blockchain companies would also love the fact the platform is super scalable and won’t crumble down under pressure.
What Does It Offer?
Node Managing Authority
It’s kind of like an authentication process to enter the network. At the entry level, an authority will check whether the party is eligible to enter the network or not. That’s why you will always find trusted verified people on the network.
Trade finance blockchain platforms need to maintain privacy, even during transactions. That’s why Quorum allows anyone to transact privately with another user.
Agreement through Voting
Quorum reaches an agreement through majority voting. And so, it doesn’t run on any typical energy consuming consensus protocols. As everything depends on the vote, it takes a really short time to get the transaction approved.
Unlike the public version of Ethereum, Quorum offers high-class performance. Not only that but it also offers a higher transaction rate than other platforms.
Chapter-7: Blockchain Consortia for Trade Finance
Eight banks came together and formed trade finance blockchain consortia named We.trade. Previously, We.trade was known as Digital Trade Chain. However, to make it more impactful, they rebranded as We.trade. At present they are taking trade finance blockchain support from IBM.
Furthermore, their main intention is to offer blockchain base trade finance for small to medium companies as usually, these companies face the most issues.
Moreover, with the help of Hyperledger Fabric and IBM’s banking industry experience, the blockchain based trade finance will be cheaper and easy to use.
In reality, trade finance blockchain consortia are taking all the facilities from the Hyperledger Fabric v1.0.0. Furthermore, Hyperledger is more than capable of being a trade finance blockchain platform.
At present the members of the trade finance blockchain are –
UniCredit, Rabobank, Santander, Deutsche Bank, Natixis, Nordea, KBC, and HSBC.
The trade finance blockchain consortia will directly run on IBM Cloud. Furthermore, this way the trade finance blockchain process will keep running smoothly.
Moreover, it will also track, manage, and secure international and domestic trade transactions on the blockchain based trade finance. Additionally, you can also track everything using mobile devices too. So, this blockchain based trade finance is super convenient.
There are lots of financial companies that formed the Marco Polo trade finance blockchain consortia platform. Furthermore, there’s also another member acting as just an observer and not taking any part is International Trade and Forfaiting Association (ITFA). Moreover, ITFA consist of over 170 members.
Marco Polo trade finance blockchain consortia exist because they want to offer better bank experience along with offer trade solutions to potential customers.
At present, Marco polo trade finance blockchain consortia are taking a technical backup from R3 Corda and TradeIX. There are several benefit points of this blockchain based trade finance platform. Let’s see what they are –
- Mutualization of Cost: Marco polo trade finance blockchain allows mutualization of the cost across many participants and members on the network.
- No Risk: Using the trade finance blockchain platform is highly beneficial as they offer zero risks because every participant is verified and pinned down with law and regulations.
- Network Effects: Comes with critical mass necessary solutions to promote a strong network structure.
- Collaboration: Sharing expertise and playing with technology across the industry gives rise to innovations. Moreover, the trade finance blockchain platform promotes it.
At present the members of the trade finance blockchain are –
Bangkok Bank, Natixis, Commerzbank, SMBC, DNB, ING, Standard Chartered, BNP Paribas, OP Financial, and NatWest.
Batavia is another one of the trade finance blockchain consortia. At present, they are collaborating with IBM for implementing their trade finance platform. It’s a small consortium of banks with only five banks at present.
At present the members of the trade finance blockchain consortia are –
CaixaBank, Erste Group, UBS, Bank of Montreal, and Commerzbank.
Batavia strives to exist because they aim to offer cross border trading networks along with the creation of multi-party. Moreover, they want to allow an open ecosystem of exporters and importers where both parties can find relevant partners for trade.
Furthermore, during their trial period, many live projects are also getting conducted such as transportation modes in different regions.
Also, Batavia traded various sizes of transactions and products goods to test how their platform works in a different situation. So, using Batavia trade finance blockchain consortia customers can trade without any errors with full transparency. Additionally, the single trade finance blockchain platform is also connecting more efficient partners together.
Voltron trade finance blockchain consortia are based on R3 Corda platform. However, they are also collaborating with CryptoBLK for technological support. Again, Voltron comes with 12 banks that want to streamline the process of trade finance in the international marketplace.
At present the members of the trade finance blockchain consortia are –
U.S Bank, Natwest, Bangkok Bank, Mizuho, BNP Paribas, BBVA, Intesa Sanpaolo, ING, HSBC, Scotiabank, SEB, and CTBC bank.
You all know how letters of credit is a fundamental need for trade finance. That’s why to make it even full-proof Voltron offers a secured trade finance blockchain platform. Using the platform the banks can issue letters of credit with relevant documentation without worrying about any mistakes.
As both parties can preview everything live, they can also come to an agreement or point out any errors before they seal the deal. Furthermore, corporate customers’ could directly upload the documents only with their respective partners. So, not every people can view all sensitive documents on the ledger.
HKTFP is a Hong-Kong based trade finance blockchain platform. The platform is a collaboration of banks and Hong Kong Monetary Authority. Moreover, the trade finance blockchain platform works on a proof of Concept based on special features for trade finance only.
At present the members of the trade finance blockchain consortia are –
Bank of China, HSBC, Hang Seng Bank, ANZ, Standard Chartered, DBS, and Bank of East Asia.
The primary goal is to get every single document and process digitized. Moreover, with having a single form of true documentation, there would be no frauds. Furthermore, they also want to link up to other trade finance blockchain platform in order to broaden the network of trading.
Also, HKTFP is a scalable solution as the marketplace of trade finance suffers from a lack of liquidity. Another great issue they want to solve is the high pricing. So, with the help of the platform, you can finally trade in low costing in those regions.
To power the platform they are using Hyperledger Fabric.
Komgo is another trade finance blockchain consortium. Their primary goal is to offer efficiency and security through simplification, automation and promote specific industry based functionalities.
At present Komgo wants to offer a decentralized blockchain platform to solve data exchange issues for the trade finance industry.
For commodity trade, they want to bring out data exchange and security, but they want to streamline it on the platform fully. Using their platform the buyer and seller can meet and connect seamlessly through secured channels. At present they are using Ethereum to power their blockchain network, and they are also taking tech support from ConsenSys’s Kaleido.
Furthermore, there are fifteen diverse stakeholders of this consortium which includes commodity traders, banks, inspections companies, and energy majors.
The trade finance consortia members are –
Gunvor, Shell, BNP Paribas, Citi, Société Génerale, Macquarie, Mercuria, ING, ABN AMRO, Rabobank, Crédit Agricole Group, MUFG Bank, Koch Supply & Trading, SGS, and Natixis.
Chapter-8: Real-World Companies Using Blockchain for Trade Finance
Japan’s Mizuho bank is fully taking on the trade finance blockchain platform. Recently, they completed one of the first trade finance transactions between Japan and Australia without any hassles. Moreover, according to them, every documentation and data were shared smoothly between the two parties.
Furthermore, Mizuho is actually working with two other parties – Sompo Japan Nipponkoa Insurance and Marubeni Corp. In reality, their trade finance blockchain solution is able to reduce a significant amount of time for trading.
At present they are taking tech support from IBM Japan for developing the trade finance blockchain platform. However, Mizuho thinks they still have a really long way to go before the project is absolutely perfect. So, hopefully, we’ll be getting a great trade finance blockchain solution form them soon.
Barclays is another one of the companies that are changing the traditional ways of trade finance. Along with the company Wave, they are working on a trade finance blockchain platform that would deal with global trading issues.
Furthermore, on their very new trade finance blockchain platform letter of credit transaction happened between Seychelles Trading and Ornua. Moreover, both of these parties exchanged trade documents using the Wave platform without any issues. Additionally, they used SWIFT to pay up their funds.
The new trade finance blockchain platform makes sure every party on a contract would see and transfer shipping documents and titles using their secured decentralized network. Thus, the new system can really speed up the process and reduce the overall costing.
Moreover, it’s also able to detect any fraudulent activities within the documentation. At present, Barclays is the only company exploring the potential of the Wave platform. But they also want to collaborate with other banks or financial institutions to fully utilize the potential of this wonderful trade finance blockchain platform.
People’s Bank of China
Another great trade finance blockchain platform is working its way to the world. This time People