Future cross-border trade and supply chains have undergone a significant change as a result of the pandemic’s first two years and subsequent armed conflicts. Businesses have started to realize that dangers like these are commonplace, and many have taken significant steps to improve their digital capabilities to avoid supply chain disruptions in the future. However, the modernization of a crucial part of the supply chain network is still lacking. There has never been a greater pressing need for the trade finance industry to update its antiquated methods of operation than there is in the current corporate banking environment.
Trade finance, which is essential to the supply chain, must urgently modernize in order to keep up with the rapidly evolving cross-border trade environment. It can no longer afford to be mired in mountains of paper papers.
The negative effects of living in the past
One of the oldest industries in the world, trade finance has always required a lot of paperwork and labor. Unfortunately, the conventional trade finance system is quickly losing its viability due to advancements in automation and the need for speedier communication flow. A cross-border trade ecosystem is a complicated one that involves numerous parties and involves the constant exchange of tonnes of documents between them. If banks continue to manage trade finance in a manual and labor-intensive manner,
The negative effects of living in the past
One of the oldest industries in the world, trade finance has always required a lot of paperwork and labor. Unfortunately, the conventional trade finance system is quickly losing its viability due to advancements in automation and the need for speedier communication flow. A cross-border trade ecosystem is a complicated one that involves numerous parties and involves the constant exchange of tonnes of documents between them. If banks continue to manage trade finance in a manual and labor-intensive manner, the result is likely to be increased process inefficiencies, rising costs, delays in credit analysis, data privacy concerns, and, worst of all, an inexhaustible vulnerability to fraud. Although fraud is not new to the world of trade finance.
Duplicate trade financing is the most severe type of supply chain fraud that banks encounter. This problem, which arises when an invoice is financed more than once, has plagued the sector for a while. One of the most notable recent examples included Hin Leong, a Singapore oil trading company, which resulted in losses of over US$3.85 billion for more than 20 institutions. Duplicate trade finance fraud can be linked to a lack of visibility and openness that makes it difficult for financial institutions to work together and provide crucial information on time. Financial institutions can ill-afford to consistently be on the receiving end of such malpractices as competition heats up, especially with the rise of fintech companies.
The blockchain’s potential
Given the difficulties the current system of trade finance faces, the best course of action is to quickly begin modernization using blockchain. Using blockchain will help reduce many of the dangers and worries that are currently associated with trade financing. High volumes of documentation, including information on the goods, the shipping method, and the transaction, are exchanged in a supply chain flow. In a system where information is expected by the hour or even minute, timely communication of large amounts of information is extremely difficult. Processes now take days or even months to complete.
All transactions are stored in a database and then distributed to multiple locations and important stakeholders when trade financing is carried out on a decentralized blockchain. Immutability of information, better compliance, better activity tracing, and long-term cost and risk reductions are all made possible by this. Additionally, blockchain promotes higher confidence among supply chain actors by enabling speedier transaction tracking and increased overall transparency that is available only to authorized network users.
Realizing blockchain’s full potential
Multiple stakeholders, including importing and exporting businesses, logistics providers, banks, and insurance firms, interact in a cross-border commerce situation. All parties must be on board with the effects that digitalization will have on trade finance, demonstrate a strong dedication to the cause, and consciously work to align themselves with the goals of carrying out financing on the blockchain.
Financial institutions and other significant organizations must set the bar for blockchain adoption by taking the lead and exerting pressure on the rest of the network to do the same. This might also make it more urgent to develop laws and regulations that promote or compel the adoption of blockchain technology across the whole supply chain.