Trade finance through banks and financial institutions plays an indispensable role in the global market. It fuels international commerce by providing delivery and payment assurance to buyers and sellers, helping them cover the trade funding gap. Currently, the trade finance market stands between $4 trillion and $5 trillion.
However, trade participants are exposed to various business risks followed by uncertainties. Besides, many frauds and challenges are associated with trade finance. The various vulnerabilities can be counted as payment and delivery delays, lack of insights in the movement of goods and the efforts required for the counterparties’ due diligence. Due to these obstacles, both risk and cost factors increase, especially for small businesses.
Blockchain technology can eliminate all these problems, resulting in a better financial ecosystem. Enterprise blockchain solutions have the potential to:
- Minimize frauds and disputes in delivery and payment mechanism
- Enhance the transparency of asset movement
- Enable easy flow of trade receivables
Potential of Blockchain Solutions
The realm of blockchain technology has the potential to navigate the shift to a new advanced digital world. The technology reduces operational complexities and transaction costs and redefines the value chain interactions.
The three salient features of blockchain that will contribute to treating the major pain points of trade finance are:
- The cryptographic security — the security is maintained as it is based on the blockchain technology, making the information immutable and credible. It is based on permission access for trade participants, thus ensuring privacy and confidentiality of data.
- Distributed ledger architecture — ensures transparency and traceability of the transactions. It increases the visibility of the status of asset tracking, enables execution of contracts through smart contracts and can handle the downtime and risks.
- The network consensus mechanism — it is based on the consensus network which enables a single source through which the truth flows enabling it to be a base for issuance of financial obligations. It eliminates the problem of double-spending, fraud and a requirement of continuous reconciliation.
All these features together form a strong foundation for the collaborative trade finance ecosystem and it effectively increases the efficiency of processes, improves the liquidity and provides a better vision into the trade finance chain.
Blockchain’s impact on trade finance
The benefits of blockchain can be leveraged by the finance industry while addressing the pain points of trade finance.
Automated payment methods
An effective way to minimize business risks is the use of the letter of credit (LC). It facilitates the trade flow and settlement process though the mediator of banks. These are affected by high costs of transactions, complexities in the process and contractual delays. There are many flaws in the system as LC is based on the system of evaluation of documents instead of the actual delivery of assets which made the goods unclaimed at the delivery location.
To alleviate the various risks associated with the LC, it can be re-modeled on the concept base of blockchain. This would enable the mitigation of ambiguities in the payment contracts by automating the compliance verification process in terms of the contract and ensuring faster payments to sellers. The integration of enterprise blockchain solutions into the system also discovers the early detection of any inconstancy or inefficiency in the process.
Assurance of delivery to buyers through asset tokenization
In the shipment transit, buyers need to foresee timely indications. It enables them to minimize the business risks and future damages that may happen when assets may not reach the delivery location at the expected time. Buyers lack the insight into the damages or delays that happened along the journey may be due to bad weather, custom hold-ups, congestion in ports or any other reason.
The main factor affecting this situation is that the actual trade documents move separately from the flow of the goods. In this situation, a buyer cannot claim the goods until he receives the physical documents. The documents may get forged, leading the buyer into a complete mess.
However, integrating blockchain technology into the system enables the digital transformation of assets into crypto assets. It will further denote the custody and ownership of the bearer. Thus the trade documents can be issued and verified directly on the blockchain by the concerned parties. It will also enable delivery issuance and better management of risk.
Increasing the financial revenues for banks through digitized payment instruments and mitigation of risks
Banks act as a medium for the trade receivables and other financial instruments such as promissory notes, drafts or bills of exchange. These are the negotiable instruments which are transferred to the third parties. This enables the suppliers to maintain their working capital daily by choosing methods such as discounting and factoring.
In a traditional process, banks face some obstacles in the compliance procedures due to the inefficiencies of limited availability of information, reliability on trade documents and huge incurring of cost. This results in business risks, further leafing to financial fraud, duplication of transactions, damage to reputation and costly law-suits.
To overcome this, the payment instruments can be issued on a blockchain network. These can be digitally created as the financial contracts between the issuer and the redeeming party. It will thus prevent fraudulent activities, improving SMEs financing options, maintenance of liquidity and efficient management of receivables.
Enterprise blockchain solutions can help will remove the inefficiencies from the trade finance process, subsequently improving the interest of all the stakeholders. This association will further result in the seamless management of major operational complexities.
Antier Solutions helps businesses and entrepreneurs adopt the next wave of a digital business through enterprise blockchain solutions development. We create a harmonious trifecta of technology, design thinking-driven approach and intelligent strategies to help in blockchain integration.