Financial news

Since the beginning of trade, market participants rely on three key factors: logistics, credit, and payments. In today’s market, there are well-established solutions to address these three factors to provide financing and insure the associated credit risk, manage and process invoices, document the transfer of goods, and execute succeeding payments. However, the current technology supporting trade finance is no longer fit for purpose due to increased regulatory oversight and operational costs to support global trade growth in terms of size and reach.

Traditionally, commercial banks and credit insurers mainly focus on selective numbers of large corporate clients and occasionally mid-market companies with their trade finance offering. As it stands today, this limited profile of viable trade finance customers means a limited customer base. There is a huge potential for banks with an untapped customer base to increase trade volumes and reduce overall costs. In addition, current trade finance solutions offer poor customer experience with complex, mostly paper-based processes with information exchanged among many different parties requiring a high degree of coordination, time, and efforts.

Today, setting up a trade finance solution for a client is associated with relatively high costs in terms of due diligence, implementations with multiple platforms, onboarding, and compliance, as well as collaboration with other financial institutions and data providers. Furthermore, financial institutions still face the regulatory burden and mandatory elements of fraud prevention and anti-money laundering, even if the transaction is backed by credit insurance.

However, many of these challenges within the status quo of trade finance are being addressed with the introduction of distributed ledger technology and newly developed infrastructure for trade finance. The market recognizes that, for the first time in history, we have both the opportunity and the tools available to significantly grow trade finance in both the scope of solutions and the scale on which they are offered. As such, there are fundamental improvements and benefits that can be achieved for the entire trade ecosystem and the creation and deployment of entirely new business models for global trade. This requires breaking out from traditional boundaries within the banks and credit insurance offerings and thinking across the wider landscape.

Blockchain or Distributed Ledger Technology

A paradigm shift needs to happen to achieve this, with the first step being the opening of previously closed systems. This requires an open, automated, and transparent platform for implementing, executing, and managing trade finance solutions. With this new platform, the different parties don’t have to rely on complex integration, collaboration, and costly due diligence to trust each other. The platform should be able to work with existing solutions through automated communication channels, application programming interface (API), or by using light and modular applications based on specific rules engines leveraging distributed ledger technology.