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Guest writer: Alisa DiCaprio, chief economist and head of trade at enterprise software firm R3
Trade finance is notorious for its stubbornness to embrace digitisation, but technology has now matured to the point where it is ready to direct the industry onto a more sustainable and efficient path. Against a backdrop of continuing supply chain disruption, bottlenecks and delays, now is the time to harness digital solutions to implement widespread and strategic change.
Enterprise blockchain is perhaps the most promising and appropriate technology to enable this journey. Trade is inherently a decentralised system, and the decentralised nature of blockchain makes it a perfect fit for trade finance. For the first time, the industry is getting behind this new technology and moving it into real-world deployment at record pace.
With the industry experiencing a period of reflect and reset like never before, how are participants benefitting from this change? Many of the processes and technologies underpinning trade finance have not been modernised in decades, from paper-heavy processing to juggling between multiple portals and documentation for each shipment.
These inefficiencies in trade finance mean that nearly $1.5 trillion of in-demand capital across the industry is rejected by banks, according to the Asian Development Bank, with some 60% of banks expecting this figure to increase over the next two years.
Developing markets that rely heavily on access to trade can be severely hindered through trade finance’s outdated processes. By digitising these manual processes, such as invoice financing, and superseding ageing legacy systems, blockchain can have a real impact on reducing the costs, risks and delays to participants involved in trade finance.
Creating an open, inclusive global network
Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. That said, there is growing debate about how blockchain can provide decentralised solutions for trade financing.
One such solution is real-time visibility, which is available via permissioned access to authorised network users and gives buyers and sellers unprecedented transparency into the status of their transactions. In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process.
Moving to mass adoption
For trade finance to truly capitalise upon the digital revolution, mass adoption on a global scale is essential. This elusive network effect can only be achieved if technology players prioritise forward-thinking and inclusive integration solutions that lower the barriers to entry for all types of companies involved in the trading process.
If only a handful of firms adopt a blockchain solution for invoice financing, the benefits such as speed, efficiency and lower costs mean nothing, as there won’t be enough counterparties to connect with.
Marco Polo is a key example of a solution built for its market. The Marco Polo Network has developed a solution for post-shipment trade financing using the TiX platform. Powered by the distributed platform from TradeIX and R3’s Corda blockchain technology, Marco Polo enables end-to-end, real-time, seamless connectivity between trade participants. This eliminates the data silos, which prevent free flow of information causing inefficiencies and discrepancies.
The impact of digitisation on the trade finance industry, however, will not be felt instantaneously. With many businesses yet to become fully digitally native, the key to unlocking blockchain’s true potential lies within plugging this technology into existing infrastructure rather than overhauling legacy processes entirely.
Instead, integrating this technology into firms day-to-day business operations holds the key to rewiring the $8 trillion global trade finance market and solving the $1.5 trillion shortfall.