How can you use FINTECH to acquire new insights into your business by identifying trends that were earlier unrecognized?

Case study:

Trade finance serves as the lifeblood of international trade in goods and services by enabling transactions between buyers and sellers worldwide. Trade finance provides the credit, payment guarantee, and insurance needed to facilitate the transaction on terms that would satisfy all parties.

One of the difficulties involved with trade finance is the large volume of paper documents that make up much of the information flow between trading parties.

Most of the trade finance activities involve a substantial amount of physical paperwork being shuffled back and forth between the importer, exporter, importer's bank, exporter's bank, shipping company, receiving company, local shippers, insurers, and others.

This reliance on documents usually has drawbacks, including the cost and time required to prepare, transmit, and check these documents. Paper documents may also be open to errors and even forgery.

COVID-19 impact

Furthermore, the COVID-19 outbreak has impacted different trade finance steps, including deal origination and distribution, negotiable instruments, document transmission, authorized signatures, and shipping.

Nowadays, several banks and financial institutions worldwide are trying to quickly scale their digital initiatives to move toward a world where digitalization is central to every interaction.

Banks are looking to utilize technology to streamline trade by creating digital ecosystems that reduce costs and increase trade finance efficiency by replacing paper with digital data flows.

The International Chamber of Commerce (ICC) survey conducted in April 2020 indicated that banks are focusing on the rapid adoption of FINTECH (IOT, AI, Machine Learning , Automation , Blockchain), the digitization of documentation, and automated processing and handling software in response to the COVID-19 pandemic.

Potential benefits of FINTECH with blockchain technology for trade finance

There has been widespread optimism regarding the application of blockchain in the banking industry. Many industry practitioners argue that blockchain technology can disrupt business and financial services in the way the Internet disrupted off-line commerce.

Blockchain technology holds the potential to change business processes by redefining value chain interactions, reducing operational complexity, and reducing transaction costs. Blockchain technology entails a distributed database that autonomously maintains a continuously growing list of transactions recorded in units called blocks and secured from tampering and revision.

Each block contains a timestamp and a link to a previous block. The blockchain combines several computer technologies, including distributed data storage, point-to-point transmission, consensus mechanisms, and encryption algorithms.

Most blockchain networks aim to create a database system in which decentralized agents or institutions can jointly record information and maintain it, with no individual party exercising continuous market power or control. The basic idea of blockchain technology is to decentralize data storage so that such data cannot be owned, controlled, or manipulated by a central actor. Blockchains proponents argue that the blockchain, serving as a shared ledger (database), may facilitate trade finance using its distributed network, which maintains transparent records of critical transactions among trading stakeholders.

The blockchain could potentially enhance transaction transparency and supply chain traceability. Trade finance practitioners claim that moving to paperless trade would be hugely beneficial in supporting the supply chain through reduced costs, error-free documentation, and fast transfer of documents to customers.

Accordingly, banks would generate more revenue from trade finance activities by attracting businesses not participating in cross-border trade and companies selectively shifting from open accounts to documentary credit transactions to seek greater risk mitigation. It is assumed that blockchain technology can address the shortcomings of the traditional paper-based trade finance system by digitizing, optimizing, and shortening the trade finance process and making it more transparent, cost-efficient, and accessible.

By digitizing documents, banks and corporates would reduce the need to collect, scan, and re-key data, leading to greater efficiency in the trade finance process.

Furthermore, as blockchain allows for simultaneous access to critical documents by all authorized parties anytime or anywhere, it might eliminate manual tracking and reconciliation of paper trails and bilateral e-mails.

Using Smart Contracts in International Trade

Blockchain technology has permitted the emergence of "smart contracts". Smart contracts are contracts based on decentralized consensus as well as tamper-proof algorithmic executions.

The smart contracts refer to a series of digital agreements, including terms and conditions promised by contract participants.

With its programmable protocol, the smart contract allows the execution and automation of contract terms. The essence of smart contracts is that they can enable parties who have no trust in each other to collaborate without the need for a trusted intermediary like a bank. Smart contracts may be programmed according to the terms of contractual agreements, and payments may be triggered by predetermined events.

Various research indicated that smart contracts could reduce costs for gathering and processing information, drafting, and negotiating contracts, monitoring, and enforcing agreements, and managing relationships, allowing for more market-based governance structures under certain circumstances.

Smart contracts generally may increase trust in data due to the secured storage system and guarantee operations to be executed automatically without human mistakes or intermediaries involved in making the payments. Thus, smart contracts and blockchain technology seem to be appropriate for international trade activities in which the importer and export have little -if any- trust in each other.

Smart contracts could secure trust among parties in open account trading, enhance transparency in trade transactions, guarantee data reliability, reduce the risk of errors or fraud, and facilitate the exchange of payments.

Networks of Networks Interoperability Trade Finance

Initiatives to apply blockchain technology in trade finance

Blockchain technology is still at an early stage of development, and further research is needed to enhance its efficiency and security.

Several business institutions have established their own blockchain laboratories, working in close collaboration with blockchain platforms, and published a series of studies on this topic.

In 2016, Barclays announced its cooperation with fintech start-up named 'Wave' to initiate the supposed first global trade transaction with its blockchain-based letter of credit project using the Wave blockchain platform. The transaction guaranteed the trade of almost USD100,000 worth of cheese and butter between Irish agricultural food co-operative Ornua and the Seychelles Trading Company.

In 2018, HSBC announced that it completed a trade finance transaction to issue an entirely digitalized letter of credit, using blockchain technology. In this transaction, HSBC Singapore acted as the issuing bank of the letter of credit, and ING Geneva served as the nominated bank. During the same year, Banco Bilbao Vizcaya Argentaria (BBVA), a Spanish bank, used blockchain technology as a substitute for traditional trade documents.

This project was related to the importation of frozen tuna from Mexico. The letter of credit for this project was issued by BBVA. In this transaction, the blockchain solution provider utilized digitized documentation and electronic signatures to replace traditional paper-based trade documents.

In 2020, Standard Chartered and DBS Bank Ltd announced that they have kicked off a project to use a blockchain network to register trade finance transactions with the support of twelve other banks, including ABN Amro, ANZ, CIMB, Deutsche Bank, ICICI, Lloyds, Maybank, Natixis, OCBC, Rabobank, SMBC and UOB. DBS Bank Ltd and Standard Chartered mentioned that they would work with the Association Banks of Singapore to implement the trade finance registry within Singapore before expanding it globally to cover major trade corridors at a later stage.

IBM has been spearheading the application of blockchain and smart contracts to trade finance.

In 2017, IBM and Maersk, cooperating with Hyperledger Fabric, announced the completion of an end-to-end digitalized supply chain model using blockchain technology, which involves trading parties and various ports and customs authorities.

Furthermore, different types of blockchain consortiums have emerged to promote blockchain technology and its applications. The development of trade finance platforms was carried out by several large banking consortia in collaboration with technology providers such as IBM Hyperledger or R3 Corda.