With Asia being one of the world's largest economies, trade finance is a key element in facilitating the region's cross-border commerce. According to the International Monetary Fund (IMF), about half of imports in the United States and a third in Europe come from Asia. The financial agency also notes that Asia accounts for almost half of global demand for key commodities.
However, the disruption of recent years has underscored that these opportunities will continue to be tempered by headwinds – highlighting the need for greater agility and resilience.
Yet a key hurdle to achieving this much sought-after agility and resilience is modern supply chain complexity, which is compounded by trade finance's persistence with legacy systems. Sticking with these outdated, labour- and paper-intensive processes only chip away at competitiveness, slowing down transactions and hindering visibility. Pivoting to digital and doing away with processes that have outlived their usefulness is no longer negotiable, but an imperative.
Not only does digitisation of trade finance bring significant benefits in the near-term, it also shores up resilience and solidifies organisations' ability to navigate future disruption.
Optimising document processing
Every day, trade finance deals with massive volumes of data that need to be processed and delivered to stakeholders such as banks and traders. These datasets are exchanged at different stages of the supply chain, but due to reliance on paper documentation and checking, can introduce unnecessary hold-ups such as contractual delays. For instance, data mismatches in letter of credits and underlying trade documents can cause payment delays.
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Such delays are often directly caused by the use of paper documents as they are required to be amended by the party involved before the letter's expiration date. With hard copy storages in box files and or disparate and siloed document management systems, it is cumbersome to retrieve information on time. Digitally enabled immutability is the key to mitigating these risks as it enables real-time visibility and authentication.
Challenges to seamless credit flows
Manual processing and the rudimentary structure of trade finance today are also ineffective at combatting duplication and, worse still, fraud.
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This is further complicated by the different concerns held by a range of stakeholders party to trade. Regulators, for instance, will be particularly preoccupied with trade-based money laundering and will want additional layers to cross-check before approving a transaction.
Banks, on the other hand, will want to avoid duplicate bills of lading, multiple financing, fake bills of lading and the like. Naturally, overcoming this requires effective, data-driven multi-party collaboration. This holds the key to mitigating duplicate financing from different banks and lenders for the same inventory. It also shores up trust and confidence among banks and traders, which in turn, facilitates more sustained credit flows.
Blockchain technology adoption
Digital solutions such as blockchain hold the potential to elevate trade finance by providing technological infrastructure to manage large volumes of data quickly, efficiently and securely through a decentralised network. Blockchain technology will enable documents related to trade finance to be effectively managed by hashing it to ensure that parties involved are able to access and amend documents to its latest version.
This single source of truth also enables contracts to be created and updated directly on the blockchain via a multi-signatory mechanism. When coupled with the capability to carry it through the process in the supply chain, it can be conveniently referenced for all transaction activities. This allows for storage of all information in a secure and accurate manner via cryptography. The same can be accessed using "keys" and cryptographic signatures, whereby stored information becomes immutable and is governed by the rules of the network.
Reaping all that trade digitisation has to offer
All things considered, then, modernisation is no longer a 'nice-to-have' luxury. Stakeholders across Asia Pacific must embrace blockchain to remove friction from supply chain flows to allow vast volumes of documentation – including product, shipping and transaction details – to exchange hands transparently and securely.
Understandably, as much as, cutting down on losses from manual errors, having greater confidence in transactions and increasing credit lines are attractive propositions, trade finance digitisation can seem like a major overhaul. It may seem like too much of a hassle in the face of a deeply entrenched and relatively functional system. However, hedging on legacy systems will only leave the business playing catch up in the near term, and most definitely irrelevant in the long run. Instead, leveraging a "plug-and-play" blockchain solution eases this transition, giving businesses the best of both worlds – facilitating all the benefits of trade digitisation without all the bother.
Farooq Siddiqi is the CEO of #dltledgers
