In this piece Oliver Belin, CMO at TradeIX takes a deep dive into blockchain tech, the benefits of digital provenance and the security of knowing payments are rapid, encrypted and compliant in all markets. The future of underwriting is going to be powered by AI, and settled by DLT tech.
The market has always counted on three key elements since the dawn of trade: credit, payments and logistics. Looking at the current market, there are well-established solutions that target these three elements allowing to get adequate funding and risk mitigation and the subsequent execution of payments between the relevant trading parties. Nonetheless, today’s technology used is no longer adequate in order to accelerate the growth of the trade finance and credit insurance market. This is mainly because of growing regulatory oversight as well as operational costs support global trade growth in terms of volumes, jurisdictions and number of trading parties.
In general, both commercial banks and credit insurers primarily focus with their financial services on a selective number of large corporate clients and mid-market companies. Yet, this minimizes the addressable market, and leaves an untapped customer base and large trade volumes on the table.
Furthermore, the current trade finance solutions provide poor customer experience with slow, paper-based processes, creating operational costs and requiring a lot of time. As a result, implementing a trade finance solution for a client is attached with high fees in terms of due diligence, integrating with multiple platforms, onboarding of trading partners, compliance as well as partnerships with other finance institutions and data providers. In addition, financial institutions remain facing the burden of regulatory and compliance requirements event though the transaction is backed by credit insurance.
The good news; many of these challenges in market are currently being addressed through the advancement of distributed ledger technology and new trade finance solutions. It is a unique situation and opportunity where we have all the new technologies and toolkits at our finger tips to change the trade finance market in terms of scale and scope of solutions being offered by financial institutions to their corporates clients.
In order to achieve this, a paradigm shift must occur. First, by opening systems that were previously closed. Secondly, we need a new open platform which allows for all participants to interact in automatic and transparent way for setting up, executing and managing trade finance solutions. By leveraging blockchain technology in this distributed trade finance platforms, trading parties and financial institutions don’t have to rely on complex integration, collaboration and time-consuming due diligence to trust one another. Through the use of Application Programming Interfaces (APIs), and the use of light and modular applications, the platform allows the different parties to collaborate with their existing systems and solutions.
By leveraging distributed ledger technology (DLT) for the underlying data infrastructure, we can achieve the following benefits.
- Immutability – Data is stored into the ledgers without delay and cannot be altered, providing a high level of data integrity.
- Security – Each interaction is based on blockchain technology and secured using cryptography.
- Availability – Data is distributed allowing the system to work continuously even when one node is down.
- Provenance – All assets that are traded, financed or insured can be tracked back to their original source. Every action that takes place on an asset is logged, stored and can be distributed along the ledger.
Aside from that, with API’s and blockchain technology allows to enhance data across supply chain transactions within the trade ecosystem. This additional data can be sourced from logistic providers, ensuring transparency when goods have been collected, sent and delivered, without breaching terms of the contract or service providers supplying electronic invoicing information.
By introducing additional data streams from the physical and financial supply chain, the transparency of trade finance transactions can be increased in real-time. This can improve the level of trust between the various constituents in the supply chain reducing both credit and performance risk as well as introducing new potential trigger points to offer trade finance services.
In order to capitalize on this opportunity, a new network of technology providers, financial institutions, credit insurers, data and service providers is required to break down old silos and to collaborate. The necessary scale can be achieved by having a multitude of participants adopting these new and open trade finance applications, distributed ledger technology and APIs.
The great news is that we don’t have to wait as such networks have already been set up. The largest and fastest growing in the market, Marco Polo is already used by over a dozen of financial institutions such as ING, Commerzbank, BNP Paribas, Anglo-Gulf Trade Bank, NatWest, Natixis, Bangkok Bank, Standard Chartered Bank, OP Group, SMBC, DNB, Danske Bank, LBBW and their corporate clients. The Marco Polo Network is powered by a trade finance platform distributed among its members and leveraging the Corda, distributed ledger technology from R3. The Marco Polo Network is focusing on open account trade finance solutions such as receivable and payable finance, factoring or guarantees. By leveraging API’s, blockchain technology, cloud-based services modular applications, all members can collaboratively improve transparency of trade flows, reduce operational costs and provide better access to credit and risk mitigation services throughout the lifecycle of the supply chain.
These global trade networks and the implementations of new technologies are just the first steps towards the disruption of the entire trade finance market. The transformation is happing now in front of us with huge opportunities ahead. The only question is how fast financial institutions such as commercial banks and credit insurers will grasp onto these new solutions and collaboration models in order to enhance the trade ecosystem.
About the author: Oliver Belin, CMO, TradeIX
Oliver has over 15 years of experience in supply chain finance and account receivable finance solutions. He has worked for numerous leading organizations in trade finance and had key roles with PrimeRevenue, GSCF and Sumitomo Bank. In 2008, he founded Swiss Commercial Capital, a company specialized in trade finance solutions, which was successfully sold to Macquarie Bank in 2011. Oliver is the co-author of the book Supply Chain Finance Solutions and a frequent speaker on this topic.
This article is published in association with TradeIX trade finance company