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Trade finance, the complex management of capital required for international trade to flow, has made huge strides in developing blockchain networks designed to ultimately replace more traditional methods.
It is an area that is ripe for innovation and transformation, and it is obvious why.
There are various kinds of trade finance with differing requirements. But at its simplest, if a bank wants to finance trade for a client, it needs access to the underlying trade data. This generally involves receiving invoices and other data by email or spending valuable time trying to integrate with client systems.
Both methods are potentially unsecure, time consuming and prone to human error. These costs and risks are multiplied if the data then needs to be shared with other banks and third parties.
All too often, valuable trade data is trapped in different siloed applications, making it hard to collaborate and even harder to verify.
As things stand, a client relies on its Enterprise Resource Planning (ERP) system, a management information system that typically comprises planning, purchasing, inventory, sales, marketing, finance and human resources.
Here is the problem: The success of trade and working capital finance solutions depends on access to accurate and timely data on underlying commercial transactions. But the client’s ERP is currently disconnected from the technology systems of the financial institutions on which corporate entities depend for funding.
This means, among other things, that there are large pools of disconnected trading assets not eligible for funding by financial institutions.
Both corporate and financial institutions instead use manual, slow and costly processes to carry out key functions in the set-up and operation of trade and working capital solutions.
The key challenge facing trade finance is therefore making ERP systems and banking services interoperate so that data is better trusted and a client can provide its bank with information quickly, make faster decisions and secure better outcomes.
Blockchain in trade finance Blockchain aims to achieve what back-office trade systems cannot: Enable participants to share data and documents among themselves securely and in real time, creating a legitimate and reliable digital record in the process.
It connects a bank via an application programming interface to its client’s ERP system, giving that bank access to the necessary client invoices and other trade data.
This information can be enhanced further by connecting to logistics providers, verifying the invoice data and matching it to shipping tracking information.
In this way, blockchain creates a new workflow, business logic and rules engine, allowing a bank to automatically check financing and credit risk rules and process transactions.
Blockchain allows its bank users to share data securely with other financial institutions, resulting in improved funding and credit insurance options for its clients.
In other words, real time visibility into what blockchain fans see as their holy grail: a single source of critical trade data.
Are you involved in a blockchain project? Get in touch with Andrea Hotter on ahotter@fastmarkets.com.