In this age of advanced technology, the $10 trillion global trade finance industry hasn’t embraced innovation, instead maintaining its dependence on paper-based systems. A single cross-border, trade finance transaction typically consists of 100 pages of documents from different counterparties — importers, exporters, bankers, shippers, insurers, customs agents.
A Blockchain, on the other hand, can contain information from all the paperwork in one digital ledger. That has huge advantages for transaction security, efficiency and costs. Distributed ledger technology in trade finance has the power to transform an industry overwhelmed by paperwork.
More organizations are looking to Blockchain to address these and other longstanding problems. Over the past 18 months, a number of major banks have launched Blockchain initiatives and policy makers have ratcheted up the debate over its regulation.
Industry Ready for Change
Trade finance appears particularly ripe for disruption, with Blockchain the obvious disruptor. Major trade banks have been experimenting with new business models, forming trade-related tech partnerships and launching blockchain pilots aimed at a broad range of customers and products.
Even so, not every entity involved in a trade transaction — shippers, insurers, importers — are ready to adopt Blockchain. Small-to-medium-sized businesses may not have the resources to launch Blockchain projects despite potentially being the most significant beneficiaries.
Replacing a trusted resource that’s grown expensive and inefficient with Blockchain can be costly and require hard-to-find expertise. Only 12% of financial institutions responding to a recent International Chamber of Commerce survey said they had successfully implemented technology solutions in their trade finance operations, and only 9% have found the solutions increased efficiency.
The short-term investment in Blockchain implementation may not produce hoped-for long-term benefits — future system savings are always harder to estimate than the immediate costs of new systems. It is also one of the reasons why so many banks stick with archaic technology systems rather than invest in more efficient solutions. The high cost of new systems, security concerns, talent shortages, and numerous technical and regulatory challenges are also concerning, particularly for SMEs.
Even some business decision makers open to blockchain’s potential have concerns. High-profile security breaches and concerns about regulation have tainted their opinions.
In addition, cross-border trade finance transactions are complicated largely because of varying regulatory and compliance requirements. Ever-changing anti-money laundering and counter-terrorism regulations and data protection rules across jurisdictions make effective implementation difficult. To address this problem, Blockchain platforms are targeting trade finance niches and collaborating to create scale:
- We.Trade, a European trading platform led by 12 banks including HSBC and Societe Generale, targets SMEs
- Marco Polo, an international consortia that includes BNP Paribas, ING, Standard Chartered, focuses on larger clients and provides guarantees, receivable discounting and factoring.
- China’s Central Bank Blockchain platform, with 28 Shenzhen banks in its group, has processed more than $4.5 billion in trade transactions and is considering a partnership with Hong Kong’s eTradeConnect.
Parties involved in trade transactions all must verify and record information, but they have varying technological resources and capabilities, which make scaling and commercialization of technology more difficult. They may also have different pain points and incentives for the adoption of Blockchain.
Yet Blockchain will likely have far-reaching benefits for them. An industry set in its ways may just need another decade or two to switch over.