Co-written by Checca Aird and Ethan Bornakovs
International trade, as a key engine of global economic growth, is underpinned by trade finance. This is a process where financial institutions provide credit facilities and intermediation in order to guarantee the exchange of goods and enable trust between exporters and importers. Between 80–90% of the world’s trade is reliant on financial instruments such as letters of credit, guarantees or supply chain finance. In 2015 alone, the trade finance market was measured at more than $10 trillion USD. The trade finance process is centuries old and is characterised by the exchange of physical documentation, silos of information management, and a lack of transparency. Expanding trade volumes and unmet financing needs of $1.4 USD billion have increasingly exposed the inability of the current process to meet market demand. Small and medium enterprises, the lead sources of job creation, are particularly credit-constrained with 50% of their trade finance requests rejected, compared to a mere 7% for corporations (WTO). Given the severe implications for economic growth and wealth-creation, we must utilize the unique opportunity presented by cutting edge technologies such as blockchain, to transform the systemically important practices of trade finance.
Below we explore an example of how blockchain can streamline the Letter of Credit process within the industry.
In the current trade finance process, the correlation of physical documentation, goods and finance flows is necessitated. For example, an archetypal Letter of Credit may mandate the release of funds conditional on surrender of the Bill of Landing by the exporter. The Bill of Landing would then have to be physically couriered to the importer’s bank, reviewed and accepted before the shipment or funds can be released. The delivery may take several days, documents may be invalid or fraudulent as well as get lost in transit, all of which would negatively affect the exporter’s balance sheet as well as the importer’s production timelines or quality of goods in case perishables are shipped. Moreover, the relationship between the parties would be compromised.
The document rectification and exchange timelines could be accelerated by creating a blockchain network that can be accessed by ecosystem participants such as:
The single platform would offer an immutable record of the trade that would be immediately available to the authorised parties for view, amendment, acceptance, invocation and cancellation. By digitising the flow of customs, trade finance and shipping documents via the digital ledger, a single source of truth and access would be created. The ledger would enable participants to audit the changes made to the documentation, improving transparency and alleviating fears about fraud and tampering when dealing with new trade partners or authorities. Where currently network participants have siloed document management and tracking approaches, the shift to a single source of truth with multiple nodes would breakdown information asymmetries and offer a real-time view of the documentation and the trade finance process, presenting information on the outstanding actions or location of documents. Moreover, as each transaction is recorded sequentially and indefinitely, regulators would be provided with a real-time view of essential documents to assist in enforcement and AML activities.
A block chain-based Trade Finance Solution would allow all the parties in the Trade Finance Value Chain (Importer, Importer’s Bank, Exporter, Exporter’s Bank, Customs Office, Port Authorities, Shipping Companies etc.) to access an immutable record of the trade using a single platform and would enable faster processing of the transaction.
Capgemini is also co-innovating with SAP and customers to begin and expand their SAP Leonardo Blockchain journey and as a global corporation present in over 44 countries, Capgemini has local experience with trade-related products and practices. We have the people, processes, proven methodologies and accelerators to deliver trade-finance operations platforms from leading vendors such as Misys, Finacle, Temenos and Flexcube.
A special thank you to Sreedhar Krishna, Satish Kumar, D Chandana, and Vara-prasad Urumadla, your work on IBM Hyperledger and your input and support was invaluable in writing this paper.