Trade finance has earned a reputation for an industry reluctant to adapt in the face of change. Characterized by unwieldy and cumbersome legacy processes, the industry has seemingly remained stagnant whilst other sectors have steamed ahead with digitization. But, the pandemic has prompted the call for change that the trade finance industry has sorely needed for years, and steps towards technological innovation have been seen, most notably across the Asia Pacific. These technological advancements are helping to revolutionize the trade finance space and, hopefully, trigger a coordinated, global approach to creating more efficient trade.  

The list of challenges that trade finance faces, point to an industry reliant on paper. Incorrect documentation and KYC, non-interoperable systems and manual reconciliation could all be overcome with appropriate technological input. These issues are now finally being addressed by various progressive digital solutions. 

One of the technologies which seem most encouraging is enterprise blockchain. Trade is a fundamentally decentralized system. The industry is heavily intermediated – predominantly by banks that help to facilitate transactions and provide the financing behind them, but also by insurers, customs officials and other market participants. Firms have tried countless times to apply centralized solutions to this decentralized system, but, unsurprisingly, none have really worked. 

The decentralized nature of blockchain makes it a perfect fit for trade finance. For the first time, the entire industry is getting behind technology and moving it into real-world deployment at a record pace. 

Meanwhile, regulators are working with technology providers to understand how to audit and gain insight into the transactions taking place on these new blockchain-based platforms, and ensuring suitable laws are in place, including those relating to electronic documentation and electronic signatures. 

The architecture underpinning the entire ecosystem of trade is undergoing complete digital transformation – but how are participants benefiting from this change? 

Sizing up the challenge  

Many of the processes and technologies underpinning trade finance have not been modernized in decades. The result is that those transactions continue to rely on paper-heavy processing, unsuitable for the current digital age. Traditional technology required corporates to log into multiple portals and juggle relationships and documentation for each shipment. 

These inefficiencies in trade finance mean that nearly USD $1.5 trillion of demand for trade finance is rejected by banks, according to the Asian Development Bank (ADB), with 60% of banks expecting this figure to increase over the next two years. Developing markets that rely heavily on access to trade can be severely hindered through these outdated processes. 

In addition, businesses all over the world must navigate the growing threat of cyber-attacks, changing regulations, and ever-changing sanctions lists. Despite this complexity, cumbersome and time-consuming paper-based exchanges are still commonplace.  

Take, for example, invoice financing. While a common activity, managing invoice payments and terms can be slow and inefficient for companies and their trading partners. They must navigate different currencies and jurisdictions, each with unique requirements in terms of contract terms and payments.  

By digitizing these manual processes and superseding aging legacy systems, technology such as blockchain has a real impact on reducing the costs, risks and delays to participants involved in trade finance.  

If applied effectively, the technology has the potential to unlock the potential $1.5 trillion opportunity in global trade finance. Companies of all sizes will benefit from better visibility into trading relationships and easier access to financing options, beyond point-to-point relationships, to a global network of trading parties.  

Calling for a decentralized network  

Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. While the rollout has been more gradual than some of the more over-enthusiastic predictions, many see it as a brilliant innovation capable of remedying a lot of the operational pain points perturbing financial services. As such, there is growing debate about how blockchain can provide decentralized solutions to solve many of the problems facing trade financing.  

One such solution is real-time visibility, which is available via permissioned access to authorized network users and gives buyers and sellers unprecedented transparency into the status of their transactions.   

This single source of truth and use of smart contracts could remove a number of inefficiencies in the paper-heavy processes that exist in trade finance, such as negotiations of letters of credit. In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process.   

Coordinated action  

In order to move towards a truly digitized and connected ecosystem for trade finance, mass adoption on a global scale is essential. This elusive network effect can only be achieved if technology players prioritize forward-thinking and inclusive integration solutions that lower the barriers to entry for all types of companies involved in the trading process.   

If only a handful of firms adopt a blockchain solution for invoice financing, for example, the solution is useless if one company needs to trade with another that is outside this circle of early adopters. All the other benefits of blockchain such as speed, efficiency and lower costs mean nothing if you cannot use the platform to connect with the necessary counterparties.   

Marco Polo is a key example of a solution built for its market. The Marco Polo Network provides an open enterprise software platform for trade and working capital finance to banks and corporates and allows for the secure exchange of data and assets between participants. The network leverages blockchain to provide a rapid and secure way to access working capital and efficient solution to provide trade finance. When it launched in 2017, it introduced to the market an integrated solution to overcome critical trade finance challenges including lack of connectivity, time-consuming processes and high onboarding costs.  

Although blockchain has the potential to revolutionize trade finance, it is unrealistic to expect an industry that is still one step behind to adopt new technology in a ‘big bang’ moment. In reality, most businesses will continue to use their long-standing legacy systems throughout this transition to a fully digitized space. Blockchain platforms that offer high levels of interoperability with existing infrastructures will therefore prove themselves to be the best fit for purpose in the move to digital.  

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As Head of Trade and Supply Chain at R3, Alisa is responsible for trade strategy, standards and governance design. Alisa was previously a senior economist at the Asian Development Bank and holds a PhD from MIT.