Trade Finance keeps the world’s supply chains moving. But despite ubiquitous technological progress, traditional trade finance continues to be plagued by antiquated processes, operational inefficiencies, and lack of trust between participants. Digitization will be key to building smarter supply chains. In what ways could digital solutions remove barriers and help create a more integrated trade ecosystem?
Tackling Supply Chain’s Unchanged Status Quo
Trade finance maintains a status quo; documents still need to be stamped using ink, and some courts around the world only accept disputes if submitted in paper form. Digitizing this industry is and has been difficult. Realizing the high disruption potential in this stagnating market, new Fintech initiatives have mushroomed to help modernize the financial service that impacts all countries and most industries. But they are not necessarily aligned. It is tricky.
Global market size was USD 63.5 B in 2019 and is estimated to hit USD 79.4 B by the end of 2026
Complexity - the supply chain and its financing are very complex. Trade Finance operates with it. Digitizing this industry is and has been complicated.
of global trade relies on Trade Finance, as it is a strong catalyst for the global supply
80% - 90%
Challenges to Digitizing Trade Finance
Slow-moving industries and lack of innovation tend to attract fraud more than those ahead of the curve. Fraudsters can exploit processes that barely change more easily.
Establishing inter-operability between technologies: The industry is a fragmented ecosystem, dominated by paper processing and multiple participants along the transaction lifecycle: disjointed interactions between stakeholders, variations in country-specific regulations and trade procedures, an overall lack of security and
The process-driven nature of the industry and the hefty volume of transactions in Trade Finance make new technologies adoption difficult. Technologies like Blockchain and Big Data have the potential to be positively disruptive; yet, their take-up is compromised by high cost and a lack of global digital finance standards. Disruptors are not always working in the same.
Increasingly, many are left behind as they cannot cope with the burdensome requirements imposed by market makers.
Access to Underserved Opportunities
the estimated gap between market demand and supply for trade finance
45% of Trade Finance applications by SMEs are rejected, compared to 39% for mid-sized and larger-sized firms and 17% for multinational corporations. Additionally, anti-money laundering (AML) and know-your-customer (KYC) regulations are significant obstacles to trade finance expanding operations.
Forces of Transformation
The most significant opportunities for DLTs lie with its cost savings through improved efficiencies, its function as a compound for change and innovation, and its ability to accelerate standardization. Traditional computing and cloud computing costs have decreased significantly, permitting a fast and wide DLTs adoption.
There are efforts from the United Nations to push for a greater acceptance of digitized documents around the world, but jurisdictions are often still reluctant.
The gap between unmet demand and inaccessible trade financing continues to grow as global trade continues its steady growth.
Distributed Ledger Technologies (DLT) and IoT are paving the way for profound structural changes.
Within DLTs, Programmable Money has been developed to verify and enforce underlying contractual obligations such as the transfer of assets if certain conditions are met.
Relying on “If This Then That” mechanism, not only can Programmable Money help exporters and importers better transact based on agreed rules, it also comes with safety guardrails that benefit all trading parties and help curtail fraud.
Embedded in their core, Programmable Money and Smart Contracts have the potential of traceability to prevent, for example, terrorist financing, black-market purchases, money laundering, transfer of stolen funds, etc.
The benefits are substantial and include streamlined processes, authenticity, programmability, better cost management, and opportunities for new products and services.
Interoperability must be a priority. A solution that could prevail would combine existing networks with DLT. Thus, relying on an infrastructure that is already global and supports large and small commerce would allow to reduce the complexity of and increase the efficiency of the new networks being built.
Adding a digital identity on a physical good or service, leveraging data in transportation and exchange, creates valuable data points that can enhance supply chain transparency and its financing. Enabling the digital identity of goods via end-to-end transparency is more critical now than ever, and technologies like blockchain, IoT and 5G are making it possible.
An Inevitable Future of Greater Efficiency and Trust
With cutting-edge technology infiltrating the supply chain, demanding regulatory and economic adjustments, change is inevitable. These changes are only going to accelerate with the merging of Blockchain, AI, 5G and IoT. The use of DLT in supply chain will bring consumer, supplier, and intermediaries closer and enable financing to a much greater extent than projected market size.
Supply chain participants will need to revolutionize to manage through these changes, satisfy the evolving customer preferences, and align themselves with customers’ values and expectations around transparency, sustainability and efficiency.
"The supply chain stuff is really tricky."
"The supply chain stuff is really tricky."
Since the beginning of trade, there have been concerns around transparency and supply chain management between exporters and importers. Despite innovations globally, not much has changed in this industry. In many ways, the way Trade Finance operates today is very familiar to the way it did centuries ago. It is time for an overhaul.
The demands of the trade finance ecosystem are driving change in this otherwise stagnant industry.
The process-driven and fragmented ecosystem has enabled an environment unreceptive to innovation.