FX International Payments
By Mike Faden
According to the International Chamber of Commerce (ICC), up to 80 percent of global trade relies on some form of trade finance.2 Traditionally, trade finance has been largely based on letters of credit, with multiple banks involved as financial intermediaries. One goal of trade finance is to eliminate transaction risks for both exporters and importers in international trade. For exporters, the risk is that they will ship goods but won’t get paid on receipt. Importers, however, may not wish to pay in advance because of the risk that the exporter won’t ship the goods. To address the risk for both companies, the importer’s bank issues a letter of credit that guarantees it will pay the exporter’s bank once it receives proof that the exporter has supplied the goods.
However, current trade finance processes are seen as cumbersome, expensive, error-prone, and in some cases susceptible to fraud.3 “Existing trade finance is often associated with high operational burden and cost, owing to a typically paper-heavy process and lack of cohesion between participants in the transaction cycle,” according to Rethinking Trade & Finance, a 2017 ICC report.4 Manually creating and transferring letters of credit among the parties involved can take five to 10 days, according to some experts.5 Problems can occur even when documents are maintained electronically, because information about a trade finance transaction is spread across the systems of multiple parties.6 Amendments to the documents, as well as errors and ambiguities, can lead to further problems and delays.7
Blockchain offers the potential to radically improve trade finance, according to the ICC, offering a secure, fully digitized process while reducing cost for each party involved. This could help make trade finance more available and affordable for small- and medium-sized enterprises (SMEs).8
The various blockchain trade finance initiatives vary in approach and scope, but they generally have several elements in common. These include:
Several current blockchain trade finance initiatives are handling pilot transactions and approaching broader production use. They aim to replace traditional letter of credit trade finance processes, and in some cases they also automate other steps in import-expert trade.
One obstacle to the spread of blockchain trade finance is the potential lack of interoperability between the various initiatives under development. Digitization of trade finance requires communication among all parties, as the ICC points out in Global Trade — Securing Future Growth, a 2018 report on global trade finance. “Platform developers must be mindful of open standards and future interoperability,” according to the report. The ICC also says that the full benefits of digitizing trade finance can only be realized if a few important trade corridors go fully digital.
Major blockchain trade finance initiatives are gaining momentum in mid-2018, transitioning from the proof-of-concept stage to live pilot transactions and approaching commercial use. If successful, these initiatives promise to accelerate and reduce the cost of trade finance for businesses worldwide.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. How Blockchain Can Reshape Trade Finance, Deloitte; https://www2.deloitte.com/content/dam/Deloitte/global/Documents/grid/trade-finance-placemat.pdf
2. Global Trade — Securing Future Growth, International Chamber of Commerce; https://iccwbo.org/publication/global-trade-securing-future-growth/#section--download
4. Rethinking Trade & Finance, International Chamber of Commerce, https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
5. “Blockchain for trade finance: a network business,” Finextra; https://www.finextra.com/blogposting/15390/blockchain-for-trade-finance-a-network-business
6. Rethinking Trade & Finance, International Chamber of Commerce, https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
7. How Blockchain Can Revitalize Trade Finance, Cognizant; https://www.cognizant.com/whitepapers/how-blockchain-can-revitalize-trade-finance-part1-codex2766.pdf
9. “We.trade enables international trade transactions via blockchain,” Rabobank; https://www.rabobank.com/en/about-rabobank/innovation/tech-trends/articles/wetrade-international-trade-transactions-via-blockchain.html
10. “The Platform,” We.trade; https://www.we-trade.com/the-platform
11. “First Pilot Client Transactions Successfully Executed on Batavia Global Trade Finance Platform,” IBM; http://newsroom.ibm.com/announcements?item=122895
12. “Leading global banks together with TradeIX and R3 pilot blockchain trade finance solution,” Marco Polo; https://www.marcopolo.finance/press-release-february-2018/
13. “ICICI Bank on-boards over 250 corporates on its blockchain platform for trade finance,” ICICI Bank; https://www.icicibank.com/aboutus/article.page?identifier=news-icici-bank-onboards-over-250-corporates-on-its-blockchain-platform-for-trade-finance-20181704141936142
14. “Singapore and Hong Kong launch a joint project on cross-border trade and trade finance platform,” Monetary Authority of Singapore; http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/Singapore-and-Hong-Kong-launch-a-joint-project-on-cross-border-trade-and-trade-finance-platform.aspx
15. “HSBC says performs first trade finance deal using single blockchain system,” Reuters; https://www.reuters.com/article/us-hsbc-blockchain/hsbc-says-performs-first-trade-finance-transaction-using-blockchain-idUSKCN1IF01X