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Taking the rough with the smooth: Innovating the trade finance industry

With the recent announcement that 2020 will be the end of ‘frictionless’ trade between the UK and the EU, many businesses will be considering what this step into the unknown will mean for them. Indeed, those in the trade finance sector will be keen to investigate how this change can affect their industry. However, in order to make this change advantageous, innovation and transparency need to be at the heart of the industry.

Seeing the value

With a long-standing, established sector such as trade finance, change can sometimes feel daunting. Often, processes are so ingrained that it becomes a challenge to roll out a new, more efficient way of running operations. However, with the potential for increased strain around overseas trade in the years to come, transforming an archaic process can help offset the impact that changing trade relations may cause.

Something as necessary as the Letter of Credit (LoC) process is an area which can be revolutionised with today’s technology. Instead of relying upon a traditional paper-based system – which in many cases can take up to 10 days to complete – banks and the rest of the network have the potential to streamline this process and reduce the time taken by up to 90%. Contour has recently tested this, succeeding in reducing the LoC process to 24 hours.

This is not just innovation for innovation’s sake but a genuine demand from the market. Contour’s internal research found that 86 per cent of firms say inefficiencies around trade finance are becoming ‘intolerable’. As such, finding an effective technology solution can enable a suitable environment and allow trade finance to not only continue functioning but also to thrive.

Preparing for tomorrow

LoCs are a banking solution to the trust deficit between corporates doing international trade. However, today’s wider governmental and societal demands require businesses to further monitor how they interact with their supply chain. Issues such as transparency, legitimacy, and provenance have become increasingly fundamental to how an international business operates and presents itself to customers.

Companies not only need to show who they are dealing with but also ensure the privacy of all those involved. With the General Data Protection Regulation (GDPR) imposing strict repercussions for businesses that do not offer the appropriate security, this needs to be an ongoing priority for organisations.

Traditional paper processes cannot offer the security that modern regulation demands. Information needs to be secure, accessed by only those with the proper clearance. A technological solution like blockchain can provide this protection, but it needs to be supported by a flexible platform built for the business that can also manage their existing requirements. For example, granting the ability for the instant issuance and amendment of LoCs will allow corporates and banks to adapt to rapidly changing conditions rather than be resigned by the standard two to five-day process.

Implementing innovation

There is a range of innovations companies can use to enhance their trade finance challenge and blockchain is one process which has proven highly effective in the sector. Distributed ledger offers the right balance between visibility and privacy to users, while its digital nature makes it an ideal platform to modernise the paper-based LoC process and add more functionality and services.

Contour’s research has shown that, because of the current frustrations around the trade finance process, 60 per cent have said they are likely to move trade flows into an ‘open account’ – while this switch may make certain elements of the LoC process easier, it is a far riskier option for exporters. Blockchain systems provide a new mechanism for trust that allows direct interaction among all the parties – providing a personalized ledger, risk mitigation, and linking to other ecosystems to bring in data electronically for additional efficiency.

The trade finance sector has the potential to be a core example of how technology can bring a new level of trust and transparency to global business and supply chains.  In heading into the unknown, collaborative banks, corporates and services partners can lead the way in innovation and efficiency, reducing friction and improving the effectiveness of the sector.

 

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This item appears in the following sections:
Financial Supply Chain Platforms
Trade & Counterparty Risk Mitigation
Trade Finance
Treasury insights

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