Revolutionize Trade Finance With Open-Source Blockchain Technology

By Suffescom Solutions

May 23, 2022

What is the new digital paradigm that offers high security and transparency for most business verticals? There is one obvious answer for this “blockchain technology,” which can potentially disrupt the traditional business approaches. It is like a distributed database and has proved its power by offering an unparalleled experience with reduced cost and operational complexity. 

The foundation of blockchain technology is robust and can reduce digital fraud, as we all know. So keeping these features in mind, we can guess which next sector blockchain can reshape. Yes, it is the right time to leverage the potential of blockchain in trade finance.

So, here in this blog, you will learn about trade finance and the role of blockchain in the finance industry and various benefits of integrating blockchain, and how you can go ahead with this venture. So let’s go in detail:

What is Trade Finance And its Working?

If you are new to the trade finance business domain, we will give you an overview to make you understand it in an easy way. Trade finance covers many areas like:

  • Lending
  • Factoring
  • Export Credit
  • Insurance
  • Letter of credits issuing

A maximum of 90% of international trading depends on trade finance. No international trading can be completed without the involvement of finance trade. It incorporates numerous activities and paperwork.

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Current Working Of The Trade Finance

Let’s consider an example to understand the functioning of trade finance. Assume there is a company named ABC located in India that wants to receive the ordered goods from a supplier company, SSI, situated in the USA.

The receiver company has to pay money to get the supply from the company, SIS. But the criteria is that the company needs surety that goods will arrive on time as per the demands. Therefore there is some hesitation in starting the payment process. And at the same time, the exporter also feels uncomfortable starting the shipping without receiving the payment for the supply.

So, in this situation, the third party comes into play which can be a bank or insurance company. The foreigner buyer needs to issue the LC (letter of credit) to the exporter from his bank to the exporter’s bank. This signifies a promise to pay the amount once the required proof shows that the goods are loaded on the ship or any other transport means. Banks ensure trust between both parties.

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What Challenges In The Traditional Trade Finance Demand Blockchain Integration?

The traditional process has been in operation for the last few years, which incorporates the daunting job of heavy paperwork. So, the current system is highly manual. And some of the limitations are low transparency, high cost, and complicated processes.

Bulk Document Handling- There are, on average, 400-500 transactions every day containing 20 sub documents.

Unstructured Data- Most of the data on the papers are in unstructured form, so it is quite difficult to edit, update, or find out a specific detail in the manual method.

Compliance Check- Several checks are made for a single customer in multiple documents.

High Error Chances- With higher chances of error, there can be poor risk compliance.


Therefore the current system needs immediate modern solutions by incorporating the blockchain networks for fast and accurate business processes. Blockchain technology is the first choice to introduce new tech solutions in the trade finance sector.

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Blockchain and Trade finance: How It Works

The foundation of the blockchain is “distributed ledger technology” which makes it feasible to maintain the transparency flow of all the documentation while maintaining the security between the companies, banks, and all the participants present in the process.

The transactions executed on the network are recorded on the blockchain along with the timestamp and the crystallographic signatures. The data recorded on the blockchain network is hard to alter as all the nodes on the network need to be altered to make the changes. Therefore, it offers great security. 

Every participant on the network can independently access the information from anywhere whenever they want. The transparency and security of blockchain technology prevent the fraudulent acts and forgery of data.

The smart contracts include the terms/conditions regarding shipping and other commercial things that need to be met to start the transactions. For example, shipment of the goods, and payment notifications. 

Companies can easily apply digitally for invoice financing through easy to use interface. The online process cuts off the significant cost involved in the process for all the parties.

What Are The Benefits Of Using Blockchain In Trade Finance?

There are numerous benefits of blockchain in trade finance that encourage various entrepreneurs to adopt this latest trend. The major ones are reduced cost/time and processing time. Moreover, it prevents the wastage of tons of paper. As blockchain has the tendency to remove intermediaries, the data manipulation risks are also lowered.

Here we have mentioned the top benefits of blockchain in the Trade Fiance in the list below:

Efficiency

The efficiency is increased with the use of blockchain as the transaction is done between the involved parties directly without the involvement of the third party. The involved parties can execute the commercial actions through smart contracts. The smart contracts streamline all processes of trade finance resulting in increased speed of the transactions.

How Smart Contracts Are Impacting The Modern Business


Traceability

 Blockchain technology allows the exporters and the importers to keep track of the goods to be transported or in transit and where they are at a particular moment. Furthermore, the information can be retrieved from the previous owner and can be forwarded to the next one. It offers new opportunities for trade finance and makes the export business perfect with the least flaws.

Auditability

Every record of the trade finance is recorded serially on the blockchain network. This feature facilitates the long-lasting audit trait for verification purposes of the assets. And it also benefits in terms of cost as there is a significant cost reduction in the whole process.

Security

Every transaction is verified through cryptography. The data is transmitted securely over the distributed ledger with cryptographically secured keys. The different financial institutions can safely receive the data anytime.

What Are The Other Impacts Of The Blockchain In The Trade Finance Sector?

There are various advancements due to the blockchain’s addition to the trade finance industry. Here we are addressing the top most impacts that has completely revolutionized this business market while easing both the parties.

Automated payment methods

The most effective method to assure the good's delivery is a letter of credit. It helps in regulating the trade flow and the whole process where banks play the intermediary role. However, the whole process is complicated along with the contractual delays and involves high costs. The system flaws are quite high as all the LC procedure depends on the document evaluation rather than the delivery of the real asset resulting in unclaimed goods at the delivery location.

Therefore to mitigate the involved risks related to the LC, the whole concept is remodeled through the use of blockchain. Because the compliance verification process is automated based on the smart contracts and the quick payments to the exporters. The enterprise blockchain development solutions also detect the errors and issues prior to the detected inefficiency that can be improved without wasting any time.

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Asset’s Tokenization To Assure The Delivery To The Importers

Buyers want to have timely insights about the goods in shipment transit to minimize the future damage and the potential risks associated with the transit. The buyers can't see the damages that happened when the goods are in transit and cannot predict the delays in the shipment and the reasons behind which are possible due to bad weather, technical fault, port congestion, or any other reason.

The main cause is the trade documents flow separately from the goods. And the buyer cannot claim the goods reached at the destination without receiving the physical documents. Also, the documents can be forged or get damaged resulting in a messed-up situation for the receivers.

With the use of blockchain technology, digital transformation is possible as the physical assets are converted into crypto assets.  It also indicates the ownership of the goods bearer and the trading documents can be easily verified on the blockchain network by the involved parties.  Also, the process of risk management and insurance delivery is made efficient with the blockchain introduction.

Increased Revenues For Banks With Digitized Payment Process

The banks act as the bridge between the financial instruments like exchange bills, drafts, etc, and the trading receivables. These negotiable entities are transferred to the third party. All this allows the suppliers to retain the capital by choosing the ways like factoring and discounting.

In the current conventional method, the banks encounter some obstacles when dealing with the compiles procedures. And it happens due to the limited available information, inefficient dependability on the trading documents, and the high bearing cost. These problems arise further issues like transaction duplicacy, reputation damage financial fraud, and expensive legal proceedings.

These obstacles can be solved with blockchain integration in trade finance processing by issuing the payment instruments on the blockchain network. It also ensures the effective management of the receivables.

Concluding Lines

After reading the whole content you must be sure that the inefficiencies in the current trade finance can be alleviated with the integration of blockchain technology. All the significant intricacies of various operations can be resolved effortlessly. And blockchain advancements can help in attracting new entrepreneurs taking the industry higher. The enterprise blockchain solutions are in high demand and if you are also interested in adopting the blockchain in trade finance then you can reach the experienced blockchain development company to make your dream reality.

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