A new blockchain-based solution has been launched with the aim of stopping the double financing of invoices.
The tool allows banks and factors to check if another funder has already paid an invoice, by cross-referencing it against a blockchain-based central registry.
Trade finance is rife with cases of document duplication and the industry is currently exploring ways in which blockchain can be used to prevent these cases of fraud. Earlier this year, warehousing company Access World experienced a number of cases of warehouse receipt duplication, while the costs of the Qingdao fraud, which also involved multiple warehouse receipts, are still being counted.
Invoice Check from Trade Finance Market (TFM), a Singapore-based fintech company, is one of the early products to launch with this aim in mind. It has been developed over the past year on the Ethereum platform and uses smart contracts.
“Our system is in public beta and provides a manual method of entering invoices and having them checked against a blockchain-hosted database. A bank or factoring company simply enters basic invoice parameters to perform an initial check in less than 30 seconds. This data is stored on the blockchain and funders are alerted if there is a potential risk of double financing,” Raj Uttamchandani, the company’s executive director, tells GTR.
He adds: “We have received an enthusiastic response from factoring organisations and governments to ensure wide adoption and usage of the tool – especially in markets where there is no central registry on which to register a charge or enforcement takes a long time. We have also received a high level of interest in markets where peer-to-peer platform usage has grown, as Invoice Check can help with de-risking spot factoring and single invoice transactions. Making the basic version of the tool free is also key in lowering friction to usage.”
The company is working with trade finance organisations globally, he says, to garner invoice data, which is currently entered manually by banks and factors. The next step is to automate the process and to on-board more financial institutions, so that the registry is comprehensive. “By providing this data, the industry as a whole benefits – which is why we made it a public good and free to use,” Uttamchandani says.
The initial pain point TFM is trying to address is SME financing – or lack thereof. The company already has a trade finance lending platform, and has found that the inability to validate invoices provides an obstacle for SMEs in getting finance.
It has also built a tool called Collateral Check, which provides a registry for warehouse receipts, which will be available in beta launch later in August. Combined, this suite of tools has the potential to improve risk management processes – but it all depends on buy-in, in order to build a comprehensive database.
The theory behind blockchain preventing fraud in trade finance stems from its immutability. Once information is lodged on the blockchain, it cannot be distorted or duplicated. It is stored, digitally in – as blockchain evangelists like to tell us – “a single instance of the truth”.
Uttamchandani says the company is still assessing how useful it is at eradicating fraud, looking at it from two angles.
“The blockchain is just like any other database, so the data on the blockchain is only as good as its source. If fraudulent data goes in then the blockchain cannot solve that problem. We can run artificial intelligence algorithms on the blockchain data to stop fraud but blockchain itself cannot eradicate it,” he explains.
The second one is around the adoption of common standards. “Right now, with many legacy systems and competing private blockchain initiatives, this may take a long time to achieve – especially if one considers a consortium of financial entities who will all have to work together with governments, logistics providers, tech companies, ports, etc. Just look at the bank payment obligation (BPO), even though it was promoted by Swift, adoption has been slow,” he says.
This has prompted TFM to look towards “specific niche areas where we can solve small real-world problems”. The company is trying to use blockchain to fix a known problem, in other words, rather than be the solution to all the issues with trade finance.
There have already been a number of other tools launched in this space. LMEshield from the London Metals Exchange is a central electronic register “providing global off-warrant commodity receipting”. Again, it helps to alleviate problems around document duplication (off the blockchain) but relies on all parties involved being registered on the solution.
Meanwhile, in 2015, DBS and Standard Chartered became the first banks to develop a trade finance application on blockchain, when a proof of concept (PoC) was launched that tracked invoices, backing loans to suppliers, reducing risk of invoice duplication, while retaining client confidentiality.
At the time of the launch, Gautain Jain, global head of digitisation and client access for transaction banking at Standard Chartered, told GTR: “We believe we can substantially reduce the risk of duplicating invoice financing using the distributed ledger and soon we will start looking at other trade instruments like the bill of lading. In time, we believe that the assembly of all the various documentation and processing stages involved in a trade transaction can happen on a distributed ledger.”
Since then, countless PoCs have been launched, but the industry is still awaiting a fully-commercialised and widely-used blockchain solution. As yet, you can count the number of live transactions involving multiple banks on blockchain on one hand.