This weekly four-part series serves as a guide to blockchain for trade finance. Fluent Network founders, Lamar Wilson and Casey Lawlor, provide GTR readers an overview of how blockchain technology provides transparency, streamlines asset transfer and lowers the operating costs of global trade finance programmes for all relevant parties. Follow the links for Part 1, Part 2, and Part 3.
Part 4: Increasing transparency, trust and adoption – the positive feedback loop
In part 3 we discussed the benefits of connecting parties in trade finance and distributing transaction information amongst network participants to reduce risk. Equally as important is distributing vital information about the participants themselves. Financial institutions engaged in trade finance collect as much information as possible about companies requesting financing to aid in credit analysis and trade readiness validation. Blockchain technology excels in this area by offering a vast improvement in transparency and aligns incentives to create a positive feedback loop benefiting participants in global supply chains.
In a blockchain-based network, rich transaction data and information on businesses, down to the user (private-key level), can be accessed on an immutable ledger from inception. This searchable, distributed record of information is continually updated, creating a single source of truth and an immutable record. This network can provide a level of granular data that has traditionally been extremely hard to collect, especially in global trade finance programs.
For a supply chain network built on blockchain technology, records of late or non-payment, fraudulent invoices, or attempts at double financing are tracked and broadcast to the necessary financial institutions in real-time. This information can be used to evaluate parties and supplement existing KYC, AML, and credit data.
Eventually, this data can be used to create an index or rating, leveraging information previously housed across many siloed institutions or simply not collected at all, and helping inform credit decisions. This alone will help boost the speed to trade readiness and more importantly, provide better risk profiling for financial institutions. As we learned in part 2, this data can also be used as inputs into smart contracts that automate decisions and functions around financing, risk, and compliance decisions.
De-risking suppliers through the collection and distribution of granular but pertinent supply chain data can lead to lower discount rates for good actors. It can also provide insight into financing decisions for peripheral suppliers, potentially lowering discount rates for those who fit a similar risk profile or deal with the similar businesses in their supply chain.
Properly assessing risk and making faster financing decisions can drive uptake of supply chain financing programmes, as trustworthy businesses have faster access to low-cost capital. These incentives have the potential to grow the network into the mid-market and beyond. More uptake means a greater set of data on a wider variety of suppliers, transactions, and financing activities.
This paradigm shift in global trade will not happen all at once, and it will not be easy, but it is critical that it occurs.
This process can also drive standardisation of processes (discussed in part 3) and an increase in adoption of a network, further lowering the cost of due diligence for financing institutions. This positive feedback loop fuels a powerful network effect as increased transparency allows for a much more efficient deployment of capital into global supply chains.
As adoption is driven down to second and even third-tier suppliers, this data will be used to create individual profiles of businesses, track and prosecute malicious actors, and has the potential to save financial institutions billions in fraud loss, due diligence costs, fines, and man hours. With access to richer data, banks and financial institutions can make more informed and anticipatory financing decisions on types of trade finance sometimes deemed too risky to participate in such as purchase order financing and pre-shipment financing.
The result will be a streamlined and efficient flow of capital to trustworthy companies, lower financing rates, increased capacity for lending, and a healthier supply chain from tip to tail which can in turn support growth in international trade. This paradigm shift in global trade will not happen all at once, and it will not be easy, but it is critical that it occurs.
Luckily the benefits of this disruptive technology are already being realised thanks to innovative start-ups and forward-looking financial institutions who are replacing manual processes and disconnected, antiquated systems with smarter, more connected, and more efficient solutions; blockchain technology solutions are interoperable and provide a qualitative and quantitative advantage over existing systems. And as is the case with all networks, their value grows exponentially with each new participant. In time, these solutions will be the bedrock of the next wave of transformative business applications that we have yet to conceptualise but will redefine the way global trade and financial services interact.
We are still living in the late 1990s ‘internet’ stage of this technology. While this means we are just at the cusp of this paradigm shift, it also means we likely have our next Google out in the wild building something that will transform or even create entire industries. A rewiring of supply chain processes, of core financial infrastructure, and of pervasive, antiquated ideologies regarding global trade will only happen once, and it is happening today. We encourage you to follow the evolution of blockchain and distributed ledger technology in our industry as we prepare for the next wave of innovation that will propel us towards the fourth industrial revolution.