25 August 6 Ways Blockchain is disrupting trade finance
In international business, the concept of trade finance is highly essential. The purpose of trade finance is to complete international business transactions effectively and to offer complete assistance and assurances to the buyers and sellers involved in an international transaction. One major application of trade finance lies in filling the gap within the trade cycle of international buyers and sellers. Trade finance is the backbone of the global international trade industry that is worth $16 trillion.
In the last few years, digital disruption has been noticed in the global trade finance industry due to the introduction of blockchain technology. Blockchain has created a revolution in international trade by making transactions faster, smoother, and cost-effective.
Here is a discussion on how blockchain technology is turning out to be a disruption for trade finance:
1. High trustworthiness
In the case of international trade, trust and belief is very much important. The use of blockchain technology makes sure that trust is maintained in an international trade transaction. A bank or distributor finance tries to assure both buyers and sellers that delivery and payment will be completed successfully.
It is the responsibility of blockchain technology to complete supply chain optimization and to complete an international trade activity with credibility. In the presence of blockchain technology, records are maintained comprehensively so that transaction history is at place and trustworthiness increases. Also, blockchain monitors every transaction until it is complete for both parties.
2. Reduced costs
One of the critical areas of international trade finance is high operational costs. This particular area of international trade finance has been anticipating a disruption for years. With blockchain, this disruption has been possible.
Blockchain completes complex international trade transactions within minutes as blockchain can easily store rigid contract information. Hence, if there are any disagreements between a buyer/seller and the bank, blockchain technology can make sure that they are easily resolved. As a result, operational costs can reduce and a significant amount of capital is reduced for banks.
3. Lesser risks
Trade finance activities like factoring and forfeiting involve some critical risks. These risks include the exchange of documents between the buyers and sellers, underwriting activities performed by banks, etc. The disruption offered by blockchain technology in this context is huge. Blockchain technology stores all information within its distributed ledgers. Therefore, it’s not an issue for different parties to access real-time datasets through blockchain technology. Hence, the risks of the regular paper transaction can be easily avoided through blockchain technology.
4. Easier direct transactions
Before blockchain technology came into practice, one critical aspect related to international trade was the presence of intermediaries. Without the involvement of multiple intermediaries, it was next to impossible to perform a blockchain transaction. However, so many intermediaries would gradually delay the entire transaction.
Due to the involvement of numerous intermediaries, the settlement would take time. Hence, the payment and delivery of a product would also take time. In those days, a long chain of intermediaries within an international trade finance transaction would include several remittances, long array of verifications, etc. In such cases, the risks of forgery and duplication would also be higher.
To resolve all these challenges, blockchain technology opts for a more direct transaction. This technology can ensure that the bank is the sole intermediary involved in a trade finance transaction between buyers and sellers. This direct relationship is also a disruption relevant to blockchain technology.
5. Offering payment certainty to sellers
In an international transaction, the motive of the seller is to receive their payments as first as they can. Letter of Credit would (LC) did this job. A letter of credit would mitigate the uncertainties of an international transaction to speed up the settlement process. However, in scenarios of payment delay due to mismatch of datasets were not always under the control of LC.
Hence, to resolve such issues, blockchain can be a great help. This technology can be remodeled with the help of blockchain technology. By doing so, verifications of compliances would become a lot easier and in an automated manner. Therefore, sellers would be able to recover their payments a lot faster and without any complexities and confusion.
6. Offering delivery certainty to buyers
In a trade finance transaction, buyers are most concerned about receiving the delivery of products. They often face delays in shipping due to many unpredictable reasons. Unavoidable reasons like bad weather, natural calamities can also cause such delays.
The use of blockchain technology can resolve these issues faced by the buyers effectively. Blockchain offers the facility to digitalize trade resources. By using cryptocurrencies, products can be easily displaced from one place to another, without much hustle. Issuing any trade documents and verifying it not even a challenge for blockchain chain technology and takes place at the fastest speed.
The tokenization activity in blockchain also makes sure that buyers can receive all updates relevant to the shipping of products. Hence, when buyers have real-time data, it is much less risky. In this way, blockchain technology is effectively handling risk management. Management and transfer of various trade documents can also take place at a much faster speed with the help of blockchain technology.
Hence, it is rather easier for blockchain technology to speed up the delivery of goods and services. As a result, this technology can easily gain the satisfaction of buyers in the case of international trade finance.
While wrapping up, it should be stated that blockchain technology is still in its initial phase. In the upcoming days, this technology is subject to many more revolutions. But it’s easy to see that blockchain technology will be disruptive for the international trade finance transactions.
This technology has made international transactions faster, easier, and affordable for many. The underlying automation of blockchain technology can effectively fasten the receiving of payments for sellers. Furthermore, the tokenization feature of blockchain technology ensures that settlement between buyers and sellers take place quickly and the delivery of products also happen without much delay.