It is unsurprising that a well-established industry such as trade finance will have certain practices entrenched in its infrastructure. These processes help in maintaining consistency across corporates and banks but have gradually become out of date and are impediments to change. The Letters of Credit (LC) process is perhaps one of the more recognisable elements of trade finance that needs innovation.
Sticking with paper
Despite numerous changes in how business and finance are conducted, LCs have remained relatively unchanged. Still heavily reliant on paper and manual processing, the method for confirming credit for corporates lacks the integration that modern organisations demand.
The manual process for LCs has wider consequences than simply being an archaic structure for businesses to follow. Often, concerned parties will not have visibility on the LC or will receive updates after a delay, meaning the information they have at hand may no longer be relevant and decisions are made on old data.
Additionally, the time that it takes to amend an LC does not allow it to keep up with last minute changes, causing many documents to have discrepancies which fundamentally take away the key benefit of the instrument. These are issues that cannot be ignored if the sector wishes to keep up with the faster moving world. It is here that technology needs to be employed to improve this fundamental tool of the trade finance sector.
Keeping up with the times
This technological innovation goes beyond improving the way internal processes operate within trade finance. The expectations of instant gratification from consumers that put increased pressures on corporates and banks can be served through the benefits innovation brings.
The modern demands on international trade have continued to stretch exporters and importers to their limits. Businesses are increasingly pressured to exchange goods at a faster pace with more transparency than ever before to meet customer demand. The time-consuming process of LC issuance, combined with banks needing to manage increasingly stringent regulatory controls, mean that many corporates need more effective ways of receiving credit.
New technologies are needed to streamline the LC process and overcome these obstacles. While digitising paper documents has been in some form of use since the 1990s, through using the Electronic Data Interchange (EDI), innovation efforts still duplicate the trade finance processes that have been present for centuries as it still manages the data in a sequential manner.
Finding the right tech
It is here that blockchain can revolutionise the sector. From a simple numbers perspective, the technology has huge benefits for trade finance. Indeed, The Boston Consulting Group recently estimated a saving of $2.5 billion if institutions adopted technologies like blockchain.
Beyond the cost savings, blockchain’s benefit for trade finance comes from its ability to provide real-time visibility to all the relevant participants without the risk of a centralized database containing sensitive competitive information. That means no delay in receiving an LC or its amendments, improved timelines for export-import and greater reliability of the trade. Data converges onto a single platform, allowing a single source of truth for banks and corporates.
Partnerships to make things easier
Yet, to allow blockchain to receive wider adoption within the trade finance sector, ease of access and the ability to engage easily with the technology is vital. Being a well-established centuries old industry, engrained processes and practices can often be hard to shift. A blockchain solution to trade finance must not only improve upon existing methods of conducting LC issuance, but it needs to be accessible for all parties.
Contour’s recent partnerships have aimed to achieve this goal. By collaborating with well-established institutions within the trade finance sector, as well as leading trade platforms, the aim is to provide greater accessibility to all parties involved. As a network, Contour is providing an opportunity for all organisations in trade finance to work together in a far more seamless way than before.
It is clear that the LC process needs innovation, and blockchain solutions show huge potential in overcoming some of the challenges that the traditional process retains to this day. However, to fully engage with the market, the network has to be open to collaboration between partners to enable a smooth transition of verifiable data. This approach will allow for real time decisions, whether commercial or credit related, more accurate and efficient LCs as well as offer new opportunities for new product offerings by financial institutions.