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Blockchain Is Accelerating The Digitization of Trade Transactions









Almost every industry was affected by the pandemic, and many businesses that had already incorporated some form of digitization in their processes were still forced to significantly implement digital operational processes to service clients.

For the “manually-intensive, paper-based” global trade finance industry, where trade transactions are accompanied by countless original paper forms that need to be reviewed and signed off in-person at each stage of the process, one can only imagine how incredibly ineffective the sector became.

And the fact that many buyers, sellers, ports, customs officials, banks and other parties were working from home and unable to retrieve or send documents only made the situation worse.

As Joon Kim, global head of trade finance product and portfolio management in BNY Mellon Treasury Services, told PYMNTS’ Karen Webster, the pandemic and its consequences not only affected the movement of goods, but also created a disruption in global trade and the supply chain process.

“Exporters usually present the documents to the counters of various banks, but many critical small and medium-sized enterprise employees were working from home offices, so it was extremely challenging to review the original patch,” said Kim.

The good news is that the sense of urgency the crisis created helped “fast-track” the digitization of trade transactions, combined with robust business continuity plans and the desire to transform the industry from a “paper-intensive business into more of a digital environment, starting with small steps such as the e-signature process.”

But like all significant changes that are often met by some level of resistance, Kim said the industry was reluctant to move toward digitization, partly because of the countless players within the value chain: “It’s not just as simple as an agreement between an importer and an exporter,” he explained. “Here, you have logistics companies and different jurisdiction standards, as well as different rules and guidelines that require original documentation instead of a digital version.”

For that shift to digitization to gain pace, industry bodies such as the International Chamber of Commerce (ICC), Bankers Association for Finance and Trade (BAFT), and the various banks have had to work together to speed up the digitization processes, which Kim said provides “a high degree of optimism” that progress is being made and that the sense of urgency to digitize is growing.

Two Sides of the Same Coin

According to Kim, the trade world can be divided into two parts. On one side is traditional trade, which involves the use of a letter of credit (LC), a document from a buyer’s bank to the supplier guaranteeing that payment will be made, subject to the conditions set forth in the LC on the due date.

The other component is an open account financing transaction involving supply chain finance (SCF), in which transactions are processed and goods are shipped and delivered without the use of a letter of credit.

Of the two components, Kim said digitizing processes will be much more complex on the traditional LC side, and it’s going to take several years to effect change given the different parties involved – including foreign correspondent banks, importers, and exporters – as well as various jurisdiction standards in which original documents rather than digital versions are a prerequisite in the settlement of the transaction.

But organizations such as the ICC and BAFT are trying to enhance the digital rule book (e.g. eUCP) so that correspondent banks can settle transactions using electronic documents in lieu of paper-based documents. Industry bodies are encouraging the use of electronic documents as the primary means of transacting within a robust set of controls to ensure that the electronic version can be treated or authenticated as an original document. Kim said this will trigger a snowball effect of sorts: “One player plus one is always the hardest, but two plus two becomes easier, and three plus three becomes even easier.”

Other technologies like IMB (International Maritime Bureau) tracking helps in the fight against potential crime, fraud and malpractice including charter party, cargo theft and ship deviations by providing information on where a vessel is headed or located to protect the integrity of the international trade.

FinTechs Lower Fraud Risks

The need to accelerate digitization also recently led BNY Mellon to join the Marco Polo Network, an Ireland-based digital trade and payment solutions provider that is working to introduce blockchain technology into international trade finance.

Related news: BNY Mellon Introduces Blockchain Tech to International Trade Finance

As part of the network, operated by FinTech firm TradeIX, the corporate investment banking company can digitize how working capital is provided to both suppliers and buyers worldwide, facilitating the insertion of liquidity into the international supply chain and offering discounted finance solutions to suppliers worldwide in the process.

And because there are fewer parties involved in the open account space, given the strong relationships and level of counterparty risk comfort between buyers and sellers that have eliminated the need for an LC, Kim said BNY Mellon chose to collaborate with FinTechs on these open account transactions, which make up most of the deals in international trade — about 85% to 90%, compared to the 10% to 15% being settled using an LC.

He added that while most banks will typically provide a platform in the open account space, it still involves a great deal of manual intervention and “physical traps” when it’s time to execute a deal. That’s why using blockchain-embedded solutions not only creates value and efficiency, but also helps to reduce the chances of double or triple financing on the same invoices, so that potential bad actors don’t use a well-intentioned trade instrument to create fraudulent deals.

“It’s not just a software, but rather a blockchain-embedded technology that ensures other banks and players have real-time visibility over the invoice or draft financed by a bank through the network,” Kim explained.

SCF: Be Inclusive, Not Selective

As much as banks want to offer financing to people in order to facilitate more trade, Kim said institutions that are still lending to a select number of parties that they’re comfortable working with are not “necessarily promoting world trade with parties that require working capital optimization.”

Banks understandably take a relatively conservative approach, prioritizing large corporations because they are unwilling to take on the risk with smaller counterparties. But closing the supply chain financing gap will involve providing working capital to those who need it the most: “It’s the middle market, commercial banking clients [and] small businesses that are looking to optimize their working capital.”

Here, too, technology can create “a massive solution” in leveling the playing field, Kim said. For example, an interoperable distribution network like Marco Polo’s creates a distribution channel for banks, so those that are unwilling to take on a particular risk can leverage the network to sell or distribute assets to the other banks that may be willing to take on the risk.

A blockchain-based registry of trade finance transactions also helps network participants know the environmental, social and governance (ESG) profile of suppliers and buyers, which BNY Mellon can then leverage when deciding on and distributing incentives.

“It’s a combination of figuring out exactly what the client profile looks like so we can create a different set of strategies,” Kim said. “So if there are more incentives that can be offered to clients who are more ESG-focused, we are able to identify and focus on those particular segments without necessarily sidelining those who take a less environmentally friendly approach.”




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