March 8, 2021 By Parm Sangha 5 min read

According to the 2020 Global Trade Survey from the International Chamber of Commerce, trade and trade finance are in a state of global uncertainty, in part due to COVID-19. While many banks surveyed expressed concern over pandemic-related declines in trade flows and revenues, the survey also found that lockdowns and working from home are hastening the shift to digital solutions in trade, including blockchain.

Fifty-four percent of banks surveyed say that transformative technologies like blockchain, digital trade and online trade platforms are priority areas of development and strategic focus in the near term as they look to secure future growth. More than 50 percent also agreed that a growing number of document types used in trade could be paper or digital.

Moving forward with digitizing trade finance requires cooperation between organizations that are normally competitors. Through our IBM Blockchain Platform solution for trade finance and our participation in building the digital trade finance network, we’ve proven that banks (and indeed any competitor in any industry) can collaborate successfully and reach agreement on how to do business digitally, to their mutual benefit.

Open new corridors of trust for new trading partnerships

The resulting blockchain-based trade network is designed to improve the trade finance lending process, helping banks access new markets with new products, while reducing risk and streamlining cross-border trade for buyers and sellers as they grow their business and expand into new countries.

Proven benefits of a blockchain-based solution for trade finance

By participating in a blockchain-based platform for trade finance, banks can:

  • Pursue new revenue streams through new financing products and alternatives to letters of credit
  • Offer banking services to small and medium enterprises (SMEs) and companies that would traditionally use open account trading
  • Gain deep insights into client financial positions and transaction histories
  • Reduce operating costs by digitizing slow and cumbersome paper processes
  • Employ blockchain security attributes to demonstrate greater visibility and control of their transactions, thereby positively affecting the bank’s capital adequacy position
  • Speed financing approval processes and trading cycles

Buyer and seller companies that use the platform can:

  • Access trade finance products and services offered by participating banks more readily than through traditional routes
  • Reduce the risk of non-payment or late payment by a new buyer
  • Track all steps in a trade deal end-to-end
  • Expand reach and grow business through access to global markets
  • Speed business processes with digitization and automation

Blockchain and trade finance: How it works

We have a replicable solution built on the IBM Blockchain Platform that enables individual banks, bank consortia and/or fintech organizations to digitize trade finance and build an ecosystem that connects buyers and sellers — who also comprise a new pool of customers — In a seamless and secure trading environment.

Distributed ledger technology (DLT) makes it possible for documentation to flow transparently yet securely among banks, trading companies and other network participants like Insurance companies. All transactions are immutably recorded on the blockchain with a timestamp and unique cryptographic signature. Everyone with the right permission can access the right or same information for complete transparency, which helps increase trust and prevent fraud.

A self-governing rulebook defines how banks and traders participate to conduct business, as well as defining risk and dispute management. Smart contracts capture the codification of the commercial and shipping terms of agreement between parties. When specified conditions are met, such as shipment of goods, the smart contracts trigger notifications for payment.

Through a simple user interface, companies can apply online for bank-guaranteed payment or invoice financing. The completely digital process simplifies transactions and reduces costs for all parties.

Banks collaborate to simplify cross-border trade with

Founded by a consortium of major banks in Europe plus IBM Blockchain, the platform connects buyers, sellers, banks, insurers and logistics organizations. The network simplifies cross-border trading, fosters greater trust and transparency, and opens new markets for all participants. Live since January 2019, it has grown to include 16 banks across 15 countries, with transaction volumes growing rapidly and valued at millions of EUROs. streamlines the trade finance lending process, reducing friction and supporting companies as they grow their business and expand into new markets. The platform helps automate many of the processes around trade finance, as well as providing traders with access to insurance, credit rating and logistics services.

Buyers and sellers join via their participating banks. Once on the network, traders can initiate orders, manage the order-to-payment process and apply for bank payment guarantees and financing — all through a simple online user interface. They can also search the network to discover new trading partners, all of which have passed their banks’ Know Your Customer process.

The fast track to a trade finance platform: Build on our experience and assets

This trade finance platform is both replicable and extensible. Because we have built it already for existing clients, we can recreate the solution quickly for other consortiums of banks and partnering companies. Assets such as rules for terms and conditions, codified workflows, templates for user interfaces, and APIs for connecting with existing systems of record can be customized for your particular business relationships and potential participants.

The platform is also extensible. Once your solution is in production, you and your partners can grow by adding more participating banks, expanding into new markets or incorporating other supply chain participants like logistics, shipping and insurance companies and offer new services to buyers and sellers. Platforms can also be interconnected with other existing trade platforms to further extend reach.

By taking advantage of an existing customizable solution and the expertise of IBM Blockchain Services, organizations can progress from design to working pilot in as little as three months. After applying learning from the pilot, you can begin to scale by adding new participants to the network.

The solution itself is built on the IBM Blockchain Platform, which is IBM’s commercial distribution of The Linux Foundation’s open source Hyperledger Fabric. Each party in the blockchain network can maintain their data on the IT infrastructure or third-party cloud vendor of their choice. The platform is GDPR compliant, so it is ready to support global business relationships.

IBM Blockchain Services can help you join, or talk to us about how we can replicate a similar a blockchain-based trade finance solution for your bank or consortium of founders. We can also help you standardize rules of engagement and establish how your platform will be governed.

This use case telling the story of trade finance will be followed up by more examples of how blockchain services are being used in various industries to help solve real world problems. Be sure to read our recent articles on letters of credit, financial netting, invoice reconciliation and digital ticketing and upcoming articles, or schedule a free one-on-one consultation to find out how you can benefit from this solution.

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