Technology is touching every aspect of finance, transforming decades-old practices and redefining core tasks. In our new series, Disruption in Financial Services, we explore how new tools and technologies are changing the business of finance and reshaping how financial professionals do their jobs.
Disruption in Financial Services
Fintech Is Shaking Up The Sleepy World Of Trade Finance
Trade finance has traditionally been a relatively quiet corner of the financial world, heavily reliant on paper, phone calls, email, and fax machines. In many cases, the processes for financing trade shipments have been unchanged for hundreds of years. Recently, however, FinTech innovations have been disrupting the staid business of negotiating trade terms, securing letters of credit, and obtaining invoice financing. Banks and FinTech startups are investing heavily in new tools to make trade finance faster, simpler, and more efficient. Yet despite the promise of technologies such as blockchain, the fragmentary nature of global trade is slowing the hoped-for digital transformation.
Companies seeking to import or export goods face many challenges. The most serious of these is the risk inherent in sending goods or payment to an unknown company in a distant country in which different laws apply.
Trade finance tools, ranging from documentary collection to letters of credit to invoice discounting, help importers and exporters mitigate this risk, encouraging the smooth flow of goods around the world.
Trade finance is a multi-trillion-dollar business. Yet much of that business is conducted over phone or email. Paper contracts are couriered between parties, and physical documents remain a core part of most trade finance transactions. In this digital age, the industry is crying out for disruption.
Bain & Co – a global management consultancy firm – predicts that technological developments in documentary trade finance could boost bank revenues by as much as $2 billion and increase trade volumes by over $1 trillion. Many firms, including global banks and tech startups, agree that there are profits to be made and have been investing heavily in the development of appropriate tools.
For example, a consortium of eight banks has built and tested a blockchain-based platform called Voltron, which handles letters of credit transactions. In testing, Voltron successfully reduced the amount of time it took to complete such a transaction from 5-10 days to 24 hours. The platform has reported several successful live transactions, including a deal involving shipping soybeans from Argentina to Malaysia on behalf of agribusiness giant Cargill and a deal involving shipping wool from Australia to China.
Another blockchain platform, Marco Polo, which is also backed by a group of large banks, focuses on open accounts – the platform reported its first successful live pilot transaction earlier this year.
Still other blockchain-based platforms, such as We.Trade, Trade IX, and Finacle Trade Connect, offer invoice finance solutions. Invoice discounting has received particular attention, with a number of FinTech firms offering rapid invoice financing solutions, many of which simply require firms to upload invoices, purchase orders, and transport documents to a central, easy-to-use platform.
To add to the mix, major shipping and transportation companies, such as AP Moller-Maersk and Hyundai Merchant Marine, are looking to take advantage of their position at the center of trades to launch their own finance systems.
Yet, despite the explosive growth in such platforms, the transactions conducted on them still represent only a small fraction of total global trade finance business.
One major hurdle to broader uptake is that a typical trade transaction involves multiple parties, including the importer and exporter (frequently small or medium-sized businesses), their respective banks, and, potentially, one or more shipping companies.
To conduct a transaction through, for example, a blockchain platform, all the parties to the transaction must understand and have access to the tool. For small companies, learning and managing a new system is costly, and many are unwilling to commit the necessary time and resources.
In addition, because the area is new, there has been a proliferation of competing platforms, and there are no standardized processes or procedures. Thus, even if a small company learns how to use one platform, if their trading counterparty wishes to use a different platform, it may simply be easier to conduct the transaction using traditional paper-based systems.
The result is that usage of new platforms has been slower than many hoped, and banks and FinTech companies have yet to see their investments in technology pay off. Nevertheless, as time winnows down the number of platforms and accepted standards emerge, it seems clear that trade finance is on track to become much faster, simpler, and more digital.
Intuition Know-How has a number of tutorials that are relevant to trade finance and FinTech. Click on any of the links below to view an intro video to the same tutorial.
- Trade Finance – An Introduction
- Open Account Trading
- Documentary Collections
- Letters of Credit – An Introduction
- Letters of Credit in Practice
- Export & Import Finance
- Blockchain Structure & Security
- Smart Contracts & Blockchain Applications