Today, trade finance is an area that consists of a lot of in-efficiencies. And it are these outdated practices of trade finance that the stake holders are trying to address through technology innovations. Needless to say, by adopting technology disruptions, almost all the industries have witnessed big time benefits. It is believed that the same prospect can also be witnessed in trade finance world as well.
The other dimension to it is adoption of technology in trade finance was more than just a need. Digitalisation move in trade finance can speed-up the long and arduous process of payment mechanisms. In addition, it will also allow trade finance to keep up with the advancements of evolving corporate and consumer demands.
Block chain technology is considered as the ‘hottest trend’ in the banking sector and would soon become common place in the industry. Why is it so?
Before getting into the details of it, let’s begin by-
What is Blockchain Technology?
Blockchain technology is basically a data structure which allows users to create a digital ledger of transactions and distribute it among a digital network with the help of using independently verified cryptography. It can help participants on the network to securely amend that ledger without the need for a central authority. Further, by updating the technology participants on the network, one can view all the recent as well as past transactions easily. It cuts down the time to make multiple copies of the same document of information stored on numerous databases across various entities. In simpler words, it is a digital platform where participants come together to perform their activities such as changes, processing etc without the need for physical interaction as is the case in today’s trade.
A single blockchain can actually assimilate all the necessary information in a single document and data can be updated instantly. It can be viewed by all the members on the network at the same time. Further, transaction settlements that took many days to complete through traditional practices can now be spedup with the help of technology. Transparency of the process amongst parties is increased and capital is unlocked faster. The reason why capital remained tied up earlier was mainly due to the long waiting hours to be transferred between parties.
Evaluating such factors and many others too where technology disruption can prove to be a huge boon, banks and several MNCs have thus begun investing in technology. They are increasingly looking out to developing programs that utilize blockchain mechanism in trade finance and receivables finance.
Technology offers real-time monitoring by multiple parties and the exchange of important documents through digital mode in secure and decentralized manner. It thereby helps in streamlining the operational activity of international trade transactions. Blockchain technology has also helped in fighting risks associated with fraudulent practices and this comes as a huge relief for the importers and exporters around the world. Besides, technology also provides various other benefits that include -
Indian & Global Banks Leverage Blockchain Technology
Modern banking practices are getting better with the adoption of blockchain technology. A lot of operational activity is fast turning into digital mode from manual paper work to add to efficiency. The best part about the inclusion of blockchain technology in banking practices is that it brings in a high level of transparency and ensures trust among its clients. It is this transparency which automatically forces players in the industry to play as per rules and not adopt any illegal manipulation in the trade finance world.
Last year we witnessed the massive news coverage on HSBC India and Reliance Industries executing their first blockchain based LC transaction. This live trade finance transaction was possible with the joint effort between HSBC and Tricon Energy. (Source: Business Standard)
Furthermore, Infosys has partnered with ICICI bank and other banks to develop blockchain network for trade and this is known as Finacle Trade Connect. Banks that fall under this alliance are- Kotak Mahindra Bank, Axis Bank, Yes Bank, Bank of Baroda, HDFC Bank, IndusInd Bank, RBL and South Indian Bank. (Source: Livemint & Infosys Press Release)
Elaborating further on the blockchain fever in Indian banking sector, Jitin Chandanani, Blockchain Offerings & Engagement Leader, IBM India/South Asia said, “Blockchain technology eliminates manual processes and friction in day-to-day trade finance, digital identities and cross border payments. Banks are using Blockchain to rewire financial markets for optimized cash management and consumer lending while transforming online and international payments processes.”
Outside India, some of the renowned global financial institutions who have started working on shifting the trade finance operation to blockchain technology include names like- Royal Bank of Scotland, Commerzbank, BNP Paribas, and ING. These banks have realized that old age customer delivery systems are fragmented and are relatively inefficient for the emerging technology-driven world we thrive in today.
Digital Approach to Trade Finance-The Way Forward
Digital approach is just entering the dominant paper-based documentary trade business. However, in order to realize the true potential of blockchain, the industry participants will have to agree on the network with common standards and business rules. At the moment, it looks like attempts to digitize the documentary trade finance process are falling short because, projects are just focusing on a narrow slice of the entire process. Institutions such as the large banks, government agencies, and other trusted parties have to take up more proactive steps and work as “super connectors” to serve as a bridge among networks to share critical information.
Most organizations today lookout for and has made digitisation their primary goal for business transactions. This is achievable with the creation of trusted and permissible interactions between corporations, B2B networks, service providers and other financial institutions. It would, however take some time to fully transition into a digital approach. But with technology overpowering all the industrial operation in the 21st century, this is where even the trade finance industry is slowly heading towards.
We at Myforexeye also back the idea of offering tech-enabled trade finance assistance to MSMEs with an objective to support transparency of dealings and quick operation of promised services to the clients. Transparent dealing is our hallmark and we strive to increase efficiency level by adopting digital solutions.
There is no denying the fact that a better connected and highly automated and far more open infrastructure enables more efficient trade finance solutions for customers. Technology has the power to introduce ‘smart contracts’ and allow businesses to automatically trigger commercial actions that are based on defined criteria. It boosts the efficiency level to a great deal and allows streamlining of processes, removing time and cost barriers from transaction operation process flow. An end to end trade finance network for banks and their corporate clients will make it easier to exchange data relating to trade. It will also helps in easy liquidity flow and most importantly, increase the level of efficiency in the trade market.
10 Dec 2019 05:19 PM
Most of us understand the importance of the global interest rate benchmark LIBOR – London Inter-Bank Offered Rate, especially when millions of dollars are benchmarked against it for decades since 1984.
29 Nov 2019 02:16 PM
Ideally a trade constitutes a foreign exchange transaction but currency can be traded without any underlying which makes it a risky proposition.
26 Nov 2019 12:29 PM
Foreign exchange risk is a financial risk which exists when a home currency is converted into another during the transaction.
14 Nov 2019 02:54 PM
A foreign exchange transaction is recorded in the books of accounts at an exchange rate though the payment is made at a different exchange rate. This leads to transactional foreign exchange loss or gain.
07 Nov 2019 10:48 AM
Modern foreign exchange market started its shift from a fixed exchange rate to a floating exchange rate system. Thus a global decentralized, over the counter (OTC) market for trading of currencies evolved which determines the forex rates.
29 Oct 2019 05:00 PM
Trading in the financial markets is what increases the volumes especially when some markets are open across the borders over different time zones. Each market has its underlying asset which is tradable over the exchange.