Digital transformation is crucial for supply chain reform

Amit Ghosh, Head of Asia Pacific for blockchain enterprise software firm R3, explains why digital transformation is crucial for supply chain reform and how blockchain protects and helps mitigate risks.

In 2020, research showed that more than 200 of the Fortune Global 500 firms have a presence in Wuhan, the city that has become known for its alleged origination of the coronavirus. In line with this, the need to decentralise supply chains was recognised last year when trade ministers of Japan, India and Australia agreed to work towards achieving supply chain resilience, citing digitisation of trade procedures as part of their initiative.

Digital transformation is part of the solution to reducing the heavy reliance on specific cities and countries in order to protect against future pandemics, along with environmental and socio-economic disasters. Blockchain technology’s decentralised ledger could remove the risk of a central point of failure and in doing so, bring wider benefits to global trade finance networks.

The need for digitisation

Many of the processes and technologies underpinning trade finance have not been modernized in decades. The result is that those transactions continue to rely on paper-heavy processing, unsuitable for the current digital age. Traditional technology required corporates to log into multiple portals and juggle relationships and documentation for each shipment. In addition, businesses must navigate the growing threat of cyber-attacks, changing regulations, and ever-changing sanctions lists. Despite this complexity, cumbersome and time-consuming paper-based exchanges are still commonplace.

Although trade financing is lagging behind other industries, the sector supports some 80-90 per cent of world trade, according to World Trade Organization estimates. As such, trade finance remains a hugely underserved market, with potential for de-risking lending in emerging markets thus reducing the finance-access gap, as well as consistent yields in return for relatively stable investments.

By digitising these manual processes and superseding ageing legacy systems, a technology such as blockchain has a real impact on reducing the costs, risks, and delays to all participants involved in trade finance. If applied effectively, the technology has the capability to unlock what the Asian Development Bank has identified as a potential US$1.5tn opportunity in global trade finance. Companies of all sizes will benefit from better visibility into trading relationships and easier access to financing options, beyond point-to-point relationships, to a global network of trading parties.

A single source of truth

Blockchain’s integration across the financial services ecosystem has delivered some encouraging results so far. There is growing debate about how blockchain can provide solutions to solve many of the problems facing trade financing.

One such solution is real-time visibility, which is available via permissioned access to authorised network users and gives buyers and sellers unprecedented transparency into the status of their transactions. 

This single source of truth and use of smart contracts could remove a number of inefficiencies in the paper-heavy processes that exist in trade finance, such as negotiations of letters of credit. In addition, settlement finality removes the need for intermediaries to perform reconciliations. All of these applications could streamline the entire process and result in a significant reduction of the Cash Conversion Cycle, thus unlocking working capital and improving balance sheet health. 

A digitised and connected trade ecosystem

In order to move towards a truly digitised and connected ecosystem for trade finance, mass adoption on a global scale is essential. This elusive network effect can only be achieved if technology players prioritise forward-thinking and inclusive integration solutions that lower the barriers to entry for all types of companies involved in the trading process. 

Letters of credit are one of the traditional methods of undertaking trade finance across borders, and these are largely the domain of banks. However, as trust is building between buyers and sellers, there is a new wave of fintechs and non-bank financial institutions that are staking their claim, entering the market to extend additional trade finance instruments.

Like any piece of enterprise technology, blockchain will be most useful when used in conjunction with existing systems. The reality is that most businesses are not full digitally native and so will continue to rely on legacy systems – all to different extents – in the near future. 

In the paper-intensive business of global trade, blockchain is a gamechanger, offering the ability for real-time review of trade documentation, traceability, and transparency of ownership. The technology, however, provides optimal benefits when all relevant industry parties are leveraging it in a coordinated effort.

The key to unlocking blockchain’s true potential, therefore, is not to try and oust legacy systems but to make sure the technology fits into the right places, with minimal cost and disruption to a firm’s day-to-day business. Integration holds the key to rewiring the US$8tn global trade finance market.

Applied effectively, innovative technologies such as blockchain will bring countless benefits to existing trade networks. It can enable them to run more smoothly, quickly, efficiently, and ensure that, when the world faces another crisis, there is no one centralised point of failure.