Augmenting Trust With Technology In Global Trade Finance

In cross-border trade, trust has historically been a critical part of the equation. Corporate buyers must trust that their suppliers will deliver what they promised. Vendors, meanwhile, must trust that their customers will pay on time. And the banks that finance these transactions must trust that what business partners say will happen, has actually happened.

Of course, participants in the global trading ecosystem won’t simply take each other’s’ word for it. High volumes of trade documents are key to verifying purchases, payments, deliveries and more – but paper and manual data checks severely hamper transparency and accuracy.

Lee Tarone, CEO and founder of trade finance and payments platform Envoy, says a lack of trust continues to hamper the industry’s ability to address the ongoing $1.5 trillion yearly trade finance gap, with paper as a massive culprit limiting access to trade finance.

Financial institutions (FIs) today face the ongoing threat of trade finance, he noted, pointing to a common tactic of a supplier submitting the same invoice to two different financiers to receive double funding. But it’s not the only risk faced by traders and banks today: With such a high volume of documents, including bills of lading, customs documents, inspection certificates, invoices, warehouse receipts and more, paperwork forgeries are common, and are often “so good that you can’t tell the difference,” said Tarone.

Even as businesses move away from physical paper, their reliance on email to transmit information between trading partners and players in the ecosystem exposes the trade finance arena to the growing risk of cyberattacks.

“Traditionally, financiers had to take various methods to try and mitigate fraud,” Tarone noted. “Third-party validators help, but they also add an additional cost. Some financiers have even traveled huge distances to check in-person that the foods they were going to receive were real.”

Lower Trust, Higher Costs

From invoice fraud to cyberattacks, the threats hampering trust in cross-border trade continue to grow. And as financial regulations expand to combat financial crime, many financiers have found trade finance is simply too expensive to underwrite as a result, leading to either higher costs for global traders or banks pulling back from trade finance altogether.

The procedural burden of verifying a high volume of documents and mitigating fraud and cybersecurity risks has had a particularly profound impact on the ability of smaller businesses to access trade finance, noted Tarone, adding that one of SMBs’ biggest barriers to global expansion is accessing the financing that is necessary to grow.

Often, SMBs do not have the clout or relationship with a large, multinational bank, leaving them to rely on local banks for trade finance.

“These local banks do not have the liquidity or risk threshold to finance the entire trade, so they have to turn to affiliate banking and attempt to sell a portion … in an attempt to pool resources and mitigate risks,” he said. “Unfortunately, their affiliates are often in a similar situation and would need to turn to other affiliates as well.”

As a single trade finance transaction proliferates down a chain of banks in an effort to pool resources and disburse risk, financing becomes more expensive – and far less efficient – for financiers and businesses alike.

Technology’s New Approach To Trust

Automation technology has made an effort to address financiers’ biggest trade finance risks and the knock-on effects of a lack of trust in the market. One of the most promising tools in this space, according to Tarone, is blockchain.

“Many have tried to shoehorn blockchain technology into solutions [where] it doesn’t quite fit, [but] trade finance, supply chain finance and cross-border payments [are] some of the few examples of commercial use where it can genuinely make a real difference,” he said.

The opportunities for blockchain are significant in areas like managing high volumes of trade documents, with distributed ledger technology (DLT) able to promote the validity of documents with significantly less risk of duplication or data tampering. But blockchain goes further, said Tarone.

The technology, along with smart contracts, also enables the automated execution of certain processes: For instance, a payment can be automatically released only when certain criteria are met pertaining to the delivery of goods.

Encryption and other security measures also lower risk barriers and promote efficiency – not only for banks, but also for alternative financiers or crowdfunding models. Tokenization enables a cross-border payment process to be integrated directly within the broader trade financing agreement, with the potential to lower or eliminate foreign exchange costs.

And beyond finances, blockchain’s interoperability with technologies like RFID and the Internet of Things (IoT) means that data stemming from the tracking of physical goods as they move along the supply chain can add an extra layer of validity and efficiency in trade finance transactions, too.

Overall, said Tarone, the true value of technologies like blockchain in trade finance doesn’t necessarily lie in enhancing trust between parties – but in not having to rely on trust at all.

“What blockchain provides is [a] trust-less and transparent system,” he said, pointing to the rise of “triple-ledger accounting,” in which validation does not rely merely on confirmation by only two counter-parties, but also a network of other users on the blockchain.

“In such a system, there is no need to ‘trust’ other people, because all participants are able to keep one another honest,” he said. “This is the time for decentralization and autonomy to bring trust and transparency into an industry that has historically lacked it.”