So we are now 3.57 Degrees of Separation – What does this mean for trade finance?

Trade Financing Matters welcomes this Guest Post by James Sinclair at Trade Finance Global, reporting on why connecting global supply chain finance and trade finance systems are a huge opportunity for the industry.

John Guare’s Six degrees of separation theory is now a thing of the past, well, according to Facebook’s research, we’re now connected to everyone in the world by just 3.57 people.

So what does this mean for trade finance, and how are we connecting the dots between buyers, sellers, shippers and everyone in between, given the trend towards ‘Globalisation 2.0’, and an interconnected world.

The Internet of Things could revolutionise Trade Finance

But before we go into the complexities of global trade systems and supply chains, let’s take a step back into the consumer world of the Internet of Things (IoT). Things interacting with other things is now no longer just a ‘cool’ concept. Imagine your Apple Watch or fitness tracker was able to detect low iron levels in your blood, and then arrange for your local GP to give you a call back or Skype you, who then prescribes you drugs, maybe transferring funds from your wallet for the prescription, and having them delivered to your door, whilst you track the entire process on your smartphone app, without actually lifting your finger. Welcome to concept of IoT.

Connecting trade and supply chain finance, where multiple systems, ports and parties need to connect with one another, is ripe for innovation through IoT. This emerging technology can be used to ‘track and trace’, bringing efficiency and reducing costs in trade finance systems. Mapping an entire supply chain system from start to end is a valuable asset, increasing comfort between different parties, reducing the risk of defaulting, given that a good’s location can always be tracked.

As shown in the diagram below, there are several touch points the goods pass through, numerous ‘confirmations’ are needed, and right now, the process depends on lots of paper based confirmation, the manual ‘rekeying’ of data and sometimes there is no guarantee of where goods are until they arrive at the end destination!

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CAPTION: Some of the different touch points and stages of a basic shipping transaction between a buyer and a seller via a typical trade finance deal using a Letter of Credit

Having devices that can not only monitor the state and location of goods (e.g. what’s the real time location of the canned produce which is being shipped from China to France, and are they still being stored at between 1-5°C).

The 3 Musketeers in Trade Finance: Skuchain, Flexport and Satago

Skuchain is a Silicon Valley based company attempting to disintermediate trust by way of electronic signatures, and by using sensors to trigger automated contracts, release funds as necessary, and guaranteeing payment through a blockchain based trust system. What does this mean?

Let’s say barrels of crude oil are being shipped from destination X to Y, the sensors would detect and relay data on its whereabouts, and storage quality, and then trigger a smart contract (essentially a computer programme that executes when certain conditions are met). Following this, funds for the transaction would be automatically released in real time, as soon as the order is fulfilled as agreed. The same types of sensor could be used to monitor warehouse conditions for the storage of inventory, which ultimately is underwritten by insurers and possibly financed through pre-shipment or a Letter of Credit. Once financiers and insurers can access the state of these collaterals, rewrite and amend the data if necessary, there’s a lot of value and potential.

Another game-changer on the block is Flexport. Flexport provides the infrastructure – or rails – for transforming the shipping and freight forwarding industry. Speaking to Ryan Peterson, CEO of Flexport, he mentioned that the shipping industry still operates as if we’re in the 1990’s. Flexport has mapped out the seas, and provides real-time information of the location of goods, what’s on certain cargo ships, and allows sellers to find inefficiencies in global cargo and place goods on ships when the price is right, optimising shipping routes.

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CAPTION: Shipment of goods can be tracked using the Flexport online dashboard in real time

Credit control and risk is an important factor in supply chain finance, particularly when it comes to qualifying a company requiring trade or invoice finance. Leveraging and sharing data across different systems is key here, and adds significant value to funders and insurers. Satago connects financiers to accounting systems. Steven Renwick, CEO of Satago has built an innovative fintech business that helps SMEs accelerate their cash flow through flexible, confidential single invoice finance, provided through free credit control software, which plugs into their accounting systems.

Steven said: “Thanks to the online network we have built between suppliers and customers, which connects hundreds of thousands of organisations already, we are building insights to allow us to finance the type of SMEs that the mainstream banking sector would prefer to ignore”.

Cautious Optimism for IoT

Integrated trade is probably one of the most powerful tools to make way for a revolution in the sector. Digitilisation and utilisation of new technologies such as IoT and Blockchain will open doors for efficiency and a reduction in the cost of trading goods.

The key dependencies however rely on two things; security and transparency. The anonymity of blockchain and its peer-to-peer nature means that bank-grade checking and lack of control over a transaction does present a roadblock which is causing some angst within larger financial institutions to adopt these technologies.

Coupled with the rise in trade finance fraud over recent years, we need to constantly think about how to bring security protocol and compliance to the same level of rigour as currently stands.

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