Intelligent Trade Finance: The Confluence of Blockchain and the Internet of Things

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The fundamentals of trade and trade finance have not changed in centuries: it’s process heavy, with bottlenecks and disputes everywhere. Characterized by paper and manual operations, the back office is ripe for next-generation transformation. In the middle and front office there is potential for far greater automation and use of real-time data, for example in the accounts receivables process, in SME credit underwriting, loan booking, and monitoring and indeed for relationship managers (human and virtual) to surface and analyze data to gain insights and provide more data-driven recommendations to corporate clients along the financial supply chain.

Customers and suppliers often point the finger at banks for their rigidity and slow turnarounds. Bankers worry about process lapses, risk issues, and huge piles of unstructured data. The biggest problems come down to data, trust and authenticity. The most compelling technology solutions today shift the way trade finance transactions and portfolios are monitored and managed; they seek to help banks balance corporate clients’ cash and working capital lifecycle demands with their own capital, compliance, and cost conundrums.

Times have changed. In the background, the industry is going through a pivotal period of transformation. There is push towards transmitting more structured data between counterparties, largely driven by SWIFT’s mother of all changes to letter of credit and guarantee message types in 2018 and 2019. Alongside these foundational changes, a handful of fintechs have emerged with distributed ledger or blockchain solutions to promote faster and more secure transparent money and document transfer. But these new networks must also be considered alongside other disruptive technologies. Artificial Intelligence will provide the automation algorithms of the future while the internet of things (IoT) unleashes digital data from the physical world to potentially change the nature of end-to-end financing for imports and exports. It means a new perspective on how banks validate and monitor quality, manage trust, and provide new risk mitigation and financing services along the supply chain.

IoT provides an integrated network of devices, embedded with software and sensors that connect and exchange data. It represents a big opportunity to deliver on the promise of connected commerce. While banks have dreamed of a ‘track and trace’ utopia, being able to verify and feed data into the financial supply chain about the quality of goods shipped or claimed has been virtually impossible. Banks have played the role of postman, transferring documents and exchanging money; industry policy concerns itself with compliance of the financial transaction and the contract between the importer and exporter, but in the real world bankers are limited in their ability to monitor risk and fraud along the entire trade flow. Take perishable goods as an example; they must be transported and received in a good condition. This measure of quality should be tied and monitored against the credit agreement. Financing should be linked to the state of the collateral.

With the advent of IoT, there is an opportunity to continuously monitor qualitative aspects of a trade to improve the efficiency of financing, reduce risk for banks and their counterparties, and cut out friction that comes with disputes. It can help RMs and credit managers to make more informed decisions when submitting and approving limits and facilities (especially for smaller businesses or those with less credit history). This data can also inform credit insurance decisions.

The know your customer (KYC) process remains a big barrier to trade finance. Maybe it’s time for a new acronym, KYG (Know Your Goods) to enter parlance? Being able to do KYG can truly be a facilitator of trade finance going forward, but it’s not just about financing. In a world where an increasing premium is placed on sustainability and ethical sourcing, the ability to ‘Know Your Goods’ will be key to proving provenance and building trust in supply chains.

Today the most forward-looking banks we work with are not looking at these technologies in isolation. The combination of IoT with blockchain will provide the killer apps of tomorrow, infusing trust into data exchange and analytics. Distributed ledger technology (DLT) — the underpinning technology of what is commonly known as blockchain — improves transaction efficiency, providing security and proof about the exchange of information and value. Where IoT data feeds transactions and triggers smart contracts on a blockchain, we can monitor the authenticity of goods; for example, precious goods like diamonds or commodities at risk of illegal trafficking. We can therefore avoid fraudulent invoices that might result in defaults during the funding process.