The trade finance market has undergone a great deal of change in the past few years. This has been a direct results of several different factors, including changes in regulations, corporate behaviour, and increased competition. That being said, the greatest impact to the market has come from advancements in technology. Technology has been integrated into trade finance in order to streamline processes, improve relationships between banks and finance organizations, and safeguard transactions. Further, banks feel the ever-pressing need to go completely digital, what with the increased risk of fraud in the $4 trillion trade-finance industry and Standard Charter Plc’s nearly $200 million China fraud incident in 2014.
Challenges faced by the trade finance market
The challenge with integrating technology into trade finance is two-fold. First, it is difficult to get all parties on board, which includes every single one of the buyers and sellers. Total adoption and agreement is the only way for any technology to work seamlessly and effectively. Secondly, technology cannot have a “one size fits all approach” when it comes to dealing with trade finance processes, as there are different requirements based on the nature of transactions and the operations of the banks and trading partners. However, the trade finance market also presents a great deal of opportunity, as it can benefit the most from the type of change that technology can offer.
Blockchain technology and Internet of Things: just the beginning
One example of how technology has impacted trade finance can be found in the implementation of blockchain technology by banks and technology firms, which seems to be a growing trend. Blockchain technology, originally designed for bitcoin transactions, is used to make transactions easier by significantly reducing the cost and time associated with them. This is achieved through a shared database, which allows banks and all participating organizations to trace every single transaction made. The goal is to completely eliminate paper transactions, which are one of the major sources of fraud in trade finance. According to an article published by Reuters last month, Bank of America Merill Lynch and HSBC have come together to develop a blockchain prototype specifically designed to improve trade finance processes. Additionally, according to an article published by Law360, tech firm R3 in conjunction with 15 banks has created two block chain solution prototypes. Advocates of blockchain technology predict that it will completely reshape the trade finance market, saving lenders billions.
Perhaps not as obvious but still significant, the Internet of Things (IoT) has and will definitely continue to influence trade finance. Technologies such as iBeacons and RFID allow for easy transactions and ownership transfers, as well as advanced tracking and analytics. And we have only just begun to scratch the surface in terms of harnessing their potential. Data sharing is also an extremely important component to trade finance operations, which is where cloud-based software solutions come in. That said, software can be just as tricky as hardware. While it can be more difficult to get organizations like banks to adopt to a new piece of technology, the problem with software is that many vendors currently offer one-off solutions that aren’t tailored to specific trade finance needs. Further, the implementation process itself can be costly and can disrupt existing processes. Vendors will need to determine the appropriate level of customization for their products, and offer solutions that are more than just a software package.
In conclusion, the trade finance market is certainly well-positioned for redevelopment led by technological advancement. In fact, according to analysts at Technavio, the trade finance market will be worth $47 billion by 2020. Expect to see greater competition between vendors, significantly increased use of blockchain technology, and a more comprehensive approach to software services in the next five years.
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