The World Economic Forum published the white paper ‘Trade Tech – A New Age for Trade and Supply Chain Finance’. The paper analyzes trade and supply chain finance, saying that technologies could narrow the current trade finance gap of $1.5 trillion.
The white paper, a joint initiative of the Supply Chain and Transport industries and the System Initiative on Shaping the Future of International Trade and Investment, outlines the topic of trade and supply chain finance, including a snapshot of the status of technological developments.
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Namely, there are concrete examples indicating that technologies could reduce the current trade finance gap of $1.5 trillion, representing roughly 10% of global merchandise trade volumes.
This is important as international trade and global value chains are crucial for the wealth of nations and the reduction of geopolitical tensions.
However, obsolete processes are raising obstacles for small and medium-sized enterprises (SMEs) and trade with emerging markets. In order to mitigate this, the paper suggests the switch from paper-based documentation into electronic formats.
In addition, smart tools and technologies have the ability to reduce trade barriers and improve processing times at borders, particularly for small businesses and companies which are located in higher risk developing countries.
Specifically, distributed ledgers are secure, shared databases, where each participant has a copy of the stored data. When a transfer of funds or information about a shipment is recorded, it is immediately validated, made transparent and available to all participants.
The important thing here is the fact that only certified parties can conduct transactions, via encrypted digital signatures. This is the essence of ‘smart contracts’, which basically are a digital protocol that verifies and enforces a contract without third parties. These systems guarantee a shared version of the truth, while they are also faster, cheaper and safer than manual systems.
Namely, distributed ledgers have the following advantages:
- Faster credit risk assessment from the transaction history;
- Minimized human error in document checks;
- Instant verification and reconciliation of records;
- Automatic execution of workflow steps through smart contracts;
- Instant, secure and low-cost exchange of data.
So, it is obvious that faster trade transactions can lead to a sharp drop in lead times, affecting by its turn inventory costs, indirect labour and transportation costs.
In fact, Bain & Company estimates that distributed ledger technology could reduce trade finance operating costs by 50-70% and improve turnaround times three to fourfold, depending on the trade finance product involved.
You may find more information in the PDF below