In yet another posting on the seemingly overly hyped blockchain-driven set of scalable use cases (and the corporate versions are the ones I personally cover), we have a reasonable overview of the trade finance space. The three most widely-discussed enterprise (or corporate, if you will) use cases for banks and their clients have been around 1) payments (x-border in particular); 2) fraud and security; and 3) trade finance (most directly replacing a physical documentation paradigm with virtual). In this discussion the point is to extend that to supply chain finance (SCF), which has gained wider popularity and usage in the past ten years with the increase of open account trade, which is inherently more digital in nature. Traditional trade finance is most closely associated with letters of credit (LOC), and as such more paper-intensive. The point of this piece is to provide a window into some of the use-case testing and activity extending into SCF, most particularly with regard to smart contracts.
The question is: what can blockchain mean for supply chain finance and how could it be applied?…..A blockchain-based supply chain finance solution more specific via so-called smart contracts will essentially enable all parties in a supply chain finance solution to act on a single shared ledger. A supplier and manufacturer, along with every other participant, will solely update their parts of the transaction, enabling efficiency and an “unprecedented” level of trust and transparency on a ledger record that is immutable…..“If you talk to supply chain experts, their three primary areas of pain are visibility, process optimization, and demand management. Blockchain provides a system of trusted records that addresses all three.” Brigid McDermott, vice president, Blockchain Business Development & Ecosystem, at IBM
In effect it is the same application effect across all of trade finance, since a smart contract can link to open account or LOC scenarios, possibly triggering any number of follow-on processes, including financing choices. But it widely-believed that this use-case application is a major cost-extraction and supply chain efficiency driver. The article goes on to review various pilots in process between IBM and other partners. So while Mercator maintains a healthy skepticism around the true meaning and adoption of blockchain, the advent of large scale proofing and market reality seems to be getting at least more transparent for healthy market judgement.
There are still challenges to be dealt with, too, such as the need to implement paperless trade, issues of data privacy, and how to get all members of a supply chain to participate. If global supply chains are to gain the full benefit of this technology for managing payments and related data, all parties that play a role in global trade must be involved!
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
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