December 12, 2017
While perhaps not a direct concern for all corporate treasurers, improvements in the Trade Finance space, brought about by blockchain, could help in the areas of cash flow certainty. And for those companies that have a heavy Trade Finance element, treasurers are often directly interested in the progress of shipments and ultimately, the payments.
Trade Finance has historically been very paper-based and has relied on central authorities (often banks) taking a very active role in providing payments and credit services against the purchase and supply of goods. The Letter of Credit is perhaps the most widespread example, and while there has been a big shift toward open account arrangements in recent years, the Letter of Credit is still used widely. As such, the inefficiencies remain, and given the characteristics of Trade Finance instruments like Letters of Credit, they are ripe for innovation. There are often multiple participants, domiciled in multiple jurisdictions and there is a large amount of paper involved, which moves between those parties. So, can distributed ledger technology bring better levels of efficiency and certainty to this process? Well, blockchain technology is already being used to digitize the Letter of Credit process, with several banks/fintech companies coming together to produce Proof of Concepts. So the answer appears to be “Yes!”.
There are further areas where blockchain technology can be relevant. First, Smart Contracts technology may become important. It essentially includes pieces of computational logic that can determine/facilitate the negotiation/performance of a contract. For example, you could add a condition to a payment that it should only be paid once the goods have been received and electronically verified.
Second, there are companies emerging that are focusing on using blockchain technology to track the authenticity and environmental credentials of goods from source. Among other things, this can help in the supply chain finance space in that it could enable buyers to extend finance more readily down the supply chain, at a cost lower than what the suppliers could get from their local banks. One example of this is a start-up company in the coffee industry. It demonstrated the ability to have robots at coffee farms which grade coffee beans on the spot and enter that information onto the blockchain. This information is immediately trusted and available to both the buyer and seller to view. The result is the possibility to purchase without having to go to the market. And the direct trusted link between buyer and farmer/producer provides a financing opportunity. Finally, it also uses blockchain to track the transport of those beans, ultimately enabling end consumers to verify the source of the coffee they are drinking. The coffee snobs out there might like that one.
While there is a lot of activity in this space (and arguably more than within core treasury itself), the solutions are arguably still all early stage. But, it is exciting and promising nonetheless. And for the treasurer specifically, increased transparency and predictability in the receipt and payment of goods should lead to more accurate cashflow forecasting.