Blockchain Could Reduce Trade Finance Gap By $1 Trillion – Report

Distributed ledger technology (DLT), such as blockchain, could play a major role in reducing the worldwide trade finance gap, according to a new study conducted by the World Economic Forum (WEF) and Bain & Company.

The Asian Development Ban estimated that the global trade finance gap currently stands at $1.5 trillion, or 10% of merchandise trade volume, and is set to grow to $2.4 trillion by 2025. The gap stems largely from hugely underserved SMEs, combined with the still massive volume of paper required for communication among customs brokers, freight forwarders, transportation carriers and myriad government agencies.

The WEF study claims that this gap could be reduced by $1 trillion if DLT is used more broadly. The report said that DLT is well suited to eliminating some inefficiencies in trade and supply chains through the following features: 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, and instant, secure and low-cost exchange of data.

“If trade transactions shorten from a week to a couple of hours, resulting in a sharp drop in lead times, then the effects on inventory costs, indirect labour and transportation costs are easily imagined,” the study said. “Bain & Company estimates that distributed ledger technology, if adopted the right way by all participants in the trade ecosystem, could reduce trade finance operating costs by 50-70% and improve turnaround times three- to fourfold, depending on the trade finance product involved.”

The report further said that by accelerating their efforts to digitalize and change processes accordingly, companies, financial institutions and public or quasi-public bodies raise their odds of benefiting from the traceability of goods and efficiencies in supply chains.

“Those that delay these moves could be caught out with undifferentiated propositions and inefficient supply chains – to the detriment of the highly interconnected global economy,” the report said. “No single stakeholder group alone can create the solution. Effective public-private collaboration is essential to deliver the benefits of digitalization and distributed ledgers to traditional trade finance. Only coordinated efforts will break through the obstacles and inefficiencies constraining SMEs and emerging market countries in their quest to expand global trade.”