• shippers

The Need for Interoperability

Extending credit and processing payments is an integral part of the global shipping trade that can expose risk and impact cash flow. The industry is currently hamstrung by the manual transfer of information, often in non-standardized formats and lack of interoperability between parties involved in the financial process. This leads to delays in validating financing conditions due to data discrepancies in the information received from different stakeholders. Critical information is sometimes lost, and it is difficult to keep a reliable track record of historical information.

Some 80% to 90% of world trade valued at tens of trillions of US dollars relies on trade finance, mostly of a short-term nature. The potential damage to the real economy of shrinking trade finance is enormous. International supply chain arrangements have globalized trade finance along with production processes. Sophisticated supply-chain financing operations — including for small- and medium-size companies — has become crucial to trade.

Trade finance generally involves multiple parties such as buyers, sellers, their respective banks as well as insurance providers, logistics companies, etc. Yet this centuries-old practice has changed very little and there is no single digital platform connecting all these parties in real-time. 

The absence of electronic and digital processing means that trade financing transactions rely on extensive paper trails and an arduous process of document exchanges. Typically, this takes five to ten days to complete, or longer, as manual verification is required. Since each party across countries operates on different platforms, miscommunication is common and the potential for fraud is high.

For banks, the need for physical documents to be delivered and verified is a time-consuming process, requiring human effort. It also causes problems for the financing party as funding can be delayed by the late delivery of documents.

Failure at any point in this lateral process has a knock-on effect. Any delay in document delivery causes delay in the disbursement of financing, and delivery of goods. The exporter may also face a delay in receiving funds as multiple intermediaries need to verify that physical goods have been delivered to the importer before releasing payments. More serious problems can occur in the event of fraud, where the same batch of goods is being financed multiple times by different banks who do not share the same information, or worse still where certain trade documents are faked to obtain financing inappropriately.

In an environment of constant regulatory change, compliance especially Know-Your-Customer (KYC) compliance, can be costly and time consuming, while fines for non-compliance are significant. Lack of global standards leads to redundant work, limits to collaboration, lengthy and complex new account opening processes and inaccurate customer information. Although other centralized solutions can alleviate some of these challenges, blockchain architecture represents the ideal solution, delivering immutability, integrity of trusted data and, through mutually distributed ledger technology, safe data storage with customer access.

Connecting for Financing and Payment Synergies

Given the significant shortcomings of the outdated, lengthy, complex and unreliable payments infrastructure that still exists today, along with the constant compliance challenges, blockchain technology that can drive an open, transparent ecosystem operating in parallel with other supply chain processes, is critical. Such an ecosystem can deliver full interoperability among parties, reliable financial transactions that can be tracked, data integrity and ultimately improved efficiency and security.

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IQAX respects your privacy and is committed to protecting it. For more information, read IQAX's Privacy Statement.