Only a few months ago, blockchain was considered a bit geeky, and known mainly in crypto-hacking and techno-banking circles. Critics said it was a technology in search of use cases. Whilst it’s hardly widely-adopted, blockchain certainly found its feet in
2016, and we’re now seeing banks experimenting with a variety of POC use cases around international payments, e-identity and smart contracts. But now, blockchain has a big new target in its sights – digitising the financial supply chain. And it has the potential
to save you millions.
Before I explain how, let’s do an abridged history lesson just for context. Letters of Credit, the bedrock of supplier trade finance, have been in existence for more than 3,000 years and date back to ancient Egypt. The whole point of a Letter of Credit was
– and still is - to provide certainty of payment to the seller. But times have changed significantly since goods went off to market on the back of a camel.
As I type this, there is more than
$7 trillion of payables and receivables on companies’ ledgers worldwide. The globalisation of buyers and sellers, combined with promotional trading peaks, such as Black Friday (which generated
$5.27 billion in just one day in the US in 2016), are making it increasingly costly to process Letters of Credit. It’s time the financial supply chain went digital. And blockchain makes that possible.
Processing Letters of Credit today is largely manual and expensive. And as fraud becomes more sophisticated and prevalent, it’s also becoming riskier. (The audacious €1 billion Letter of Credit
scam back in 2008 would no doubt be far more sophisticated by today’s standards). As the financial supply chain moves from purchase order, to material ordered, to shipping, to invoice despatch, to invoice approval, multiple parties are involved - including
a host of banks.
Blockchain provides visibility across the entire financial supply chain from the first supplier through to the end customer. This not only reduces risk, it also amplifies fiscal liquidity across the chain for all participants, including small companies,
banks and non-banks – so they can all participate safely in financing the chain with certainty
I mentioned earlier that it could save you millions. That’s because all participants in a blockchain network have a complete copy of the shared ledger where all transactions are recorded. This includes details of where the money should be sent, and provides
banks with an opportunity to increase the straight through processing rate, saving both time and money. One UK clearing bank I spoke with recently believes the cost of redressing instructions for the 2-3% that require exception handling equates to the same
cost of processing the remaining 97-98%. In my view, it’s an area that’s screaming out to be digitised.
Legacy systems cover the last fifty years, and in the context of the financial supply chain it, well and truly qualifies. Yet we make predictions that Letters of Credit will have 10% market share in 2020. It’s time to give this expensive, risky, and time
consuming process a makeover and add greater security and transparency. Blockchain has the potential to improve the way the entire financial supply chain is funded and traded globally, bringing a new wave of economic benefits.