3 Min Read |
Since the drop-off in 2007/2008 following the financial crisis, volumes in international trade have been steadily increasing, bringing supply chain management under increasing scrutiny.
Supply chain management refers to the infrastructure and processes that guide the flow of product from the raw materials through to finished goods arriving at the end consumer. One area that is coming under the spotlight is the volume of paperwork that’s generated by these transactions.
For the beauty and cosmetics industry as well as for many other sectors, moving commercial goods around the planet is a billion dollar business, and yet the system of documentation is truly Dickensian, remaining almost untouched by digitisation. Cross-border trade generates enormous quantities of paper documents that incur the administrative costs of processing, moving, verifying and storing. Additionally, large volumes of paper documents are vulnerable to fraud, human error and inefficiencies.
As goods move through the process, monetary payments are required; commonly referred to as supply chain finance or trade finance. Financial services companies have traditionally enabled these transactions using a common trade finance instrument known as factoring where the bank will pay the seller of the goods before the buyer makes payment. Managing these payments and the associated paperwork is a complex task, especially in cross-border trade and where banks are operating as intermediaries.
There are obvious risks where multiple parties are involved including non-payment, duplicate payment and fraud. Even when these risks are factored out the costs involved in processing and coordinating these payments is high.
Companies regularly involved in International trade have been looking for mechanisms that are faster, more efficient and more secure to handle the workflow of documentation. An increasing number are testing Blockchain or Distributed Ledger Technology (DLT) as an alternative in an effort to streamlining the process. The hope is that Blockchain will be used in smart contracts, eliminating the need for paperwork and making the handover of goods more secure.
Blockchain originally developed as an accounting method for the virtual currency, Bitcoin, and has become associated, wrongly, in the minds of many as one and the same. DLT,is a digitized, decentralized public ledger of cryptocurrency transactions that allows market participants to keep track of digital currency transactions without central bookkeeping; capturing the data associated with each invoice and allowing the buyer to make payment without needing to know the owner of the invoice.
There is an argument that says blockchain could smooth out the inevitable drawbacks associated with paper transaction dealings and eliminates unnecessary processes while minimizing costs associated with International trade. A few companies that specialize in beauty products are testing the waters by accepting payments in cryptocurrencies. Lush Digital Ltd UK started accepting Bitcoin payments on uk.lush.com in July 2017 to provide more global payment methods to customers.
But for cross border trade the likelihood of blockchain replacing paper based documentation seems unlikely in the short term. Shipping across multiple borders can generate up to fifty documents, some requiring official stamps. For blockchain to work would require all of the players involved from, raw material suppliers, manufacturers, shipping agents, hauliers, banks and finance companies to use the same system. If one of these is using paper documentation the whole exercise becomes pointless.
Banks and finance suppliers are developing their own cryptocurrencies for use in specific sectors but some commentators say this could take as much as five years to achieve. Inevitably the digitization of conventional trade and shipping documents as well financial instruments like letters of credit, is inevitable. But, for now, the widespread use of Blockchain and cryptocurrencies as the standard for international trade in the short-to medium term seems like wishful thinking.