Problems

The trade finance industry's efforts to standardize and automate its record-tracking system have been surpassed by the pace of globalization. An old paper-based record tracking system is used to manage the exchange of commodities across borders and jurisdictions, each with its rules, shipping standards, and certification requirements. This system could be more effective and prone to errors.

These problems include errors and fraud, security flaws, labour-intensive manual chores, lengthy verification periods, losses from transaction costs, invoice factoring, and postponed payment options. Historically, trade finance operations have been complex and significantly enhanced technologically due to various factors, such as the volume and complexity of commercial transactions and the large number of diversified stakeholders situated worldwide. Global trade finance has a $1.5 trillion supply-demand imbalance caused mainly by fractured systems and regulatory dissonance. Some of these challenges are listed below:

1. Trade Finance:

Challenges:

1. Lack of Access: Due to stringent requirements and high costs, small and medium-sized enterprises (SMEs) often need help accessing traditional trade finance.

2. Slow and Paper-Based: Traditional trade finance processes are slow and paper-intensive, leading to delays and inefficiencies.

3. Fraud Risk: Paper-based documents increase the risk of fraud and discrepancies.

2. Settlements:

Challenges:

1. Settlement Delays: Due to intermediary banks and complex procedures, traditional settlements can take days or weeks.

2. High Costs: Transaction fees associated with multiple intermediaries inflate the overall cost of settlements.

3. Counterparty Risk: The risk of a counterparty failing to meet its obligations can disrupt settlements.

4. Slow settlement: Transactions can take days or even weeks to finalize, which increases counterparty risk and ties up capital for extended periods.

3. Commodity Trading:

Challenges:

1. Price Volatility: Commodity prices are susceptible to global fluctuations, impacting trade profitability.

2. Lack of Transparency: Traditional commodity trading systems can need more transparency, making tracking the origin and quality of commodities easier.

3. Limited Access to Financing: Smaller players may need help to access financing for commodity purchases.

4. Latin America:

Challenges:

1. Large Unbanked Population: Many of Latin America's population needs access to traditional banking systems.

2. Inefficient Infrastructure: Logistics infrastructure limitations can hinder the efficiency and cost-effectiveness of commodity trading.

3. Political and Economic Instability: Political and economic instability in some Latin American countries can create uncertainty for commodity traders.

4. Limited Market Access: Previous trading models may restrict access to certain commodities or regions, limiting diversification and growth opportunities.

5. High barriers to entry:

Accessing commodity trading can be challenging for many investors. Traditional commodity markets often require significant upfront capital, making it difficult for smaller investors to participate. This high bar to entry limits market involvement and can lead to inefficiencies.

6. Limited transparency:

Traditional trading models tend to need more transparency. Prices are not always transparent, and real-time market data may be complex. This opacity can breed mistrust among market participants.

7. Lack of accessibility:

Trading is often centralized, with trading conducted through intermediaries like banks and brokerages. This structure can restrict access for investors in remote or underserved regions, limiting the overall accessibility of the market.