Contour’s Decentralized Network Digitizing Letters of Credit in Global Trade
“The $18 trillion-plus international trade market is one of those last industries that are resistant to digital transformation in the financial & banking operations. For example, Letters of Credit are issued in physical form to date which is a time-consuming process that takes weeks to get issued. Contour, in this regard, digitizes LC through its decentralized network that operates on distributed ledger technology, cutting back time & costs while assuring that all the parties stay in sync. This way, Contour is genuinely transforming global trade and making it more efficient, bringing up more opportunities for attracting businesses in different corners of the world.”
Globalization relies on banks and corporations adapting digital advancements to transform the trade finance sector. Eliminating structural and financial constraints on global trade attracts more businesses to invest and build a strengthened, interconnected global economy.
International transactions between importers-exporters are more complex than face-to-face exchanges due to distance, and national borders. On one hand, importers want to receive goods even before paying for them while on other hand, exporters want payment surety in full before delivering goods. Not even instant payments can ensure global trades on those terms.
Here, Singapore-based Contour is all set to tackle this difficulty through a digital transformation that brings importers, exporters, and financial institutions into a single network.
Trade finance is an important tool not only to facilitate global trade transactions for both importers-exporters but also to protect them from associated global trade risks. For centuries, an essential trade finance tool, known as a Letter of Credit has been used by traders to ensure safe & error-free transactions. Here, the issuing bank of LC guarantees exporters an on-time payment on behalf of their clients ie. and importers, irrespective of financial situation.
Since these LCs are traditionally paper-based, it takes weeks to exchange and open them for global trade parties. Apart from this, they also carry high overheads, making them relatively expensive, especially for SMEs.
Here, Contour is transforming LOCs and making them simpler, paperless, and more accessible. This platform utilizes advanced distributed-ledger technology (DLT) to keep global trade parties and their concerning banks in sync digitally and enables them to get separate copies of documents. This way, DLT technology protects importers-exporters from overseas business threats more efficiently than the paper-based system.
“A customer complained about spending more than a week and multiple calls to get a letter of credit amended.”Contour CEO Carl Wegner explained. “Thankfully, now the process is quite easier.”
Immediate Access And Transparency For Buyers And Sellers
Contour is digitizing the letter of credit process by bringing buyers, sellers, and their banks on a decentralized network that works on DLT i.e. each member can get a copy of the same data in the digital form but cannot alter, change or cancel anything without the majority of other members in the network.Apart from this, last month, Contour partners with TradeLens to deliver a secure, safe & transparent transfer of electronic Bills of Lading (eBL).
On the contrary, in paper-based processes, only the parties who are physically operating on their LCs are aware of their status. But with Contour, the documents can be easily accessed by any of the parties with utmost transparency, ensuring safe transactions.
The importer’s bank guarantees a timely payment to the seller through a letter of credit. When sellers are unsure of getting payment, he/she can request an LC in the sales agreement.
“These instruments are frequently used in large global trades - where there are millions of commodity transactions and only a little bit of familiarity isn’t enough. ” Wegner states. “But these are also vital in case of SMEs who don’t know each other and want a genuine guarantee of a secure trade.”
In fact, the market size of Letter of Credit to grow to $4.99 billion by 2027 as per Allied Market Research.
The traditional process gets started with an LC request made by an importer to his bank with an existing bank account. The issuing bank issues and transfers the LOC to the exporter’s bank, which further forwards it to the exporter.
After receiving LOC, the exporter ships the ordered goods to the freight forwarder and returns LC to its bank. The bank verifies everything and sends it back to the buyer’s bank. When the buyer’s bank gets satisfied, it sends payment to the seller’s bank, debits its client ie. the importer’s account, and sends the documents to the buyer to further claim the goods.
“Digitization of LC cuts back processing time,” Wegner explained. “And everything is transparent for the parties in terms of documents.” Contour’s association with ThoughtWorks is also an initiative towards digitizing trade finance.
DLT Secures and Synchronizes Transactions
The DLT network of Contour enables time shortening. It is all-inclusive and interoperable among banking and corporate clients across the international trade ecosystem.
Contour was introduced as a pilot project with financial backing from eight major international banks. One of the decisions made by the financing team was to utilize R3 Corda as the technology backing for the new system. Corda enables Contour to bring a scalable DLT platform that contains the apps for further negotiating letters of credit.
Although forms of DLT employ public blockchain networks, as conveyed through Corda on Contour, DLT is an essential technology. Only the parties involved in a transaction are capable of sharing data, and global rules & regulations handle contracts executed on the system.
“It is vital too as we are handling data between banks and corporations which is immensely important and confidential,” Wegner explained.
In a way, it works exactly like a shared online document in an office environment, where all the added users can see other users’ activity and presence in real-time. But in that situation, there is only one authentic copy of the document, stored safely in a central database with a single owner.
DLT technology enables involved parties to the transactions to regulate their data and documents. On a Contour platform, they can edit and synchronize copies as the LC process starts.
That makes DLT an ideal solution for global traders operating in trade finance activities - it ensures an organized process that is accessible to all the parties, irrespective of their rules, procedures, and regulations.
Wegner said, “Every member has its database. Data privacy and even geopolitical-related instructions are safe.”
Associating With Banks For Financial Inclusion
In 2020, Contour advanced from the proof of concept phase to the product phase, ensuring an uninterrupted user experience and financial-level legitimate infrastructure and safety. In 2021, it went online. As of spring 2022, 17 banks and over 120 organizations considered the platform - which is available in over 50 countries.
Contour’s speed and productivity draw companies' attention in high-dollar industries, including iron, petrochemicals, and transportation. It also brings organizations in sectors including retail and textile, where transaction amounts may be smaller.
The platform works towards transforming the letter of credit into a digital asset utilizing DLT. Parties to the contract can address issues faster as everyone has access to the transaction’s status and further actions. Communicating shortcomings and altering documents take place efficiently on the unified platform while regulation remains local.
Contour delivers a productive future where LCs are more practical for safe global transactions. And organizations including SMEs in emerging markets have some limitations to participate. It also empowers banks to cover new markets quickly.
Contour has a vision of digitizing the entire trade industry as DLT applies to every aspect of the financial system where a digital asset can execute the role of a physical one. With the global trade finance gap touching $2 billion yearly and primarily closing down tens of millions of small organizations, the requirement for a more practical global financial system is clear.
Wegner explained, “We think that we can help. Because if financing is cheaper and more efficient, more people can participate.”