The Fault In Our Paper Receipts
Logistical systems today mostly rely on paper for documentation. Unfortunately, as much as we rely on them, there are several problems associated with paper-based warehouse and shipping receipts. These problems can be broadly categorized into three, which I will describe in this blog post.
Firstly, they require couriers in order to be transported to banks, which is both time-consuming and expensive. It takes several days to transport receipts from an exporter to banks and the bank then has to manually check the receipts. A lot of time is lost in this process.
Secondly, it is very easy to fabricate, or make duplicates, of the paper receipt. Since these receipts can be used as collateral to obtain loans, as banks are allowed to lend money against commodities sitting in a warehouse, major problems arise when these warehouse receipts have been faked, which leads to loan frauds. An example of this is the Qingdao fraud of 2014 when some banks revealed almost $648 million of fraud involving copper, aluminum and alumina stored in the Chinese port of Qingdao that had been used to raise finance multiple times.
Thirdly, paper-based receipt system causes banks to lose a lot of time and money on compliance. Currently banks need to perform a thorough check on their customers, through procedures known as CDD (customer due diligence) and KYC (know your customer), to verify that a transaction does not result in any illegal activity such as money laundering, terrorist financing or export of restricted goods.
In under-developed and developing countries such as those in Africa, these problems are much greater because of lack of established and stable systems. Lets take the example of Ethiopia, which is the largest coffee bean producer in Africa and whose economy is dependent on the coffee produce. Since Ethiopian farmers are dependent on loans from banks, loan and receipt frauds can cause banks in Ethiopia to become stricter and stingy. In case of frauds, banks will have to perform more extensive background checks which might take several months. This means trouble for farmers because time is of the essence in farming. Moreover, losses to banks also mean banks won’t be as generous while giving out loans. This will harm farmers by reducing their ability to produce large quantities of coffee beans and that too on time. All in all, the economy of the country can be on a risk of crumbling due to frauds originating from paper-based receipts.
Thus it is imperative to seek alternatives when it comes to documenting evidence in the form of receipts. Perhaps the latest advancements in Computer Science can help us seek a solution.
This blog is part of a series of three blog posts. Please go ahead and read the second and third parts by my friends.
References:
1. Rabobank — Economic Research
2. CoinTelegraph