The 164 member states in the World Trade Organization exported US$17.43 trillion worth of merchandise in 2017. It is no surprise, therefore, that a majority of global trade utilizes some type of trade finance solution. Trade finance, or more broadly financial supply chain management (FSCM), delivers three core values to buyers and sellers — risk mitigation, payment facilitation, and working capital management.
Banks and other financial institutions offer an array of solutions under the FSCM umbrella such as letters of credit, collections, factoring, export credit insurance, and lending.
Trade finance business generally involves stacks of paper estimated at four billion pages in circulation to facilitate global commerce. Reliance on paper creates inefficiencies, increases processing costs, and negatively impacts the environment. Banks have attempted to digitalize trade finance business for some time with little success. Why?
Challenges to digitalization
No centralized database or single source of truth (SSoT): Data resides in the proprietary archives of corporations, banks, logistics providers, and government agencies. The result? Digital information islands that duplicate efforts as data is rekeyed and processed.
Manual processing: Paper flow adds complexity and increases transaction processing costs a because to verify information, manual effort is required.
However, blockchain – the new kid in the technology block – is generating excitement based on its potential to aggregate data from various platforms to create an up-to-date view of the truth. As banks seek to reduce costs and increase efficiency by replacing the flow of physical paper with digital data flows, blockchain offers an SSoT solution.
Although once considered a technological novelty, blockchain is now making inroads as a way to streamline trade finance functions. For instance, increasing experimentation with smart contracts is leading to successful trials and implementation. Powered by blockchain, smart contracts are programmable and can automatically enforce themselves when pre-defined conditions are met. When stored within a blockchain, smart contracts have the potential to weed out inefficiencies and simplify trade finance processes.
Smart Contracts Leverage Blockchain to Streamline Processes
Source: Capgemini Financial Services
For example, consider an on-demand performance guarantee executed between an applicant and a beneficiary. The applicant’s bank issues the guarantee and registers the conditions as a smart contract on a blockchain. The smart contract will self-execute if the applicant breaches the underlying terms, and the bank will pay the beneficiary – automatically.
Blockchain value drivers in trade finance
- Simplified operations: A single blockchain can be used to store all of the necessary information in one digital document, which can also be updated nearly instantly, and is viewable by all members on the network at the same time while maintaining security. This capability mitigates the hurdle of digital islands that currently must be bridged via reams of paperwork.
- Improved regulatory efficiency: Regulators receive a real-time view of essential data to manage import-export controls and Anti Money Laundering (AML) activities.
- Reduced counterparty risk: Blockchain can track bills of lading, which eliminates the potential for double spending.
- Condensed clearing and settlement times: Blockchain enables real-time, multi-party tracking and management of letters of credit to allow for faster automated settlement.
- Minimized fraud: Clear ownership of goods and invoices will remove the problem of fake and duplicate invoices. The use of blockchain in trade finance also allows rapid sharing of know your customer (KYC), anti-money laundering (AML), and customer identification program (CIP) information using cryptography.
Many firms have begun to invest in and develop programs that use blockchain in trade finance, which has led to a range of systems, networks, and prototypes created by various stakeholders.
However, trade finance and supply chain businesses realize that stand-alone solutions are not the answer to broad trade finance industry challenges. Network viability and broader adoption will ultimately define blockchain success in trade finance. A comprehensive network will be necessary to cover the wide-ranging trade finance value chain and to execute complete transactions on the blockchain. Blockchain-based networks for trade finance and supply chain – such as the Marco Polo and We. Trade platforms – are generating interest among leading banks such as BNP Paribas, Commerzbank, Danske Bank, Deutsche Bank, HSBC, Rabobank, Societe Generale, and Banco Santander.
In mid-2018, HSBC said it performed the world’s first commercially-viable trade finance transaction using blockchain technology when it issued a letter of credit for US food and agriculture firm Cargill. The trade finance transaction involved a bulk shipment of soybeans from Argentina to Malaysia. HSBC issued the letter of credit to Dutch lender ING.
Denmark’s largest bank, Danske, joined the blockchain-oriented Marco Polo Network, a global trade finance platform and network led by R3 and TradeIX.
Moreover, the Hong Kong Monetary Authority (HKMA) and 12 leading global banks including HSBC and BNP Paribas have launched eTradeConnect, a joint blockchain trade finance platform.
Executives leading these platforms and initiatives are working to attract other ecosystem players to join the network to deliver maximum value to corporate customers. Any blockchain solution should first and foremost serve the needs of corporate clients and ensure that corporates are involved to ensure a real problem is solved.
It would likely be difficult for a single trade platform to become dominant, and eventually, interoperability of these platforms will be a must to reap real benefits as blockchain will help in creating a network for networks.
Amid these developments, one thing is sure. Blockchain technology is out of the trial phase, and these platforms are prepared to commercialize it. Blockchain is expected to change and revitalize trade finance by intensifying competition between banks while reducing trade finance costs.
To learn more or to have a discussion on blockchain or financial supply chain management, feel free to connect with me on social media.
 World Trade Organization, “WORLD TRADE STATISTICAL REVIEW 2018,” July 30, 2018, https://www.wto.org/english/res_e/statis_e/wts2018_e/wts2018_e.pdf
 Swift web site, Digital Innovation in Trade Finance – Have we reached a tipping point?” October 19, 2017, https://www.swift.com/news-events/news/digital-innovation-in-trade-finance-have-we-reached-a-tipping-point_
 Coindesk, “Banks Take Sides as Blockchain Trade Finance Race Heats Up,” Ian Allison, July 17, 2018, https://www.coindesk.com/banks-take-sides-as-blockchain-trade-finance-race-heats-up
 CNBC, “HSBC says it’s made the world’s first trade finance transaction using blockchain,” Ryan Browne, May 14, 2018, https://www.cnbc.com/2018/05/14/hsbc-makes-worlds-first-trade-finance-transaction-using-blockchain.html
 Cryptovest, “Danske Bank Joins Blockchain-Oriented Trade Finance Network Marco Polo,” Anatol Antonovici, October 23, 2018, https://cryptovest.com/news/danske-bank-joins-blockchain-oriented-trade-finance-network-marco-polo/
 South China Morning Post, “HKMA and 12 banks link up to create trade finance platform,” Enoch Yiu, October 31, 2018, https://www.scmp.com/business/banking-finance/article/2171075/hkma-and-12-local-banks-link-create-trade-finance-platform