Following SWIFT’s announcement that it will discontinue the BPO, a blockchain-based payment commitment solution is vying for position as the next great step in trade finance.
If trade finance is to finally say goodbye to its long-held paper-based inefficiencies, then it needs a solution that businesses want to adopt and use. BPO worked, but for various reasons never quite caught the imagination of the corporate community.
With several pilots having already been successfully completed on the Marco Polo network – and with the likes of Commerzbank and corporate glass-tech specialist, Schott giving it their seal of approval – could this alternative reconciliation system make new headway?
It was hoped that the introduction of the Bank Payment Obligation (BPO) in 2013 would solve many of these problems. Despite the solution being championed by SWIFT and the International Chamber of Commerce (ICC), the volume of completed BPO transactions remained incredibly low.
One of the biggest obstacles to adoption is the fact that BPO is not technology-agnostic, notes Tawfique Hamid, Chief Revenue Officer at TradeIX, creator of the Marco Polo platform.
“The rise of fintechs is ushering in a new era of trust and transparency into finance, and yet BPO clings to the romantic notion of a closed system,” comments Hamid. “But things have moved on, and the old way of doing just isn't going to fix new problems or create opportunities across a digital landscape.”
That level of progress has seemingly overthrown the old. SWIFT revealed earlier this year that it was terminating its trade services utility (TSU), the centralised matching and workflow engine that operates as the backbone for the BPO. “There appears to be a realisation in the industry that SWIFT TSU would be inevitably overruled by blockchain and other emerging technologies on the horizon,” comments Hamid.
In a bid to tackle the inefficiencies across the trade finance industry, the Marco Polo Network offers an automated solution using open technologies such as blockchain, APIs and cloud technology.
Using this combination of technologies facilitates an irrevocable payment commitment by the buyer’s bank to the supplier to execute payment on the maturity date, upon successful matching of the agreed electronic trade data on the platform.
To do this, companies register digital representations of their trade finance transactions on a distributed ledger. This ensures there is only one version of the truth, based on digitised trade finance data, at any given time on the network.
Commerzbank and LBBW recently ran a trade finance pilot on the Marco Polo trade finance blockchain. The pilot involved a bank payment commitment from a buyer’s bank to the supplier upon successful matching of invoice and shipment data against previously agreed purchase order data between the buyer and supplier, including financing of the deferred payment commitment in favour of the supplier by the supplier’s bank.
“The transaction proves that blockchain technology offers our clients a payment undertaking and state-of-the-art financing for trade transactions with both foreign countries and domestically,” said Nikolaus Giesbert, divisional board member for Trade Finance & Cash Management at Commerzbank.
As part of a pilot project, two commercial transactions between the international technology group Voith, and the pump and valve manufacturer, KSB SE, were mapped using blockchain technology.
One transaction involved the delivery of special hydraulic couplings from Germany to China and the other the delivery of pumps within Germany. Additionally, the payment term was secured by a conditional payment commitment from the buyer’s bank. After shipment, the corresponding trade data was entered into the network and automatically matched, triggering an irrevocable payment commitment by the buyer’s bank.
Another pilot supported by Commerzbank and Bangkok Bank was completed successfully towards the end of May 2019. The transaction comprised the supply of glass tubes from Germany specialty glass manufacturer, Schott to the Thai packaging manufacturer A.P.A. Industries.
For the transactions, order and shipment data were agreed between the companies via Marco Polo and the payment was secured by a payment commitment from Bangkok Bank, the buyer's bank.
The entire flow of information was efficiently and comprehensibly mapped via R3’s Corda DLT platform. All parties involved (A.P.A. Industries, Bangkok Bank, Schott and Commerzbank) were able to communicate and view trading data simultaneously via specially set up digital nodes.
Mark Siegel, Senior Manager of Treasury at Schott said: “We expect DLT to significantly simplify and accelerate our international business and are pleased that we were able to participate as a partner in this pilot project.”
“By automating the matching process between purchase order, invoice and shipment data, Marco Polo’s Payment Commitment solutions ensure faster-assured payments, says Hamid. “It also provides the opportunity to enhance the data with other trade-related data feeds allowing parties to gain visibility and reduce potential discrepancies that arise from ambiguities in payment contract terms and conditions.”
The intention is to provide the Marco Polo Network with scalability by connecting ERP-systems of corporates and other networks in an end-to-end communication of data between trade partners and banks.
One of the key benefits of the platform is the automation of financial processes and reduction of paperwork. With the advent of real-time communications, Hamid believes that it is crucial to tear down the barriers between banks and trade businesses.
“For too long, it has been administrative obstacles that have held back progress through technological change. But, the digitisation of trade finance’s paper trail is finally underway and preparing to enter a new digital era.”