Blockchain-based trade finance is being explored intensely by institutions and corporates and while it’s still early days, ongoing projects exploring the application of the technology are making promising progress.
Hardly a week seems to go by without news of yet another successful blockchain pilot focused on trade finance. Indeed, to date, there have probably been more successful blockchain trials in trade finance than for any other potential use case for the technology.
The rewards from the successful commercialisation of blockchain trade finance solutions could be great. According to the World Economic Forum 80-90% of world trade is underpinned by trade finance but businesses of all sizes are struggling to access sufficient credit, resulting in a global trade finance gap of US$1.5trn. According to Bain & Company, left unchecked that gap could balloon to US$2.4trn by 2024.
The WEF is clear about where the problems lie: “Current archaic, manual processes that involve lots of paper-based requirements are impeding the flow of capital, increasing compliance costs and ultimately reducing trade volume.” It is convinced that digitisation of these processes can result in massive improvements, including faster credit risk assessment from transaction history; minimised human error in document checks; instant verification and reconciliation of records; automatic execution of workflow steps through smart contracts; instant, secure and low-cost exchange of data. Blockchain, it believes, could mean small and medium-size businesses globally benefitting from an additional US$1trn in trade financing and so help address the current US$1.5trn gap.
The development of blockchain for trade finance is being spearheaded by a clutch of consortiums that have been formed over the last 12-18 months specifically to explore the application. BNP Paribas is in the happy position of being involved in two of the most substantial efforts: Voltron and Marco Polo.
Multiple pain points
HSBC, ING, Intesa, NatWest and Mizuho are among the 11 other banks taking part in the Voltron initiative, which aims to digitise letters of credit and other trade finance documentation. Only recently, BNP Paribas became the third bank to conduct a live trade transaction on the Voltron blockchain platform. It involved the export of a bulk shipment of iron from Rio Tinto in Australia to Cargill in China, with BNP Paribas issuing a blockchain-based letter of credit to HSBC Singapore. The successful trial also saw the execution of an electronic bill of lading.
Alain Verschueren, BNP Paribas’ Head of Distributed Ledger Technology, Trade and Treasury Solutions says: “We all realise there have been multiple pain points in trade processes for a very long time, letters of credit (LCs) specifically. LCs in themselves are good products, the concept is excellent: they are about helping to mitigate payment risk for exporters. A letter of credit is therefore an excellent instrument but it is totally old fashioned; it is cumbersome and expensive for both banks and corporates.
“And those drawbacks force people to work on open accounts and take risks – unnecessary risks – because they cannot afford to use letters of credit. If we can streamline that LC process, make it really straight through processing and an excellent client experience by digitising it, LCs would become much more accessible and viable.”
The success so far with trials of Voltron suggests to Verschueren that those who have been predicting the eventual demise of LCs may well be proved wrong: “The use of letters of credit has been declining for a long time but they still account for quite a large percentage of trade finance. As long as we keep an eye on the client experience, because that is the ultimate determinant of success here not technology per se, then I believe digital technology can help letters of credit enjoy a revival.”
The Marco Polo initiative, meanwhile, is focused on providing blockchain-driven payment commitment solutions like guarantees, as well as open account trade finance solutions such as receivable discounting and factoring. Partners on the project include Commerzbank, ING, DNB, Standard Chartered Bank, and Natixis. Its bold aim is to connect financial institutions and millions of corporate clients of all sizes via ERP-embedded working capital finance apps and dedicated trade finance solutions to “create the world’s largest trade finance network”.
Going forwards, the Marco initiative hopes to integrate Internet of Things (IoT) technology so that parties to a trade are, for example, continuously informed about the quality of goods shipped, such as perishables. This measure of quality can then be tied and monitored against the credit agreement. IoT, therefore, potentially offers another powerful means of improving the efficiency of trade financing, reducing risk for banks and their counterparties, and cutting out friction that comes with disputes.
“What is great about Marco is how it is working to bring all these technologies together to bear on trade finance and the supply chain. It is still early days though – wide adoption of something like that is going to take time. I think we are making good progress. We are beyond the proof of concept stage. We’ve proven to ourselves the potential of Marco and now we want to talk to other banks and parties, see how can all work together to deliver more results, develop a minimal viable product solution, and then do real life tests.”
More broadly, Verschueren observes that while there are many banks and corporates exploring the application of blockchain and other new generation technologies for a variety of problems, it would be a mistake to believe breakthroughs are literally around the corner. “I don’t think anyone is saying these things will be commercialised tomorrow. People of course want it to be so but if they listen carefully to what has been said, we have always made it clear this is going to take time. Mass adoption is going to take time; the whole environment around these new technologies also needs to mature. Having said that, things are evolving really, really quickly now, perhaps more quickly than many people anticipated.”