Various trade initiatives, consortiums and platforms seek to overcome centuries-old inefficiencies and facilitate trade at a pace that is more suited to the digital world in which we live. Many, however, have struggled to gain traction and get the scale and network effect that is necessary to be successful.
Digitising trade finance is a bit like world peace; almost everyone agrees it should happen, but when it comes down to the nitty gritty of achieving it, it’s a lot easier said than done.
Trade finance is in sore need of a revamp as much of it relies on paper-based processes that are centuries old. And, in some cases, paperwork can take longer to reach its destination than the shipping of physical goods.
In an era of digital finance and digital ledger technology, there have been many efforts to overcome this situation. The fragmented, federated nature of systems and processes means that trade participants have to sign up to multiple platforms, initiatives and consortiums to work out which one will get the scale it needs to take off.
On the one hand there is a large, immovable part of the industry that has low growth and massive scale. And on the other, there is real innovation occurring but at a small scale with high growth – albeit from a low base, comments Anton Ruddenklau, Partner, Global Head of Innovation, Financial Services, KPMG International.
Some are focused on standards, information sharing or creating blockchain-based technology platforms. Although there are many good projects out there, “It’s easy to get caught up in the fintech hype,” says Ruddenklau. Many platforms have been unsuccessful in delivering returns to their investors, he adds.
So far, the holy grail of digitisation remains elusive and many initiatives have fallen by the wayside. One such project is the TradeLens offering, which A.P Moller – Maersk announced in November 2022 that it was discontinuing. The integrated logistics company said at the time that its vision was to make a leap in supply chain digitisation as an open and neutral industry platform. “Unfortunately, while we successfully developed a viable platform, the need for full global industry collaboration has not been achieved,” said Rotem Hershko, Head of Business Platforms at A.P. Moller – Maersk at the time of the announcement.
And then there was HSBC’s Serai, which also failed to gain the traction it needed to have its desired impact. In June 2022, the global bank announced that it was winding down Hong Kong-based Serai, an HBSC subsidiary and trade platform for small-and-medium enterprises (SMEs). According to sources quoted by Reuters, the bank had invested around US$70m in the platform. In a statement on its website at the time, the bank said, “Despite a huge amount of progress made by the team, it has proven difficult to build a commercially viable business. As a result, we’ve made the difficult decision to close our doors.”
In May 2022, another venture discontinued, this time blockchain-enabled we.trade, which had described itself as a ‘digital one stop shop’ for supply chain trade, which was overcoming the Wild West nature of cross-border trade. There have been other initiatives that have fallen by the wayside, including the Marco Polo trade finance network that reportedly entered into insolvency in February this year.
Commenting generally on the state of such initiatives – and not singling out any platform in particular – Ruddenklau comments, “It is difficult to deliver anything that gives scale and network effects.” However, there have been some successes, particularly those that are focused on a narrow part of the value chain – such as procurement – and are solving a particular business problem.
Many platforms struggle to attract enough buyers and suppliers to make them viable, and without significant volumes they end up costing more to run than they bring in. Given this, many trade participants are wondering which initiatives they should get involved in, unsure of which ones will break through. Bankers involved in such projects have told Treasury Today Asia that they have signed up to multiple initiatives to keep an eye on the developments, so they stay in-the-know and won’t miss out, just in case one of them does take off. Where banks have committed to certain platforms, others comment they don’t put their largest customers on the platform; they run it as an experiment on the side. With many banks thinking like this, many of the platforms fail to get the volumes they need to be successful.
One observation is that some of the initiatives try to do too much and they are biting off more than they can chew. “The ones that have failed have been trying to do too much at one time,” says Carl Wegner, CEO of Contour. He likens it to the evolution of Amazon. “Amazon started with books, built a network, then did other things with it,” he explains.
Another comment that many make is that people get distracted by the latest technology – particularly blockchain – and go ahead with developing a solution without considering properly the business problem they are actually trying to solve. A frequent comment in the industry is that people are creating blockchain solutions in search of a problem.
Despite this, however, it may not be the blockchain itself that is the problem. Many ‘blockchain for trade finance’ projects have failed, comments Wegner, but people often make the mistake of attributing the failure to the use of blockchain. “Blockchain projects have failed and non-blockchain projects have failed,” he says, adding that a high proportion of start-ups fail and many of them were not built on blockchain.
“It’s not really about the technology. The technology is not the goal – it’s about the service that is being digitalised,” says Wegner. And he is clear on the business problem that he is solving for, and which service he is making digital. Contour, which is headquartered in Singapore, is a decentralised trade finance network that focuses on digitising letters of credit (LCs) and overcoming the problem of them typically being more than 30 pages of paper. “We are still mailing pieces of paper across the world to transfer the title of goods – it is crazy,” says Wegner. “Everyone likes what an LC does; no one likes to do LCs. They like what they do, but they are a pain to manage.”
Contour, Wegner explains, is a communication and workflow documentation platform where everyone can collaborate in real-time. Several parties can dynamically look at a letter of credit and everyone can see in real-time if any changes have been made, a bit like Google Docs without Google. Parties can share information without any single party – including Contour – owning the network or controlling the data. And each party can keep their data secure while still enabling the sharing of information to make the LC’s journey go smoothly.
In trials, Contour was able to reduce the LC processing time by up to 90%. It is not a zero sum game ie if you get paid quicker you have to pay quicker, says Wegner. The benefit comes in the certainty of knowing when a payment will arrive, which enables a treasurer to use their cash as efficiently as possible.
Another platform that is clear on the business problem it is solving is Olea, a joint venture between Standard Chartered and Linklogis. It is a technology platform that connects importers and exporters with a range of trade ecosystem partners such as banks and investors. “The ambition is to create a different kind of supply chain solution,” Amelia Ng, CEO of Olea, tells Treasury Today Asia.
Typically, SMEs struggle to get trade finance, and institutional investors have shied away from trade finance. Olea bridges this gap with its blockchain platform and acts as a matchmaker that brings the parties together. Ng explains the platform goes further down the chain and can serve smaller companies. Meanwhile, the platform is able to connect such companies with banks and private capital. “Traditionally banks have been the majority of the funders of trade finance, and now we can see that private credit is becoming a force,” says Ng.
One reason institutional investors have not got involved in trade finance, explains Ng, is that there are different formats and requirements for how the assets are reported. In the past this would have taken too much work, but it is now possible for such investors to connect to the platform. And things are easier for companies needing finance as they treat the platform as a one-stop shop to access funds from multiple sources, rather than dealing with each institution separately as they would have done in the past.
To get everyone onboard, however, is a challenging task and getting people to change their old ways takes time. Ng says she is focusing her efforts on getting bank partners on board, focusing on regional banks and global banks that want to expand their supply chain offering in Asia. Olea’s technology platform is built for the challenges of a changing global trade ecosystem – balance sheet lite and interoperable.
Building any trade solution requires determination to get the scale and network effect that is necessary to succeed. Ruddenklau at KPMG comments, “The big learning for trade and supply chain finance is to pick your battles and have specific use cases. You need to pick smaller areas that are viable and profitable,” he says. Any fintech in this space needs to be clear on where they are playing in the value chain. “It is really critical they do not try to be everything to everyone,” he comments.
And when it comes to adoption, banks and treasurers shouldn’t be taking a ‘wait and see’ approach. If everyone did that then no solution would get past this industry-wide inertia and the immovable giants with scale won’t ever adopt the innovation that is being developed by the smaller high-growth players.
“With any new technology, adoption is a journey,” says Wegner. And it’s best that treasurers get involved and understand the technology when their bank is getting involved in it, says Wegner. This is better than waiting until everyone else is using it, or waiting until the solution has all the functionality they need. Wegner likens this to not adopting online banking years ago because its functionality was simple; without taking those initial steps the solution could not have been developed into what it is today. “Start now, learn how you will have to change your decision processes. Do not wait until it is perfect – it is never going to be perfect,” says Wegner.