Seven-bank consortium to deliver trade finance on blockchain this year

By:
Peter Lee
Published on:

Some of Europe’s biggest banks have joined behind KBC’s blockchain prototype to help SMEs increase trade across the continent.

Blockchain is coming to the heart of wholesale financial markets and it is coming fast now.

In January, seven European banks signed a collaboration agreement to put into production later this year a new platform called Digital Trade Chain (DTC). This will be built on the back of a prototype designed by the Belgian bank KBC that has already been tested to the proof-of-concept stage with its own corporate customers.

Hubert Benoot-160x186

Hubert Benoot, KBC

The platform uses distributed ledger technology to bring new levels of simplicity, efficiency, security and transparency to the paper-heavy blizzard of often manual and insecure processes companies undertake today after a buyer has agreed to purchase goods and a supplier to deliver them.

The theoretical value of blockchain in trade finance has been obvious for some time. Now it is coming closer to reality.

The DTC platform will allow onto it the seven banks and their networks of small and medium-sized enterprise (SME) clients that have already undergone know-your-customer and anti-money laundering checks with those lenders and so are known and permissioned entities.

It will also bring in logistics companies using the latest track-and-trace technology to verify the arrival of goods in agreed condition at key points in the journey from supplier to buyer that will then trigger payments automatically.

Company executives such as purchasing and stock managers as well as treasury officials will be able to access DTC on tablets and mobiles. It’s almost like a smart-phone app for trade that registers the entire process from order to payment, displaying it in an at-a-glance flowchart and guaranteeing payment when all contractual agreements have been met.

The platform is fully automated and available 24/7, so the order-to-payment process is much quicker than the traditional exchange of documents. It also requires far less back-office administration. 

DTC brings new transparency at every point in the process which we believe will bring new levels of trust and so expand trade 
 
- Hubert Benoot, KBC

Roberto Mancone, global head of disruptive technologies and solutions at Deutsche Bank, a member of the DTC consortium, says: "Blockchain is one of three disruptive technologies – the other two being artificial intelligence and the internet of things – that are now rapidly converging to change the banking business profoundly.

"Last year we saw lots of proofs of concept both to confirm use cases and test if the technology was mature and viable. Now in 2017 we will see banks coming together to use these technologies and establish new legal frameworks to put useful products into commercial production."

There are several intriguing aspects to the story of DTC.

Perhaps most important, while the discussion around most such ventures centres around what blockchain can do for banks’ clients – casting development of the product or service as a defensive move banks have to undertake to see-off tech savvy disruptors ­– a key driver of DTC is that it promises both to increase the overall volume of trade between SMEs and also to open up new opportunities for banks to intermediate those flows.

This is not blockchain cutting banks out or slashing their margins. Rather, it is blockchain bringing banks new opportunities to profit from what they have always been good at: lending money, selling guarantees to weaker credits, managing cash and handling payments.

Hubert Benoot, general manager of trade finance at KBC, explains: "We have been focusing on intra-European trade among SMEs that often takes place on an open account basis, much of it requiring advance payment from the buyer to the seller."

Benoot suggests that 50% of open account trading between European SMEs is based on advance payment. Other bankers say the proportion is even higher. That brings obvious risks to buyers – that goods might not be delivered on time and in the right condition – which, in turn, might restrict companies to dealing only with buyers that they know well and trust. And it doesn’t offer much to banks.

So a platform of SMEs from across Europe already approved by leading banks in each country and using new digital technology to record the delivery and receipt of goods is a potential game-changer.

It probably helps that by focusing on SMEs, the new platform, which has been showcased to the European Commission, might garner some political favour.

Benoot tells Euromoney: "DTC brings new transparency at every point in the process which we believe will bring new levels of trust and so expand trade.

"It also allows banks to intermediate in new ways in the open account space where their involvement today is generally limited to simply executing the payment. It might, for example, now allow buyers to execute payments once they obtain digital confirmation of the delivery of the goods at a certain point."

He adds: "Also payment terms could now take more often the form of deferred payment, certainly when the buyer’s bank guarantees in a digital way the payment on a transactional basis. These trade receivables could then again be forfeited by the seller’s bank."

Surprise

At a time when many banks are engaged in formal consortia and less formal bilateral arrangements to test new financial technology, including blockchain, news of the seven-bank consortium behind DTC came as a surprise to the rest of the industry.

R3, the 50-strong consortium testing use cases for blockchain, has a 15-bank working group focused on trade finance that announced in August successful prototyping of blockchain technology to process accounts receivables, invoice financing or factoring, as well as letter of credit transactions.

However, there has been little news since and some of the founding banks behind R3 have drifted away, perhaps in a sign of renewed commercial aggression as blockchain-based products and services come closer to production.

The seven banks behind DTC are KBC, Deutsche, HSBC, Natixis, Rabobank, Société Générale and UniCredit.

Andrew Betts, head of global trade and receivables finance for Europe at HSBC, tells Euromoney: "Many banks are undertaking various pieces of work around trade finance and blockchain. For example, we are also working with Bank of America Merrill Lynch on new ways to manage letters of credit on a distributed ledger.