Trade finance modernization turns towards blockchain
Treasurers are looking for digitized trade finance solutions; blockchain may be the answer.
A study of European treasurers by working capital fintech C2FO finds that 75% are focusing on investing in trade finance technology in 2017.
Colin Sharp, senior vice-president, EMEA at C2FO, says the shifting macroeconomic environment is pressuring corporates to refocus their efforts on trade finance: “Treasurers are facing a lot of uncertainty, both from the US and around Brexit. This is putting stress on the supply chain, with demand increasing and decreasing. Treasures want the ability to use their assets to make returns and give some certainty.”
Anne-Claire Gorge, head of product management, trade services and finance, Société Générale, says treasurers are becoming convinced that having greater control over trade finance can assist them in other areas of their business: “Better use of trade finance helps them to have a greater overview of their working capital positions. Offering financing solutions to suppliers, for example, to improve the terms of payment, helps guarantee cashflow.”
She adds that deploying the latest technology will simplify the process: “Trade is very heavy on letters of credit or invoicing solutions, making it complicated to finance receivables and payables. Doing all this through a digital solution would make this easier.”
A climate of uncertainty is not always a negative thing, especially for the banks, as it drives the need to use trade finance tools to give stronger guarantees.
Lothar Meenen, head of trade finance and cash management corporates, Germany, at Deutsche Bank, says: “Global change is positive for global trade finance. It is about securing the trade and giving comfort about the end payment. Volatility and uncertainty is good for this business.
“The political environment ultimately creates opportunities and trade flows when embargoes are lifted. There needs to be solutions in place to make sure companies can meet these opportunities.”
To put these solutions in place will require work from all parties and an industry-wide increase in spending on trade finance technology to bring it up to the standard treasurers are using in other parts of their operations.
Penny Hembrow, global lead financial services at CGI, says: “There has been long-term underinvestment in technology. What we are seeing is the first time there has been a real increase in spend.”
It should be possible to take some of the lessons learned from modernizing cash management and apply them to trade finance, perhaps creating a simpler interface for the end user.
Meenen says: “There is the possibility to leverage cross-platform workstreams. With billing, trade finance is as fragmented as cash management, but cash management has moved towards automation. If these elements come as one interface to the client, the functionality should be the same.”
Gorge adds there have been some attempts to digitise trade already: “Digital solutions are broadly in place for cash management, but this isn’t really the case for trade finance. Swift attempted to bridge that problem with Swfitnet, which allows large corporates to access the Swift network to exchange messages between themselves and their bank. It is a powerful tool, providing straight–through-processing, as there is no need to manually upload data. It thus reduces risk of error on either side.”
The solution for finally moving trade finance away from paper processing may come from blockchain. But in order for blockchain to work there needs to be an industry-wide effort towards implementation.
Hembrow says: “It is early days for blockchain, and the technology must mature, but also it needs greater collaboration to create the necessary communities to work effectively.”
The latest bank offering is to look into how blockchain can be used to benefit small and medium-sized enterprise trade.
Thierry Roehm, senior advisory, innovation and digital transformation for trade services at Société Générale, says: “There is a solution that will be developed: the Digital Trade Chain initiative. Launched with seven banks including Société Générale, this initiative focuses specifically on the SME market. At SMEs, a key issue they face is trying to identify market opportunities and connect with each other and their banking partners. The Digital Trade Chain hopes to achieve just that.”
Banks will bring their own client bases to DTC, which should eliminate lengthy on-boarding. Roehm says this will make the solution particularity efficient.
|Penny Hembrow, CGI|
Hembrow says using blockchain for trade is a natural fit: “Blockchain technology is applicable to trade finance. Using distributed-ledger technology, it is possible to link the deal into the supply chain, eliminating paper from the process at the same time.”
Although supportive of the initiative, Meenen admits there are still some questions banks need to resolve on their involvement and how they will gain from it: “Blockchain can provide more transparency to the importer and exporter on where the trade stands. But where the bank can stand in this process is not fully clear yet.”
Ultimately, the success of DTC depends on how widely it is adopted.
Hembrow says the initiative is interesting, but its success comes down to the important points around collaboration: “The intention of the consortium is to extend trade finance to the business and small corporate segments by lowering costs and simplifying the process through digitalization, process automation and blockchain. This is an exciting proposition and long overdue, but as ever the challenge will be how the members of the consortium collaborate, rather than in the technology.”