Trade finance moves toward digitization


Kimberley Long
Published on:

Trade finance has long been in need of a move way from paper documentation. With a number of digital solutions based around distributed ledger technology (DLT) in development the foundations look to be in place.

R3, the blockchain-focused consortium of banks and tech developers, has developed an app on its DLT Corda platform focused on trade finance. The app will work in the same way as standard letters of credit, in recognition of how effective these are at mitigating risks.

It was developed with a specific test group of 12 mainly Asian and European banks, including Bangkok Bank, HSBC, Intesa Sanpaolo, and Mizuho.

The banks are now looking to pilot the app with clients, and hope to make it widely available from 2018.

The app development group includes tech platform CGI, which was able to bring in its own trade finance domain knowledge and work with the banks to capture the best generic industry practice for implementation within the app, and design the user interface.

The app is designed to cover the full trade ecosystem, extending to shippers and carriers. It allows parties in the chain to validate the details when they are both onboard and deliver the goods. The app works across multiple platforms, to reach as many participants as possible.

Jerry Norton-160x186
Jerry Norton,
Jerry Norton, vice-president, financial services, at banking services provider CGI, says it has the interoperability to link with another blockchain platform to support carrier connectivity and bills of lading.

Norton says: “On the business side this proved the wider integration of different parts of the trade finance value chain while on the technology front it overcame any questions regarding distributed ledger interconnectivity.  Both of these moved the state-of-the-art of the use of distributed ledger technology in trade finance.

“From a functional perspective it sets the foundation for further development towards a commercial solution.”

R3 boasts more than 70 banks and related institutions from around the world among its members. However, it has not been without its problems. Last year, R3 saw a number of its largest global members decide to withdraw, choosing to focus instead on their own strategies on blockchain. Goldman Sachs, Santander, Morgan Stanley and National Australia Bank all decided not to continue with their membership.

A number of bankers have told Euromoney that they do not see this as necessarily a bad thing, as it gives the remaining members the opportunity to focus. It also gives the smaller, regional members a stronger voice in the decision process.

The Corda platform was developed to work across the whole financial market, and to enable approvals and consensus around various assets. The smart contracts on the DLT are legally backed.

To move forwards requires that any innovations be accepted to the same level as the current standards. There is no variation over what is accepted as a letter of credit between regulators or customs officials.

Rakshith Kundha, head of South East Asian trade risk distribution at Bank of America Merrill Lynch (BAML), says that in this push to digitize, there are numerous requirements to meet: “Trade digitization may require changes on the regulatory and legal front in several countries. We see several initiatives by various government agencies towards digitization of key trade documents.”

In Hong Kong, there has been a trade finance initiative brought about by the regulator. The proof of concept, formally announced in March this year, is a collaboration between the Hong Kong Monetary Authority (HKMA), Deloitte, and a group of banks which includes HSBC and Bank of China. The process specifically focused on trade finance to find ways to reduce the amount of paper documentation used by establishing smart contracts on DLT.

Alex Manson, global head of transaction banking at Standard Chartered, explains how the bank was involved in the project: “We

Alex Manson-160x186
Alex Manson, 
Standard Chartered 
have been working on a proof of concept with the HKMA to develop a trade finance platform powered by distributed ledger technology. The thinking is that in order to create the infrastructure to support the expansion of trade across the region, the new way to work is collaboration across both banks and regulators.”

The goal is to reduce the risk of fraud and duplicate financing. According to a statement released by Deloitte at the time, almost half of trade transactions in Hong Kong fail to obtain financing due to lack of trust and the potential for loss through fraud.

Further the statement notes how the development is for “strengthening Hong Kong as a major trade finance hub”. The authority sees a first-mover advantage in the hugely competitive Asian trade space. The next stage of the project involves the banks inviting clients and intermediaries to test the technology.

Although there is now tangible evidence of progress being made using DLT and blockchain, there is no shortcut to moving the whole industry over to digital.

Rather than expecting all operations to move simultaneously, BAML’s head of APAC trade and supply chain product management, Aziz Parvez, expects the changes to happen more readily in specific sections of trade: “Currently there is no universal digital solution for trade, however there are a number of initiatives towards digitization. Initially, we are likely to see specific supply chains getting digitized rather than one solution fits all.”