Trade finance is supposed to be the low-hanging fruit, where blockchain finds its easiest opportunity to prove itself as a transformative technology.
A global, arcane system beset by paper and stamps and faxes, it is riper for disruption than any other area of banking. It is made to be shaken up by the possibilities of distributed-ledger systems.
But until very recently, there’s been a lot of talk and not much action.
There has been no shortage of visible effort, from consortia such as Marco Polo and Voltron to regulators such as the Hong Kong Monetary Authority and the Monetary Authority of Singapore; there have been demonstration projects from Cargill and others; but nothing that has looked ready to be truly scale-able and, therefore, viable.
In the last few months, however, there have been signs of progress, both in terms of blockchain-based solutions and other forms of innovation that have nothing to do with distributed ledger.
Much of the action is happening in Asia-Pacific – and the possibilities are exciting.
For example, one of the most important events at the annual Sibos conference in Sydney in October was the formal launch of the Voltron blockchain platform to digitize trade finance documents, which will operate on R3’s blockchain-based Corda network from 2019.
The initiative brings together an esoteric cast of characters: multinationals BNP Paribas, HSBC, ING and Standard Chartered; Asian banks Bangkok Bank from Thailand and CTBC Holding from Taiwan; Scandinavia’s SEB and the UK’s Natwest. They want more partners alongside them – the Sibos launch was, in some sense, a pitch for them – and collectively they want to bring efficiencies to transacting letters of credit.
“Today’s trade finance solutions were built in silos, adding significant risk, operational inefficiencies and costs into the process,” says David Rutter, chief executive of R3. Voltron, he says, helps to fix that.
The guinea pig for Voltron was Cargill, which used the system to execute a blockchain-based letter of credit in May between HSBC and ING. Cargill made a shipment of soybeans from Argentina to Malaysia through its Geneva and Singapore subsidiaries, using a letter of credit completed digitally on the R3 Corda blockchain platform.
John Laurens, DBS
At the time, the trade was billed as being “set to revolutionize trade”: the first end-to-end trade finance transaction on a scale-able blockchain platform.
It demonstrated, its backers say, that blockchain was commercially and operationally viable as a solution for trade digitization, reducing the paper-based exchange times to 24 hours when in the past, they used to take as long as 10 days.
But it was important to note that this was a trade between Cargill and Cargill, so, while a signifier, it was a long way from being a true demonstration of something that was ready to revolutionize trade.
In that respect, a second Voltron/Corda transaction that took place about a week after Sibos is more important. In this transaction, a polymers shipment was made between two different companies: from Reliance Industries in India to Tricon Energy in Peru, with HSBC India serving as the advising and negotiating bank for Reliance Industries, and ING issuing the letter of credit for Tricon.
The transaction was even more important because it also enabled the digital transfer of title of the goods on the blockchain, which it did by integrating with Bolero’s electronic bill of lading platform. With this incorporated, one can say that the underlying trade was fully digitized – a first.
And the corporate customer was happy with the result, which also cut the time involved.
“The use of blockchain offers significant potential to reduce the timelines involved in exchange of export documentation from the extant seven to 10 days to less than a day,” says Srikanth Venkatachari, joint chief financial officer at Reliance Industries.
“When adopted at scale, it helps in significant optimization of working capital.”
He says it also helps with transparency and security.
The exchange of documents took place in a day, with a further two days to close the transaction including payment.
A couple of days later, HSBC was involved in another Voltron/Corda/Bolero trade, again for Cargill, but this time with Rio Tinto on the other end.
Rio Tinto sold a bulk shipment of iron ore from Australia to China for Cargill, with BNP Paribas issuing a letter of credit on Cargill’s behalf, over the blockchain, to HSBC Singapore. This time the LC issuance took less than two hours. As in the Reliance trade, the transaction included digital transfer of title with an electronic bill of lading.
The importance of steps such as these is that they increase the number of counterparties involved, demonstrate the savings in time and efficiency and, eventually, they become commonplace, which is the whole idea.
And speed has knock-on effects of its own.
“If Cargill was selling to a third-party buyer, they would normally have a credit limit on that buyer,” explains Ajay Sharma, Asia-Pacific head of trade and receivables finance at HSBC. “Until that buyer agrees to pay, Cargill is effectively unable to sell more, and if that takes five to 10 days, their turnover is impaired.
“If it concludes in 24 hours, they can put more goods on the ship and keep selling. This is why commodity guys are so keenly driving this space: it’s not just about a paperless operation, it’s the ability to accelerate trade.”
The next step involves further testing of Voltron by all the member banks, while hopefully getting more banks to commit to the platform. But bringing the whole solution into production will probably take another year. And getting it to scale will take longer still.
“This is not going to be a six-month journey to scale up,” says Sharma. “It will take three to five years.”
And what does scaling up constitute?
“We think that when it covers 15% to 20% of letters of credit, that’s a tipping point,” he says.
For that to happen, it is incumbent upon bigger players to assist smaller ones to be part of the enterprise.
“A small local or regional bank may not have the ability to spend millions of dollars to enjoy these platforms,” says Sharma. “They need a toolkit. What R3 is doing is developing toolkits to help banks join the platform, and customers.”
Luckily there is no need to reinvent the wheel.
“One important learning has been that there are already frameworks and rule books out there: UCP [Uniform Customs and Practice for Documentary Credits] exists to cover rules around trade, there is a registry rulebook about bill of lading,” he says.
“The strong feedback was: do not change these things. Leverage what already exists.”
If there is a problem, it’s that there are so many consortia out there attempting to do largely the same thing: digitize trade finance.
ING, instrumental in Voltron, is also a member of the komgo consortium announced in September, whose other founder members include Citi, Crédit Agricole, BNP Paribas, ABN Amro, Macquarie, MUFG, SocGen, Rabobank, Natixis and non-banks such as Shell. This one aims to digitalize commodities trade in particular.
ING is also a member of Marco Polo, launched by TradeIX and R3 with a dozen financial institutions, including BNP Paribas, Commerzbank, Natwest, BBVA, Standard Chartered, SMBC and RBS. This, like Voltron, runs on the Corda distributed-ledger technology (DLT).
ING is not in we.trade, another consortium, but plenty of others are, among them HSBC, Deutsche Bank, UBS and UniCredit. And it’s not in Batavia either, but UBS and Commerzbank are, among others. R3 underpins both Voltron and Marco Polo; IBM is the tech partner of Batavia and we.trade.
In August, Standard Chartered announced a project to create an end-to-end smart guarantees service for trade finance, digitized using blockchain technology, billed as the first blockchain client pilot that fully digitizes the process of a trade finance guarantee. This project, with Siemens Financial Services and the digital trade provider TradeIX, originates from the United Arab Emirates and the Dubai Smart City initiative, but if successful will be rolled out in Asia too.
Then there is JPMorgan’s Interbank Information Network, which has now expanded to more than 100 banks, 21 of them in Asia, including ANZ, China Citic Bank, ICICI, Kasikornbank, KEB Hana, Mizuho, Bank Central Asia, Shinhan, SMBC, Union Bank of the Philippines and Woori.
But some developments have nothing to do with the bank consortia.
For example, DBS – which is, in most respects, a tech leader – does not appear in these big assemblies. The DBS approach has not been characterized by joining consortia of other banks, but by producing integrated solutions for individual clients, by harnessing DBS’s technological capabilities to address their particular needs.
The potential is very big for Asia to drive technological innovation- Olivier Guillaumond, ING
Raof Latiff, group head of digital and GTS product management at DBS, says the best way for the bank to be relevant in the supply chain and add value is “to build APIs [application programming interfaces] which know how to study the nodes in the blockchain, and extract the information you need in order to be able to do what you need to do. You pull data related to invoices, dates, transactions, counterparties, and digitize the supply chain process.”
Latiff continues: “There are lots of instances where the bank is in the consortium but the end-customer only gets limited incremental value. That’s not what we wanted to do.”
He argues that the better way to be differentiated is to use internal tech infrastructure to develop solutions for specific client needs, “to help our clients’ businesses achieve their objectives not just for today, but for a long time to come.”
For example, DBS announced on December 1 that it had enabled an end-to-end cross-border blockchain trade platform for a commodity supply chain network, made up of farmers, exporters, traders and end customers, but not any other banks.
DBS put this together with Agrocorp International, the global agri-commodity trading company, and with Distributed Ledger Technologies, a blockchain provider.
Among other things, it offers participants in the supply chain real-time updates on commodity prices and delivery information, as well as trade financing approval for orders coming in.
DBS says it cuts Agrocorp’s average working capital cycle by about 20 days.
At the start, the solution focuses on Australia, where about 4,500 farmers in the Agrocorp network will be connected to end-customers such as supermarkets and restaurants.
Using it, customers can get access to real-time pricing and supply information, and can carry out live transactions, tracking delivery of orders.
On the payment side, once a trigger event is reached – such as confirmation that goods have been shipped – the blockchain platform triggers instructions to DBS to request financing for Agrocorp, or to release payment to the farmer. There is little manual intervention, making it faster.
What problems does this solve for Agrocorp?
“There’s a few challenges,” says Vishal Vijay, head of business development at Agrocorp.
“Firstly, we’re relying on an antiquated system that was developed a few hundred years ago by the Dutch trading houses: a system of bills of lading and letters of credit, all paper documents.”
Digitizing that process brings not only convenience but “security to all the given participants in a supply chain, from the farmers to the processors to the shippers to the end-customers, that the goods are being transacted and the payments are being made.”
Second, Vijay says, is traceability.
“More and more in this environment, our customers want to know exactly where their product is coming from,” he says. “They want to be able to trace it all the way back to the farm. That’s something we are solving with this.”
So it enables sustainable practices, and the monitoring of that sustainability.
And the third is time – which begets business.
“Paper documents take time to be generated, as well as to be sent across from one part of the world to another, and time is money,” Vijay says.
Generating documents in real time and enacting payments faster mean a reduction in the working capital cycle of five to 10 days. That translates into more business, as well as interest savings.
The plan is for Agrocorp to broaden its blockchain platform from Australia to other key origination markets including Canada, Myanmar, Ivory Coast and Ukraine.
The range of commodities traded on it will grow too, from pulses such as mung beans and chickpeas, to cereals, cotton, edible nuts and oilseeds.
Alongside all of these private-sector initiatives, regulators have been busy too, most notably the HKMA in Hong Kong and the MAS in Singapore.
“Government-sponsored activity is essential, as government initiatives typically drive effective collaboration from market participants,” says John Laurens, group head of global transaction services at DBS. “That impetus is clearly valuable in getting broad-based engagement and traction.”
There is a sense that Asia, thanks to these regulators and their proactive attitude to fintech development, can be a driver of trade finance technological innovation. ING has just set up a lab in Singapore focused on trade.
“The potential is very big for Asia to drive this,” says Olivier Guillaumond, global head of fintech at ING.
In July, the HKMA announced the launch of a project it had been instrumental in developing: a new trade finance blockchain platform in Hong Kong.
The project, led by the Hong Kong Trade Finance Platform Company, includes as launch partners ANZ, Bank of China (Hong Kong), the Bank of East Asia, DBS, Hang Seng Bank, HSBC and Standard Chartered.
The platform seeks to digitize trade documents and automate trade finance processes using the blockchain. Ping An OneConnect Financial Technology is the technological provider, with Deloitte as consultant.
On October 31, Ping An announced delivery of the platform, by now called eTradeConnect, initially connecting 12 joining banks (the original seven, plus BNP Paribas and the Hong Kong arms of Agricultural Bank of China, Bank of Communications, ICBC and Shanghai Commercial Bank) and some trade finance pilot clients to share trade information using blockchain technology.
First in line in any link-up with Hong Kong will probably be Singapore, which has been setting about its own trade finance innovations using the blockchain.
The main drive here has been something called Project Ubin, which started out in November 2016 as an industry collaboration to use distributed ledger technologies for the clearing and settlement of payments and securities. Phase one focused on producing a digital representation of the Singapore dollar for interbank settlement, and making the MAS’s electronic payment system interoperable with distributed ledger methods; phase two focused on inter-bank payments.
The most important step in terms of trade finance came in October, when Singapore’s minister of finance, Heng Swee Keat, formally launched the Networked Trade Platform, designed to be a one-stop digital trade ecosystem.
Heng calls it a “transformational platform which will take us from a traditional national single window which gives traders a one-stop interface for all trade related regulatory transactions, to a one-stop interface that will enable them to interact with all business partners, stakeholders and regulators on trade related transactions.”
More has followed. In November, MAS announced with the SGX that it had developed delivery-versus-payment capabilities for the settlement of tokenized assets across different blockchain platforms, which will help to simplify post-trade processes and shorten settlement cycles. That’s perhaps more of a markets initiative than a trade finance one, but it all helps.
You are seeing new functionality coming with new protocols. What do you place your investment into? It could become redundant very quickly- John Laurens, DBS
Connectivity between the HKMA and the MAS was formalized in a memorandum of understanding signed in Singapore in November 2017, called the Global Trade Connectivity Network. The goal is to build cross-border infrastructure between the two to digitalize trade and trade finance, and from there, to expand into the region. A working committee features the two regulators plus the National Trade Platform Office (Singapore) and Hong Kong Interbank Clearing.
It is intended that a joint trade platform will go live in 2019, with existing domestic platforms feeding into it; if that works, the hope is that Japan, South China (through Shenzhen) and perhaps Thailand will follow. All of this, though, requires common ground among regulators; while it is easy to see Hong Kong and Singapore agreeing on principles, any further expansion naturally becomes more complicated.
“It’s no surprise that Singapore and Hong Kong are the first cabs off the rank,” says Laurens. “It’s not so much about trade to or from those markets, it’s the trade conducted through them. It’s therefore very important for both to ensure that their role as global trade hubs is maintained.”
China has its own initiatives, both at the state and the private-sector level. One is a blockchain-based trade finance platform in Shenzhen, backed by the People’s Bank of China and planned to include the Greater Bay Area that embraces Hong Kong, Guangdong and Macau. The architecture underpinning it is believed to have been built by Ping An.
Then at the corporate level, the automotive parts group Wanxiang has set up a range of blockchain initiatives, including not only services for its own industry but a consultancy, accelerator and conference business around blockchain.
“You have huge national distribution activity going on, with vehicles being shipped right across the country with long physical domestic supply chains through to small outlets,” says Laurens.
Blockchain technology allows the tracking of components, and availability of financing.
“The value here is transportation traditionally has struggled to find sources of financing, in large part due to a lack of information,” Laurens says. “The provision of contracts and information through blockchain makes sense, because you are de-fragmenting what’s happening nationally.”
The range of what’s happening can be bewildering, and would benefit from some unity of direction and purpose.
“The classic blockchain use is for the dematerialization of trade,” says Laurens. “Everyone sees the potential of that, but I personally think it’ll be a slow burn. Some of the mystique of the early days is behind us now, but the problem is, there is now a plethora of protocols and options. Is there going to be some orientation around a single blockchain protocol, around which the market congregates and creates a network effect? A lot of that is going to have to wash out over time.
“You are seeing new functionality coming with new protocols. What do you place your investment into? It could become redundant very quickly.”
There is widespread agreement that blockchain, in and of itself, is not a magic bullet that fixes everything.
“The way we think about distributed ledger and blockchain is: the technology is already there,” says Geoffrey Brady, head of global trade and supply chain finance at Bank of America Merrill Lynch, speaking to Asiamoney at Sibos. “The question is implementation, not tech.
“And that’s not a BAML question, it’s an industry question. The industry needs to decide what the standards will be so that we are all operating within the same ecosystem.”
But DLT and trade finance are still the best possible match out there.
“No one debates that DLT is really the answer in trade finance,” says Guillaumond. “It unites everything that DLT is for in one place: lack of transparency, lack of trust, too much paper, the number of parties, geographical reach, too long a cycle – all in one place.
“I’m not a big believer in DLT as a solution for all the problems of the world” he adds, “but trade finance? This is the place. And we believe that things will scale up even more in 2019.”
After all, there is plenty to do.
One trade finance banker recalls being in a meeting on a high floor of a Singapore tower, looking out at one of the city-state’s signature sights: hundreds of ships moored off the island’s south coast, waiting for their turn to get into the port.
“The reason they are all here is the duration of the process,” he says. “And this is a problem we need to solve. The most visible result of Marco Polo working would be if most of those ships have disappeared in two years.”
Banks look beyond the blockchain
While blockchain continues to dominate discussion of innovation in trade finance, it’s not the whole story. At October’s Sibos event in Sydney, it was striking that one of the most important press conferences of the whole event had absolutely nothing to do with blockchain. In it, seven banks – ANZ, Banco Santander, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered – pledged to build a digital platform called the Trade Information Network by the end of 2018.
This is the latest iteration of something that used to be called Project Wilson, and it is billed as being the first inclusive global multi-corporate network in trade finance. It focuses very specifically on the pre-financing need in the supply chain, by making it easy for corporates to communicate trade information directly with banks through a new platform, in the process developing a new widely adopted industry standard. The intention is for it to grow beyond its already formidable suite of backers – at launch more than 20 additional banks were involved in developing the network, and many corporates had committed to take part in pilots. Specifically, corporates will be able to submit and verify purchase orders and invoices to request trade financing from the banks of their choice.
The network, in providing this access, avoids the risk of double financing, makes it harder for fraudulent trade information to be passed, and so improves risk assessment, hopefully leading to an earlier provision of trade financing in the supply chain. That, in turn, makes life easier for corporates, particularly small and medium-sized enterprises. It is an open architecture system using a governance model similar to Swift, and corporates will always own their own data – which makes the whole thing easier to get off the ground, since very little of what it does is under the purview of regulators (since no money actually changes hands on the platform, nor any transfer in ownership of data). But where is blockchain here?
“We didn’t not do distributed-ledge technology (DLT) to cut a corner; we strongly believe that what we set out to do doesn’t require blockchain today to do it,” says David Cooperman, global product head for treasury and trade solutions at Citi, speaking at the Sibos launch. “It wasn’t required.” It might well follow down the track, but the bankers found it simpler to solve the problem without resorting to blockchain.
“We saw the needs and requirements of our corporate clients,” says Daniel Schmand, global head of trade finance at Deutsche Bank. “We could run to whatever cloud-based or intergalactic solution, but you could end up forgetting the needs of the clients. That was specifically not the point here. The point was to look at the pain points the corporate clients had and to solve them.”
Simplicity of design is perhaps just as important a theme in trade finance as blockchain technology. “One of the key early realizations was that when you look at initiatives in the industry that have failed, they have done so because they needed everyone to change,” says Michael Vrontamitis, head of trade, Europe and Americas, at Standard Chartered. “The moment you ask a large corporate to change, you fall to the bottom of the queue,” he adds. “What you need is a network that doesn’t require the corporate to change anything: it fits into their existing processes. There needs to be a positive outcome for everyone on it: suppliers, buyers and banks.”
And that, at this stage, does not mean an automatic requirement for blockchain. This is far from the only example of new trade finance initiatives developing with no connection to blockchain. Another example in Asia would be Calista, launched by PSA International – the Singapore port operator that runs 40 terminals worldwide, and is state-owned but run on commercial terms – and Global eTrade Services, with DBS centrally involved in providing financial and banking technology services. Calista stands for ‘cargo logistics, inventory streamlining and trade aggregation’, and the idea is that it helps facilitate trade by shipping. It is a global supply chain platform, intended to bring together all the processes, documents and data – and their systems – that exist in trade finance supply chains today.
“We are seeing more and more of this co-creation activity,” says Laurens, “working with commercial platform development, where we provide the digital financing and settlement components. “Calista isn’t blockchain, but is very API [application programming interface] intensive. It is a bespoke integration. It delivers end-to-end completeness of data, without employing blockchain.”