Thought Leadership

Blockchain in Trade Finance (Pt 2)

Written by Mike Walker Cecile Andre Leruste
Blockchain in Trade Finance (Pt 2)

Re-think & Redesign (Part 2)

In the first blog in this series, we looked at some of the factors affecting the trade finance environment and at how banks are seeking new approaches to this economically vital and potentially profitable line of business.

We find banks now focusing on three major areas in trade finance:

  1. Customer centricity, led by customer segmentation and the reinvention of the customer experience
  2. Digital, to change the way business is completed (digitalisation) or make the current processes more efficient (digitization); and
  3. Sustainability and resilience as key elements of differentiation.

This blog focuses on the emergence of distributed ledger technology, commonly known as blockchain.

The inherent characteristics of distributed ledger technology make it a key focus area for new business models. It facilitates a single golden source of information with an immutable audit trail, where consensual decision making can be achieved in parallel and real time. This technology has the potential to eliminate paper from processing, to make transactions perfectly transparent andautomate actions using smart contracts.

Currently banks are focusing their efforts on private (or permissioned) blockchains, which only allow verified participants to join and perform actions. This allows them to choose the actors on their platform and control the commercialization of the network, with an end game of optimizing trade finance through the reinvention of processes.

As we discuss above, financial institutions are collaborating with their competitors through consortia, which fall into several categories;

  • Some focus on technology such as Hyperledger (The Linux Foundation) which is an umbrella of open-source projects searching to identify the full potential of blockchain-based assets
  • Others such as R3 are industry-based and have developed the proprietary Corda platform. They are testing many use cases in the financial sector. We Trade (based on the Hyperledger Fabric platform) aims to reduce the friction in cross border commerce and make it easier for European SMEs to conduct business. Meanwhile, Marco Polo (a joint undertaking of R3 and TradeIX) and Voltron (based on Corda R3’s DTL platform) aim to create a trade finance platform that connects the many players in the ecosystem through APIs to deliver consolidated data and processing.
  • If the scope of the mentioned consortia concerns specific actors or geographical zones, Batavia (based on Hyperledger) has an offering that targets companies of all sizes and spans both traditional and open account trade.

Financial institutions will probably be involved in multiple networks, as one network is unlikely to cover all regions, client sectors or transactions, so that a “network of networks” situation is likely to be the end game.

What are the key considerations for consortia and their associated initiatives in developing successful proofs of concept?

  • The value proposition to the end client is key and should be adapted to client specifics; we are likely to see the growth of regional, industry or sector specific networks. This approach will mitigate some of the challenge in driving adoption of new business models and processes across all ecosystem players
  • Secondly is the platform governance; aligning all partners, reaching consensus and other elements. The initial steps of We Trade and Marco Polo might serve as an example.
  • The third driver could be the ability to connect with other players or consortia: as the banks create networks, so are transporters, customers, corporates (for some specific industries such as gold or diamonds at this stage), insurers and others. The winner might therefore be the best connected.
  • Managing complexity is also important. The multiplication of platforms might be the first step in the evolution of mega-consortia who share common features and rules. This is rumored to take place in the near future with We Trade and Batavia.

What needs to happen for these proofs of concept to transition to adoption at scale? In our view, participants need to:

  1. Build trust in the network(s) across all ecosystem players
  2. Reduce cost of entry –a major barrier in processing today – and realize significant efficiencies, risk reductions or revenue growth to outweigh the cost of new infrastructure and technology
  3. Work towards seamless interoperability of networks using different technologies, based in different regions and, or serving different sectors
  4. Rewrite or change the rules governing international trade to recognize blockchain-based proof of title

There are clear benefits to blockchain technology along with challenges to adoption at scale, that are technical, environmental and societal. Paper originals may never be completely eradicated in some regions or sectors, but blockchain has tremendous potential to make trade finance more efficient and less costly for all involved parties.

Written by

Mike Walker

Head of Sales Enablement – Corporate Banking & Payments
Cécile André Leruste

Cecile Andre Leruste

Managing Director; Banking Lead Europe

Cécile André Leruste has 15 years of experience in consulting, both in APAC (Tokyo, Seoul) and Europe, with McKinsey and more recently Capgemini Consulting. Cécile was also a banker for 11 years starting as Co-head of Strategy before moving onto the role of Head of Debt Capital Markets development. Cécile also created the Capital and Liquidity advisory division for banking and insurance clients and was appointed co-head of SG Equipment Finance. Cécile holds a non-profit role as elected Vice...