Trading lies at the heart of a market economy, yet many banks have not developed their trade finance offering, a vital component of trade deals, for decades. we.trade, a joint venture of 12 major European banks — CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale, UBS and UniCredit — created a blockchain platform in 2017 to reduce friction and ease the trading process for participating companies.
Barriers to overcome
Global economic growth depends on trade between companies. However, challenges associated with access to capital, counterparty risk and payment speeds can often act as barriers to trading.
Trading internationally can open up new revenue streams and increase profits, enabling a company to increase internal investment and accelerate its development. However, trading with customers in other countries can also involve long, difficult and costly negotiations, and carry risks – for instance, what if your buyer doesn’t pay?
Banks have traditionally been the facilitators of trade deals, by serving as intermediaries and providing financing for transactions. However, banks have not digitally transformed trade finance for decades, and trade finance is either not scalable for banks, or too complicated and costly for the majority of the companies, therefore leaving almost 70 percent of companies without access to trade finance services. Additionally, the legal processes involved in international trade deals are often lengthy and cumbersome, preventing companies from doing business in an agile way.
Roberto Mancone, who was a co-founder of we.trade, commented: “The traditional trade finance model run by banks had not evolved for decades. Both banks and companies were constrained. Banks were not able to scale their platform to make it available to all clients; while companies did not want to be exposed to counterparty risk.
“we.trade believed that the industry could be made much simpler and more efficient, which would enable companies of all sizes to trade more easily and securely across borders, helping to drive global economic growth. We aimed to develop a platform that could achieve this.”
Automating on blockchain
we.trade worked with IBM to develop a blockchain trading platform on the IBM® Cloud™ that uses smart contracts and distributed ledger technology to enable companies to trade seamlessly, simply and trustfully. The IBM Cloud uses the Hyperledger Fabric framework from the Linux Foundation, to reduce the friction involved in cross-border trade and provide businesses with a simple way of conducting international transactions.
Companies are brought onto the blockchain platform by their bank, which eliminates potential concerns about the ability to trust counterparties. Previously, the numerous legal, financial and cultural risks associated with trading with a foreign partner may have discouraged companies from trading internationally. However, all users of the we.trade platform have already gone through international Know Your Customer processes to ensure they comply with applicable anti-money laundering regulations, mitigating these risks considerably.
Blockchain serves as a secure, shared database that cannot be controlled by any single entity and has no single point of failure. Every entry on a blockchain is given a timestamp and a unique cryptographic signature. The blockchain platform developed by we.trade and IBM has two main features that help empower enterprises of all sizes to take part in international trade: distributed ledger technology (DLT) and smart contracts.
The DLT ensures that all relevant parties have access to the same information regarding trade deals at the same time, and that no single party has control over this data. If Company A makes a change to the terms of its trading agreement with Company B, then this will alter the cryptographic hash in the blockchain, and all other parties, including Company B, banks and any other intermediaries, will be alerted to the change immediately.
Often, companies have found that a barrier to trading with businesses in other countries is the difficulty of guaranteeing that a contract will be enforced. Any delay to a payment or a delivery can be very damaging, as cashflow may rely on the timely fulfillment of the trade contract.
we.trade’s built-in smart contracts eliminate this form of counterparty risk. The smart contracts guarantee that if one party in a transaction fulfills the necessary requirements, as previously agreed and recorded in the blockchain, the payment process is executed automatically. The smart contracts ensure that all parties receive instant triggers demonstrating how one side is following the agreement and notifying the other when it is time to implement their side of the deal – such as by sending payment. The fact that the contracts are written into the platform’s code removes the need for any underpinning legal system or enforcement mechanism.
we.trade selected IBM as its technology partner in part due to the company’s deep expertise and long experience of working with the financial services sector. The company was also impressed by IBM’s global reach, which enables it to implement complex projects all over the world – this is vital to accommodate we.trade’s global ambitions. IBM’s ability to develop and support all aspects of the platform, unlike competitors, was another key differentiating factor.
we.trade worked closely with IBM Blockchain Services to implement the platform. The IBM team carried out a functional analysis of the company’s requirements and held a series of discussions at the start of the project in order to gain a clear picture of we.trade’s aims for the platform. The team established a minimum viable network, before progressing to a commercial platform with a defined operating model tailored to we.trade’s needs in only a few months.
Simplifying international trade
The we.trade platform began full operations with real transactions in July 2018. The company is now working with IBM on the launch of an updated version and in October 2018 announced the addition of three new banks to the we.trade platform extending the geographical reach across 13 countries.
In addition to removing the risk associated with trading with unknown partners; creating a ‘one-stop-shop’ of real-time information on any trade visible to all parties; and triggering automatic payments through smart contracts, the platform brings a range of further benefits to encourage companies to begin trading internationally.
Key among these is Bank Payment Undertaking (BPU). For selling parties, BPU transfers counterparty risk, already minimized by the nature of the platform, to the banks. This means that if a company fails to pay the money it owes to its trading partner, the banks facilitating the deal will provide interim payment. For buyers, BPU represents an undertaking to provide trade finance, making transactions significantly easier to complete.
we.trade is looking ahead to further development and gaining a broader client base. Currently, most of the users of the platform are financial services companies, the sector that has traditionally shown the most interest in blockchain technology. However, we.trade is also gaining significant interest from logistics and insurance businesses, and will soon seek to onboard companies in these industries. As the platform grows, IBM Blockchain Services will help with the onboarding of new members.
Gaining more participants will grow and diversify we.trade’s revenue streams. An increase in the number and type of businesses using the platform will also create a virtuous circle for the trading companies themselves: the larger the pool of potential partners, the more users can achieve on the same platform. we.trade is effectively building a convenient directory service for trade, where companies can simply search on the platform for an appropriate trading partner, enter discussions and decide to do business.
we.trade could be set to transform the entire trade finance industry. By eliminating or streamlining steps in the trading process – including identifying a reputable partner, sourcing trade finance, ensuring regulatory compliance and chasing up receivables – the company is making cross-border transactions faster, simpler and more transparent. As the platform grows and attracts more banks and corporates to carry out cross-border transactions, more companies, including SMEs, will be empowered to grow their business and diversify their revenue by trading internationally with we.trade.
About we.trade: we.trade is an innovative blockchain platform developed by twelve major European banks that aims to create a transparent, secure and simplified trading environment for businesses and banks.