Call it a dilemma, or a vicious circle, or better yet, a Catch-22. It’s what most small companies face when they first look to engage in international trading. On its face, international trade is about buying and selling across national borders, representing new market opportunities. But like most opportunities, international trading also comes with a host of risks, most of which center on whether trading counterparties will make good on their contractual commitments: Will the exporter be paid in full and on time? And will the importer get the goods he paid for?

While small and medium sized enterprises (SMEs) as a group may stand to gain the most from international trade, they’re also least equipped to absorb these counterparty risks. Case in point: A missed payment can be enough to put a small business’s working capital—and possibly its very survival—in peril. That risk causes most SMEs, in effect, to “freeze” in the face of opportunity.

Breaking the Catch-22 of counterparty risk

Up until now, there have been few options for breaking this Catch-22 standoff. It was a goal that our bank, Nordea—one of the largest banks in the Nordic region—has given much attention. As is the case with many regional banks, much of our business comes from supporting trading activity among countries in our particular region. It’s a huge slice, accounting for nearly a quarter of the region’s overall economic activity. But we also recognize that our customers aspire to trade in the wider European market and beyond. We heard what our customers—especially SMEs—were asking for: a seamless trade solution to mitigate counterparty risk.

The pursuit of that vision led Nordea to join a consortium of eight other European banks—Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Santander, Société Générale, and Unicredit—intent on building a safe, secure and easy to use trade platform that would enable even the smallest companies to participate in international trade. Known as we.trade, the platform was developed with the close involvement of IBM. Since its founding, we.trade has added three new members: CaixaBank, Erste Group and UBS.

Trading safely and openly

we.trade’s membership spans Europe, from the Nordics down to the boot of Italy. On a conceptual level, we.trade functions as a kind of protected ecosystem for cross-border trading, structured in a way that all but eliminates counterparty risk. The enabling technologies for the we.trade platform are blockchain and cloud. The platform was developed with the assistance of IBM Blockchain Services, using the IBM Blockchain Platform running on the IBM Cloud.

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Say you’re an SME in Sweden and you want to transact with another SME in Germany. Both companies access the we.trade platform through their respective banks, which are members of the we.trade consortium. Like all companies accessing the platform, those companies will have been thoroughly vetted through know-your-customer protocols for things like money laundering.

How blockchain changes the game

One of the beauties of blockchain in international trade is that it breaks the Catch-22 paralysis by neutralizing counterparty risk, in two important respects. First, it uses distributed ledger technology (DLT) to create an immutable, time-stamped record of every entry. If one of the parties tries to unilaterally change the terms of the trading agreement, the DLT underlying we.trade automatically and instantly alerts all parties—including intermediaries like the bank—of the change.

Then there is blockchain’s smart contract capability. Smart contracts neutralize counterparty risk by automating contract execution, so that once one side does something that follows the agreement, the platform automatically prompts the other side on what’s next for them, such as sending a payment. The fact that terms of the contracts are written into the we.trade platform code means there’s no need for any underpinning legal system or enforcement mechanism—that’s a big deal for small companies.

A portal to new opportunities

In working with IBM, Nordea and the rest of our we.trade partners have set the stage for a massive disruptive change for cross-border trading, and we anticipate huge opportunities in all directions. It’s not just about digitalizing existing trade processes or part of the existing supply chain, it’s about totally changing the set-up of how we conduct our trade. By eliminating or streamlining steps in the trading process – including identifying a reputable partner, sourcing trade finance, ensuring regulatory compliance and chasing up receivables – we.trade is making cross-border transactions faster, simpler and more transparent.

Hear Patrik Zekkar discuss Nordea’s partnership with IBM and other European banks to reach 30% of European SME markets: