Blockchain in financial services

Global trade: The role of blockchain-enabled trade finance networks

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We are in the fourth industrial revolution, according to the World Economic Forum, with the world’s economy changing shape rapidly since the internet came of age. From influencing consumer preference to meeting consumer demand in a timely manner — meaning, from notification of need to gratification of need — is now at the fore of all product and service provider strategies.

Macro market observation

To respond to the rising power of the citizen-based economy, delivering products and services at an optimum price point (with shareholder considerations firmly in focus) has driven supply chains to a global level. As such, efficient and effective movement of raw materials, partially and completely finished goods and perishables, is now pivotal.

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To make global trade work, governments and industries are continually collaborating to optimize the movement of goods, documents and funds. Much of the focus has been on the visible barriers to trade, which include items like tariffs and quotas. The latter and former offer direct and sometimes immediate impacts to the cost of trade between nations. Most outcomes intend to reduce cost, but with current geo-political tensions in flight, costs can also go up as well as down.

However, and now in parallel, the focus is also on non-visible areas of trade — procedures, paperwork and the many administrative formalities — that can incur comparable costs to those removed by the alignment of tariffs and quotas. This is the focus of trade facilitation and the Trade Facilitation Agreement (TFA) signed by over 160 countries and entered into force February 22, 2017.

Trade costs

Recent annual industry reports have highlighted technology’s ability to impact global trade with a common theme of reducing the cost of trade. When one can achieve that, global trade should increase, especially in key market segments like small and medium sized enterprises (SME) and business to consumer (B2C), where current costs to trade are hurdles for the economy’s main source of growth:

  • World trade is valued at approximately $100 trillion. A 16 to 18 percent reduction in trade costs equates to an increase in global trade of 0.6 percent.
  • Global value chains can improve flow by one to three percent with better trade facilitation.
  • Technology can reduce costs by 30 percent and increase the trade finance market by 20 percent.

The tenants of trade

Three key elements in trade are the movement of goods, the documents to facilitate this, and the funds used in their exchange. Within each of these elements, there are interactions between many known and unknown parties, then more broadly across elements, the completion of payment in the exchange of goods.

It is complex and although many of the parties continuously strive to be best-in-class (for example, managing letter of credit in the risk mitigation sub-section of trade finance), the ultimate end-to-end journey in the exchange of goods has room for improvement. This improvement is needed at a higher level, as the controls and tools in place to reduce the risk of trade are now the contributors that will throttle back the growth in trade.

Now, although the TFA is sowing the seeds of efficiency gains with the digitization of documents and processes, if done well, then supply chain visibility will improve when reviewing the movement of goods too. But with the movement of funds, this is still an area that needs a nudge in the right direction. It is the one area where the lack of trust is at its most severe and where the overhead of controls to reduce risk is now ripe for review to stimulate economic growth.

Blockchain for trade finance

Essentially consisting of financial solutions, risk mitigation and payments, the trade finance tenant of trade is seeing a storm of ideas to optimize. Blockchain-based innovations are on the rise and rightfully so, as since 2015 trade finance has been on a journey to learn, understand and appreciate the potential value of blockchain technology. This is because blockchain not only drives to the heart of removing process friction with its core capability of distributed ledger technology (DLT), but also in creating an environment of trust. This trust, once built, then provides organizations the power to dynamically create new trading partnerships in pursuit of new liquidity pools, via new business models, on a new trusted business platform. Initial projects have shown gains in operational efficiency within organizations and across their supply chains in trade.

We are also seeing a “co-opetition” phenomenon emerging within trade finance. This is best characterized as companies that would normally compete against each in an industry, actually coming together to cooperate and co-create something that they can benefit from. The something could be a new platform, and this platform becomes the new trust norm upon which they again compete, sharing the gains of operating in a more efficient market. Once augmented by market adoption, we expect the new marketplace to then foster an entirely new global trade environment and the potential for new and greater value.

A prime example of this in motion and actually in production, is Incorporated by twelve of Europe’s leading banks: HSBC, Santander, Deutsche Bank, UBS, UniCredit, Natixis, SocGen, Rabobank, Nordea, KBC, Erste and Caixa. in collaboration with IBM, has built a new platform to offer lower priced and risk financial services to the SME open account market segment. With open accounts becoming a rising market segment versus letter of credit, it also offers participating banks an opportunity for an incremental good growth strategy to adjacent markets, thereby avoiding bad growth and the inadvertent cannibalization of a similar business segment within its portfolio.

The next phase that we see, is to connect one trade finance network to another, providing clients of banks on Trade Finance Platform A with the ability to seek out trading partners that are clients of banks on Trade Finance Platform B. We see this starting already, including the recent signing of a Memorandum of Understanding on collaboration between and eTradeConnect of Hong Kong.

By pulling down invisible barriers to trade regardless of hard or soft trade borders, blockchain facilitates open corridors of trust for trade. We are entering a new era of significantly less friction for participants throughout the trade ecosystem — and that is a significant new development in the fourth industrial revolution, to accelerate economic growth with blockchain-enabled trade finance.

Open new corridors of trust for new trading partnerships

Executive Partner - Global Business Services

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