Blog article
See all stories »

Blockchain for trade finance: a network business

Trade finance has become one of the top focus issues for blockchain technology use. The number of pilots and other trials that are looking into the opportunities of blockchain technology for trade finance and supply chain have dramatically increased in 2017 and intensified this year. The sheer complexity of trade finance is thereby reflected in the variety of potential solutions. Different parts of the ‘trade finance supply chain’ had their own blockchain initiative. A large number of these pilots however stopped or failed being too narrow in their set-up. These were mainly focused on certain – and limited - aspects of the trade finance chain.

The various parties who are involved in the trade finance and supply chain business however are increasingly becoming aware that stand-alone solutions are not the answer to the various challenges in the trade finance industry. The success of using blockchain in trade finance  purposes stands or falls with networks effects and if it is adopted widely. They are increasingly convinced that as well as developing a platform and blockchain solution, a network must be in place that covers all the parties in the trade finance chain so that the full transaction can be completed on the blockchain.  

As a result we have seen the upcoming of blockchain trade finance networks with exotic names like Batavia, Marco Polo, We.Trade and more are expected to follow. In this blog I want to go somewhat deeper in these various offerings.  

Trade finance  

A complex process

Trade finance is a complex process. Various parties from exporters, importers, banks, truckers, shippers, custom agents and regulators all require checks and verifications at various points along the chain. Each interlocking part of the chain depends on successful completion of the previous phase and on reliable information.


Banks thereby play a large role in the trade finance chain, notably in the supply of letters of credit and other financing mechanism. Letters of credit are the most widely used way of financing between importers and exporters, helping guarantee trade transactions. At the moment buyers and suppliers use a letter of credit typically concluded by physically transferring paper documents to underpin transactions. This process however creates a long paper trail and it may take between five and ten days to exchange documentation.  

A network business
Trade finance is a network business. It is an activity that often involves multiple counterparties in various and far-away parts of the world. Creating a blockchain trade finance ecosystem that combines all the different stages of trade from production to end-delivery is a must. For blockchain trade finance platforms to work in an optimal way this means on-boarding other banks, regulators, customs and all parts of the trade cycle. This asks for the setting up of blockchain-enabled trade finance platforms or networks with common standards enabling interoperability.

  “Of course we are closely monitoring initiatives among all the other consortia that we know about developing trade finance on blockchain and we are mindful of ensuring inter-operability where we can”. Hubert Benoot, Head of Trade KBC and chairman of We.Trade  

Blockchain trade finance networks

Let’s look to the recent blockchain trade finance networks that have been announced recently. These may give some new insights in the various stages of development and the way they wish to solve the various challenges in the trade finance chain.

1. Batavia Platform

One of these new networks is Batavia, a blockchain-based trade finance platform, that is being collaboratively developed by a consortium of banks and IBM, in consultation with transportation industry experts as well as the banks’ customers. The Batavia platform derives from an initiative launched by UBS and IBM in 2016 to build a new global trade platform based on blockchain technology. Since than four additional banks were joining its ongoing Batavia initiative, including Bank of Montreal (BMO), CaixaBank, Commerzbank and Erste Group, collaborating to bring the blockchain-based trade finance platform to life.

Aims
The idea behind the platform is to simplify the trade finance process by moving away from the trade finance sector’s reliance on paper-based records. The Batavia platform is designed to support more efficient, transparent, secure and cost effective transactions. This by digitizing and automating the arranging, securing and financing of international trade transactions. The Batavia platform will as a  result eliminate the necessity to handle and compare documents, allowing buyers, sellers and their banks to execute transactions with a high degree of efficiency and transparency.

How it works
The Batavia trade finance platform is built on the IBM Blockchain Platform and powered by the Hyperledger Fabric Blockchain framework as an open ecosystem. The system aims to cover the end-to-end process of a trade, encompassing the closing of trade agreements and execution of smart payments, which can be automatically triggered by specified events in the supply chain and recorded in the blockchain. Other features of Batavia include track and trace key events in the supply chains and risk management tools, while key events can prompt the execution of smart contracts that close trade agreements.

The latest version of the Batavia platform possesses a design which enables open access by organisations of all sizes anywhere in the world, and support trade finance for transactions across all modes of trade. This includes goods transported by air, land or sea. The goal is to make trade transactions more transparent and efficient and ensure that the platform is flexible and intuitive for customers

The platform will help connect participants in a trading network, and will help organizations more easily build multi-party, cross-border trading networks worldwide. The open nature of the platform, which encourages broad participation by many banks, vendors and regulators, “will also help open new trade corridors, bring new players into the market and expedite processes that before were prohibitively time-consuming and expensive”.

Pilot
Batavia, has successfully passed its first set of live pilot transactions on the network with corporate clients. The consortium  involved two trade transactions, one that tracked the transport of Audi cars from Germany to Spain and the other, textile raw materials for furniture production from Austria to Spain. The pilot transactions used various modes of transport, geographies and trading parties of differing sizes, in order to highlight Batavia’s ability to scale and manage diverse transaction types.

“Our joint successful live transaction gives an idea of the potential of our platform. The trade data and the smart payment automatically triggered by shipment data build an important basis for risk management and financing tools adding value to every supply chain.” Commerzbank’s Niko Giesbert    

Batavia’s next step is to enter a new phase focused on the building out of a production-ready solution. This may include joining forces with other fin-techs, financial institutions or other innovation leaders in the market.

2. Marco Polo

Another interesting project is Marco Polo, named after the famous Venetian explore. Blockchain consortium R3, trade finance company TradeIX and several global banks are collaborating on this new blockhain-based trade finance solution.  It initially involved BNP, Commerzbank and ING to explore how to deploy blockchain to enhance trade finance operations. Since launching the project in September 2017, the project has since also included Standard Chartered, DNB and OP Financial Group. Earlier this year, Marco Polo expanded again to add more third-party players, including credit insurers, logistics companies and more as they begin testing the solution.

“The age of digital collaboration in trade finance has arrived and we see our participation in this initiative as an important component to accelerate this and drive financing deeper into global supply chains. This in turn enables greater availability of financing for small and medium enterprises,” Michael Vrontamitis, Head of Trade, Europe & Americas, Standard Chartered.

How it works
The Marco Polo initiative has developed a solution for post-shipment trade financing. A "fully interoperable" open-source trade finance network that is built with R3's distributed ledger technology product Corda providing the underlying blockchain and delivered via TradeIX's open TIX platform, a blockchain-based system of applications and tools for trade finance.  Microsoft is also involved as it provides its Azure cloud solution to “speed this solution to market”. The Marco Polo initiative uses distributed ledger technology to manage data and enable smart contracts, with the goal of making trade finance more secure, efficient and transparent.

Marco Polo enables end-to-end, real-time, seamless connectivity, and real-time trade links between trade networks, systems and entities through an open-standard technology infrastructure for banks, credit insurers, shipping and logistic providers, B2B networks and other technology providers, “eliminating the data silos which prevent free flow of information causing inefficiencies and discrepancies”. Initially the solution is focused on three distinct areas of trade finance: risk mitigation by provision of payment commitments based on the matching of trade data, payables finance, and receivables finance.

Pilots
The various partners recently announced they have moved their Marco Polo trade finance platform from a successful proof of concept that started last September in partnership with BNP, Commerzbank and ING to the pilot stage.

"The tests ING ran as part of the proof-of-concept enabled us to see the value this solution could deliver in three separate areas of trade financing. The technology ran fast and smoothly and the positive results showed us we are on the right track and ready to take the next step by entering into a pilot," Ivar Wiersma, head of innovation at ING Wholesale Banking

Further steps
A group of major international banks and their partners in the blockchain ecosystem have started pilot operations for their Marco Polo trade finance initiative. The Marco Polo project is intended to further expand this year to include additional banks and third-party service providers, such as credit insurers and Enterprise Resource Planning (ERP) providers and logistics firms being added to the list, thereby leveraging the collaborative nature of the platform to create a fully interoperable open-sourced trade finance network.

3. We.Trade

In one of my earlier blogs I talked about the Digital Trade Chain (see: The Digital Trade Chain: the blockchain train is roiling, July 16, 2017).  Early 2017 some of Europe’s biggest banks joined behind KBC’s blockchain prototype to help SMEs increase trade across the continent. They agreed to collaborate on the development and commercialisation of Digital Trade Chain (DTC), a cross-border trade finance platform based on distributed ledger technology in collaboration with IBM.

This year nine European banks have taken a crucial step to making blockchain available to their corporate clients, creating a legal entity for the expansion of the Digital Trade Chain platform. The joint venture incorporated under the name We.Trade, includes the nine founding banks as equal shareholders: Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale and Unicredit. The company will manage and distribute the platform, with the target of bringing it to commercial clients in the summer of 2018. In the first stage, it will cover 11 European countries: Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the UK.

How it works
Powered by the Hyperledger Fabric blockchain framework, We.Trade is a platform for managing, tracking and protecting trade transactions between SMEs. It will connect all parties involved in a trade deal,  including buyer, buyer’s bank, seller, seller’s bank and transporter in one place (online and via mobile devices), help SMEs initiate new trading relationships as well as provide easy access to trade finance.

The app registers the entire trade process from order to payment, displaying it in a flowchart and guaranteeing payment when all contractual agreements have been met. The platform is fully automated and available 24×7, so the order-to-payment process is much quicker than the traditional exchange of documents. It also requires far less back-office administration.

The DTC platform will allow onto it the nine banks and their networks of small and medium-sized enterprise (SME) clients that have already undergone know-your-customer and anti-money laundering checks with those lenders and so are known and permissioned entities. It will also bring in logistics companies using the latest track-and-trace technology to verify the arrival of goods in agreed condition at key points in the journey from supplier to buyer that will then trigger payments automatically.

Further steps
The nine large banks building the platform will ensure that the We.Trade platform is modular, so that additional participants can join easily if it builds a desirable network and that the network will be scalable. Although progress of the platform to date has been driven mainly by the founding banks, the consortium has from the start said it intends to make We.Trade available for others to join on a licence-type basis. This approach will enable We.Trade to expand to as many banks as possible – and as quickly as possible.

The next stage of the We.Trade project, which will begin after the platform is live - expectations are this summer - is to expand to additional markets in Europe and beyond by onboarding new banks. At some point, port authorities and national customs departments might become nodes on the network, but in the first instance it will depend on logistics companies.

 “Our focus is to deliver the solution in a timely manner by this summer, to companies which are looking for efficiency in their sales and supply chain journey. We are also planning to make the platform available to more businesses in Eastern Europe and Asia, as well as to expand the service offering by partnering with third-party providers.” Hubert Benoot, KBC’s head of trade and chairman of We.Trade

4. HSBC Trade Finance Platform

Worthwhile mentioning in the context of this blog is the HSBC Trade Finance platform. Working on its development for about two years HSBC recently announced that its blockchain-based trade finance solution is ready to launch — in pilot phase, at least.

Pilot
This month HSBC and ING had performed the world’s first commercially viable trade finance transaction using a single blockchain platform, in a “push to boost efficiency in the multi-trillion-dollar funding of international trade”. HSBC and ING completed the deal for US food and agriculture firm Cargill when a bulk shipment of soybeans was transported from Argentina to Malaysia. The bank thereby issued a letter of credit to ING that backed the shipment.

How it works
The Cargill transaction was an end-to-end trade between a buyer and a seller and their respective banks that was completed on one shared digital application rather than multiple systems. HSBC and ING announced that the exchange of this letter of credit was performed in 24 hours, compared to the five-to-10 days it normally takes to complete such exchanges through a paper-based system.

“The reason why letters of credit have persisted is because of two real challenges — the absence of digital infrastructure and the challenge of coordinating multiple parties.” “This platform helps us overcome the first and I think the technology and everyone focussed on it gives us the impetus to go after the second now with hopefully much better results than we have seen in the past.” Vivek Ramachandran, global head of innovation and growth at HSBC

The transaction was executed on the R3 blockchain consortium platform Corda. The blockchain application used in the Cargill transaction is supported by 12 banks, which could help bring the technology to the market more broadly.

 “This is an inflection point for how trade is conducted.” “With blockchain, the need for paper reconciliation is removed because all parties are linked on the platform and updates are instantaneous.” "The quick turnaround could mean unlocking liquidity for businesses." Vivek Ramachandran, global head of innovation and growth for commercial banking at HSBC

Throughout 2018 and 2019, HSBC will be focusing on further developing the platform and network for the trade finance solution. This involves working with regulators, other financial institutions (FIs) and customs players, and on-boarding them to the tool to ensure entire trade finance processes can be completed through blockchain.

5. Hong Kong Trade Finance Platform

An area where we see a growing number of trade finance networks based on blockchain arising is Asia, including the Hong Kong Trade Finance Platform (HKTFP), the India Trade Connect and the ICI Trade Finance Blockchain platform. This is not surprising given the big problems of getting trade finance for trade transactions with countries in the Asia area.

The Hong Kong Monetary Authority (HKMA) led blockchain trade finance initiative was started in December 2016. Recently it completed a proof-of-concept distributed ledger platform for trade finance, called the Hong Kong Trade Finance Platform (HKTFP). A collaboration between the Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS), and supported by Deloitte and five of the city’s top banks including HSBC. A number of other banks have now joined their recently announced blockchain-based trade network.

How it works
The DLT pilot - which is described as a "global trade connectivity network" (GTCN) – is aimed to digitize trade finance using distributed ledger technology (DLT). It is expected to set "new global standards" for the industry and aims to trace global trade flows between Singapore and Hong Kong. The project is designed to demonstrate the feasibility of using Blockchain to reduce the risk of fraudulent activity, while increasing business transparency, operational efficiency and productivity in trade finance.

 “There have been concerns from bankers regarding data and transaction privacy. As a result, regulators should consider regulations around, since it is a new form of innovation in the "mission-critical" trade finance space”. Li Shu-Pui, executive director of the HKMA

Future steps
Expected to be launched by early 2019, the new network will now involve participation from over 20 global banks and financial institutions. Including Bank of China (Hong Kong), The Bank of East Asia, Hang Seng Bank and Standard Chartered Bank (Hong Kong). It is expected that European financial institutions to get involved in the project as it progresses.

6. Infosys India Trade Connect

India’s IT company Infosys has announced the development of a blockchain-based trade finance network in partnership with seven private-sector banks. Aim of this network called India Trade Connect is to increase security and raise efficiency in trade finance, while also broadening its product offerings.

How it works
The blockchain-based network will be designed to digitize trade finance business processes and covers areas such as ownership validation, certification of documents and payments. According to Infosys, ITC has been built to be blockchain "agnostic" in order to "future-proof" the network against future changes in technology.

“Infosys’ network will make transactions transparent for the buyers, the sellers, the buyer’s bank, the seller’s bank and any regulator who is on this network.” Rajashekara Maiya, Finacle global head of product strategy

Pilot
ITC is currently being used by the banks for a pilot project, using the blockchain-based solution to increase automation and transparency, and help manage risks in trade and supply chain financing. Banks currently testing the blockchain-based network include are ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank, RBL Bank and South Indian Bank. Infosys is also in talks to sign up more Indian and overseas banks to the network.

“We’re in a very advanced discussions in Australia with a consortium of banks and I think you’ll see more announcements,” Sanat Rao, Infosys

7. ICICI Trade Finance Blockchain Platform

Indian ICICI bank recently announced it has successfully on-boarded over 250 corporates, who have signed up on the Bank’s blockchain application to “experience a more time and cost efficient and secure way of undertaking domestic & international trade transactions on its custom-developed blockchain platform”. 

 “I am delighted to share that we have scaled up the operations to sign over 250 corporates on our blockchain solution for trade transactions, the maximum for any blockchain solution in the country. I envision that the emerging technology of blockchain holds an immense potential to simplify the document-intensive trade transactions by bringing all stakeholders on a single platform”. Ms. Chanda Kochhar, MD & CEO, ICICI Bank

The bank also stated that it is collaborating with peer banks and other partners to create a comprehensive ecosystem in the industry using blockchain and evolving common working standards to contribute to even greater adoption of this initiative.

How it works
The blockchain application created by ICICI Bank digitises the paper-intensive international trade finance process as an electronic, distributed and unalterable ledger, and gives the participating entities, including banks, the ability to access a single source of information.

The platform allows all parties in the trade to have a real-time view of data at domestic and overseas branches of ICICI. It also allows them to track documentation and authenticate ownership of assets digitally and execute a trade finance transaction through a series of encrypted and secure digital contracts. Further, it allows each participant to check online the status of the application and transmission of original trade documents through the secure network.

Leading Indian banks are now undertaking various types of domestic/international trade finance transactions on the bank’s custom-made blockchain platform. These include cross-border remittance for salary payment to employees of a group company of an organization, domestic vendor payments in another city and payments for raw materials to a domestic channel partner among many others.

Pilot
Already in 2016, ICICI became the first in India to test a cross-border transfer pilot project on a customized block chain, specializing in facilitating trade finance and remittances. The successful pilot transaction transferred funds in real time from a branch of ICICI Bank in Mumbai, India, to an Emirates NBD branch in Dubai. The initiative aimed to simplify the paper-intensive trade finance process by bringing counter-parties on the same platform, enabling decision making in almost real time.

Future steps
As an additional initiative, the bank also aims to expand the blockchain ecosystem by co-creating another blockchain based system for trade finance in partnership with other banks. To reach  the full potential of blockchain technology, this consortium seeks to invite various parties in the trade finance chain including buyers, sellers, logistics partners, insurance companies and other authorities on to the blockchain ecosystem for providing an end-to-end digitized trade solution.


Future

The various platforms mentioned in this blog are moving forward and new ones are emerging. Given the relative progress of the various blockchain trade finance platforms/networks, the cautious and focused approach taken by many of these projects,  and the hurdles yet to overcome, commercial adoption will be “unpredictable and fragmented for the short term”.

The technology is still a way from commercial use, also in the financial trade area. A real uptake is a longer term process as these networks would require a diverse group of organisations to agree on a uniform set of rules and standards. Reaching an agreement on any blockchain network group that satisfies so many stakeholders is not an easy process. And not all regulators worldwide have the same positive attitude, though fortunately, major economies have seen significant regulatory support for blockchain concepts.

Self-executing chains in the trade finance area with fully open ledgers which involve all parties in the supply chain including  “indirect stakeholders have yet to emerge. But looking further ahead, we may see a world of interconnected blockchain networks with legacy systems.

Concluding with the following quote:

“While the (Batavia) platform needs to be universal, you will never succeed if you start with the whole world”. IBM

Comments: (0)

Carlo R.W. De Meijer

Carlo R.W. De Meijer

Senior Economist

MIFSA

Member since

15 Mar

Location

Maarrssen

Blog posts

66

Comments

0

This post is from a series of posts in the group:

Blockchain Observations

Being a forum for blockchain ideas


See all