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Trade Finance Consortia: A Market Overview

Banks have traditionally managed trade finance as a paper-intensive practice. While internet-based technologies have made giant steps into banks' departments, trade finance has long remained anchored at "business as usual." Something, however, is changing here, as corporate clients are pushing for more efficient and transparent operations.

Innovative technologies today go beyond browser-based solutions and reap the full benefits of distributed ledger technologies that are being leveraged by a variety of trade finance platforms. Banks are joining forces to create consortia running trade finance operations on a single platform generally operated on a distributed ledger infrastructure. Although documents related to bills and letters of credit are maintained electronically thanks to digital transformation, they are not always accessible to all of the parties involved in the trade relationship. Several major trade finance consortia have made initial steps to integrate traditional paper-based trade finance exchanges with electronic equivalents. Innovative software applications (e.g., blockchain, artificial intelligence, robot processing automation) and more “traditional” technologies are both providing the needed infrastructures to run the transactions on the platforms.

I recently ran a research on 12 consortia:

  • we.trade (14 main members)
  • Marco Polo (12 main members)
  • Trade Information Network (7 main members- not blockchain-based)
  • Voltron (13 main members)
  • Komgo (15 main members)
  • Vakt (12 main members)
  • Batavia (5 main members)
  • Trade Information Platform (13 main members)
  • TradeLens (2 main members)
  • Global Shipping Business Network (9 main members)
  • China Trade and Finance Interbank Trading Blockchain Platform (10 main members)
  • Bay Area Trade Finance Blockchain Platform (6 main members)

Through the consortia platforms, banks will capture and analyze events in the physical supply chain to generate a more profound and realistic representation of a company’s risk profile. This goes well beyond the set of performance indicators that a bank’s credit-scoring office uses to analyze that same company’s financial statements. I anticipate that financial institutions will get inspiration—and feel competitive pressure—from business-to-business marketplaces (e.g., Amazon, Alibaba, SAP Ariba, Tradeshift). These marketplaces already integrate the physical and the financial supply chains of the companies in the network, detecting events that trigger the need for financial support.

The opportunity for banks

Banks acknowledge that paperless trade helps to reduce the risk of global trade through better data and increases efficiency by reducing trade transaction costs. The transition to worldwide paperless trade is likely, however, to be a gradual rather than revolutionary process. Despite the use of paper-based financial instruments, corporations are putting growing pressure on banks and software vendors to enhance the efficiency, security, and trust of global trade value chains.

The trade finance consortium model leverages the transparency of the whole process provided by the underlying platform infrastructure that builds trust and loyalty across the supply chain, and promotes the use and creation of more cost-efficient products and services, making this is a win-win for all parties and especially for participating banks that can better assess risks and provide trade financing earlier in the supply chain, speed up financing decisions, and enhance the customer experience.

Banks can extend their support to consortium corporate clients as the exporters share information at the request of issuance of letters of credit: Even if an error in a letter of credit arises, detection can be done at an early stage, and correction procedures can be executed quickly. This increases revenue opportunities for banks that connect efficiently with their corporate clients via the consortium platform and gain access to new corporations and to their real-time trade data.

Consortia supporters must justify the business case if they want their bank to participate. The bank will invest in blockchain when it sees other banks doing the same and moving ahead with live use cases. Banks should consider participating in consortia to reap the opportunity of reducing operational costs and risks associated with delivering trade and working capital solutions. 

Regardless of any potential benefits that might accrue from blockchain-based initiatives—still hard to quantify—bank decision-makers are tied to evaluating project budgets against quantitative tangible results. It would be a mistake for a bank to get into a consortium to “piggyback” the work done by more active members. A savvy bank will be a driving party and a front-runner. Sitting in the back seat may defeat a bank’s reputation. 

With the consortium model, banks can each take on particular tasks, thereby spreading the workload. For example, rule books can be developed jointly by a subgroup of consortium banks. Fewer resources are needed, and the costs are spread and end up being lower than for an equivalent single-bank project. A bank’s proprietary platform ensures fast development and implementation time, and an even faster time to market. The downside, however, is having to develop the platform in isolation and keeping away players that are concerned with the presence of competitors in the driver’s seat of the consortium governance structure. 

Trade Finance consortia cannot be developed individually. Banks, technology providers, and large and small corporations must share a collaborative innovation agenda. During these initial stages of the evolution, it is difficult to decide on which platform to bet, and it is counterproductive to bet on one at a time hoping to land on the “right one.” The most effective strategy and real motivator is to actively contribute to the innovation agenda. 

 

The Trade Finance Consortia Platforms Reference Model
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Enrico Camerinelli

Enrico Camerinelli

Supply Chain Blockchain Personal Coach

Aite Group

Member since

26 May 2008

Location

Boston

Blog posts

78

Comments

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

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