Banks pursue trade finance platform revenue relief
(6 November 2018 - Europe) More trade finance deals are being executed by proprietary platforms developed by banks to harness blockchain technology.
Modernising banks approach to trade finance is primarily driven by the need to save costs and significantly reduce turnaround times in what is a traditionally document heavy and cumbersome market. Standard Chartered, Bank of China (BOC), Deutsche Bank, HSBC, UBS, Société Générale and several other major banks are investigating a small group of trade finance platforms to meaningfully speed up, streamline and manage risk in a global merchandise trade market totalling US$16 trillion in volumes per annum. Trade finance remains a firmly paper based process for age old Letters of Credit (LCs) and documentary bills for collection, conducted by courier and even fax. The market is highly susceptible to digitisation and innovation.
Global annual revenues for documentary trade finance is estimated at US$25 billion, while supplier-originated finance comprising a further US$30 billion according to McKinsey. Bain & Co predicts new products for documentary trade will boost annual revenues for banks by US$2 billion within the next ten years with a defined increased to overall trade volumes of US$1.1 trillion.
After several years of developing and testing a prototype, the first real-life transactions passing over these systems indicate that banks are getting closer to their goal of starting to make money from the investments they have patiently bankrolled. Combining shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a constantly updated digital ledger that cannot be altered. Banks hope the decentralised nature of the technology drawing in and verifying information from thousands of different sources almost in real time will remove the need for paper based authentication and free up to US$2 billion in extra financing flows within the next decade. Challenges remain however. Many platforms are struggling to link up with the legacy bank systems and the diverse range of stakeholders that engage in global trade. Some are moving ahead with development of their own technology, for example AP Moller-Maersk and Hyundai Merchant Marine which may or may not synchronise with new bank trade finance platforms.
Backed by eight banks, the Voltron platform announced earlier in 2018 that it had moved from testing to real world transactions, carrying out an end-to-end soya beans trade for Cargill. The system focuses on documentary trade products such as LCs. Marco Polo, a platform designed for receivables financing and backed by different banking consortium plans to launch before the end of 2018. At least six other competing systems are expected to go into production over the next 12 months. We.Trade and the Indian bank-backed Finacle Trade Connect focus on invoice finance. Banks are spreading their investment across multiple blockchain systems. HSBC and Standard Chartered are associated with four trade finance platforms respectively as trade finance teams expect the most successful platform to interconnect and ‘crowd out’ the peripheral systems.
“If we make the process more efficient, especially around financing, the need will be there, and there will be customers who will want access to letters of credit so they can receive financing faster,” said Vinay Mendonca, HSBC global head of product and propositions for trade and receivables finance. “The question is how we enable them to connect together seamlessly over time — and they will become increasingly interoperable. And there will be a few that survive” said Michael Vrontamitis, Standard Chartered head of trade in Europe and the Americas.