Commercial finance should be the low-impact fruit, in which blockchain finds its easiest opportunity to prove itself a technology of transformation.
A global and arcane system afflicted with paper, stamps and faxes is more difficult to disrupt than any other banking area. It is made to be shaken by the possibilities of distributed LED systems.
But until recently, there has been a lot of talk and not much action.
There was no shortage of visible efforts, from consortia like Marco Polo and Voltron to regulators such as the Hong Kong Monetary Authority and the Singapore Monetary Authority; there have been demonstration projects by Cargill and others; but nothing that seemed ready to be truly scalable and, therefore, feasible.
In recent months, however, there have been signs of progress, both in terms of blockchain-based solutions and other forms of innovation that have nothing to do with the distributed ledger.
Much of the action is happening in Asia-Pacific and the possibilities are exciting.
For example, one of the most important events of the annual Sibos conference in Sydney in October was the formal launch of the Voltron blockchain platform to digitize commercial finance documents, which will operate on the R3 network with blocking from 2019.
The initiative brings together a cast of esoteric characters: the multinationals BNP Paribas, HSBC, ING and Standard Chartered; Asian banks Bangkok Bank from Thailand and CTBC Holding from Taiwan; Scandinavian SEB and UK's Natwest. They want more partners by their side – the launch of Sibos was, in a sense, a step for them – and collectively they want to bring efficiency in the transaction of letters of credit.
"Today's commercial finance solutions have been built in silos, adding significant risks, operational inefficiencies and costs in the process," says R3 CEO David Rutter. Voltron, he says, helps solve it.
piggy of India
Voltron's guinea pig was Cargill, who used the system to run a blockchain-based letter of credit between HSBC and ING. Cargill carried out a soya shipment from Argentina to Malaysia through its Geneva and Singapore branches, using a digitally completed letter of credit on the R3 Corda blockchain platform.
John Laurens, DBS
At that time, trade was advertised as "set to revolutionize commerce": the first end-to-end commercial finance transaction on a blockchain platform capable of scaling.
He demonstrated, his supporters argue, that the blockchain was commercially and operationally valid as a solution for digitizing exchanges, reducing the time spent on paper exchange to 24 hours when in the past it required up to 10 days.
But it was important to note that it was a trade between Cargill and Cargill, so, despite being a signifier, it was very far from being a true demonstration of something that was ready to revolutionize commerce.
In this regard, a second Voltron / Corda transaction that took place about a week after Sibos is more important. In this transaction, a shipment of polymers was carried out between two different companies: from Reliance Industries in India to Tricon Energy in Peru, with HSBC India acting as a consultant and negotiation desk for Reliance Industries and ING that issued the letter of credit for Tricon.
The transaction was even more important because it also allowed the digital transfer of the product title to the blockchain, which it did by integrating the Bolero electronic invoicing platform. With this incorporated, it can be said that the underlying trade was completely digitalized – a first.
And the corporate customer was satisfied with the result, which also reduced the time.
"The use of the blockchain offers significant potential to reduce the timing involved in the exchange of export documentation from seven to ten days to less than a day," says Srikanth Venkatachari, Chief Financial Officer at Reliance Industries.
"If adopted on a large scale, it helps to optimize working capital significantly".
He says that it also helps with transparency and security.
The exchange of documents took place in one day, with another two days to close the transaction including the payment.
A couple of days later, HSBC was involved in another operation Voltron / Corda / Bolero, again for Cargill, but this time with Rio Tinto from the other side.
Rio Tinto sold a shipment of iron ore from Australia to China for Cargill, with BNP Paribas issuing a letter of credit on behalf of Cargill, beyond the blockchain, to HSBC Singapore. This time the LC issue took less than two hours. As in the Reliance business, the transaction included the digital transfer of the security with an electronic bill of lading.
The importance of these steps is that they increase the number of counterparties involved, demonstrate the savings in terms of time and efficiency and, in the end, become trivial, which is the whole idea.
And speed has chain effects.
"If Cargill sold to a third-party buyer, they would normally have a credit limit on that buyer," says Ajay Sharma, head of the commercial and credit sector in the Asia-Pacific area at HSBC. "As long as the buyer does not agree to pay, Cargill is not able to sell more, and if it takes five to ten days, his business is in jeopardy.
"If it ends in 24 hours, they can put more goods on the ship and keep selling." That's why raw materials are driving this space so intensely: it's not just a paperless operation, it's the ability to accelerate trade ".
The next step involves a further check of Voltron by all associated banks, while it is hoped that more banks will commit to the platform. But bringing the entire solution into production will probably take another year. And doing it down will take even longer.
"This will not be a six month trip to climb," says Sharma. "It will take three to five years".
And what constitutes the downsizing?
"We think that when it covers 15% – 20% of letters of credit, this is a critical point," he says.
In order for this to happen, it is up to the older players to help the little ones to be part of the business.
"A small local or regional bank may not have the ability to spend millions of dollars to enjoy these platforms," says Sharma. "They need a toolkit – what R3 is doing is developing toolkits to help banks join the platform and customers."
Fortunately, it is not necessary to reinvent the wheel.
"An important learning has been that there are already frameworks and rules books out there: UCP [Uniform Customs and Practice for Documentary Credits] exists to cover the rules on trade, there is a rule of the register on the bill of lading, "he says.
"The strong feedback was: do not change these things, exploit what already exists."
If there is a problem, it is that there are so many consortia out there trying to do much of the same thing: digitizing commercial finance.
ING, a Voltron instrumental, is also a member of the komgo consortium announced in September, whose other founding members include Citi, Crédit Agricole, BNP Paribas, ABN Amro, Macquarie, MUFG, SocGen, Rabobank, Natixis and not banks like Shell. This has the goal of digitizing the trade in raw materials in particular.
ING is also a member of Marco Polo, launched by TradeIX and R3 with a dozen financial institutions, including BNP Paribas, Commerzbank, Natwest, BBVA, Standard Chartered, SMBC and RBS. This, like Voltron, works with Corda's DLT (distributed-ledger technology).
ING is not in we.trade, another consortium, but there are many others, including HSBC, Deutsche Bank, UBS and UniCredit. And neither in Batavia, but UBS and Commerzbank are, among others. R3 is at the base of Voltron and Marco Polo; IBM is the technological partner of Batavia and we.trade.
In August, Standard Chartered announced a project to create an end-to-end intelligent security service for commercial finance, digitized using blockchain technology, announced as the first blockchain client driver to fully digitize the trade assurance process. finance. This project, with Siemens Financial Services and the TradeIX digital commerce provider, comes from the United Arab Emirates and the Dubai Smart City initiative, but if successful it will be implemented in Asia as well.
Then there is the Interbank Information Network of JPMorgan, which is now extended to more than 100 banks, 21 of which in Asia, including ANZ, China Citic Bank, ICICI, Kasikornbank, KEB Hana, Mizuho, Bank Central Asia, Shinhan, SMBC, Union Bank of the Philippines and Woori.
But some developments have nothing to do with bank consortia.
For example, DBS – which is, in many ways, a technology leader – does not appear in these large assemblies. The DBS approach was not characterized by membership of consortia of other banks, but by the production of integrated solutions for individual customers, exploiting the technological capabilities of DBS to meet their particular needs.
The potential is very big because Asia drives technological innovation
– Olivier Guillaumond, ING
CRaof Latiff, DBS's head of digital product management and GTS, says the best way for the bank to be relevant in the supply chain and add value is "build API [application programming interfaces] who know how to study the nodes in the blockchain and extract the information needed to be able to do what you need to do. You can extract data on invoices, dates, transactions, counterparts and digitize the supply chain process. "
Latiff continues: "There are many cases where the bank is in the consortium, but the end customer only gets limited incremental value, which is not what we wanted to do."
It argues that the best way to differentiate yourself is to use the internal technology infrastructure to develop solutions for specific customer needs, "to help our customers' businesses reach their goals not just for today but for a long time to come. . "
For example, DBS announced on December 1 that it has enabled an end-to-end cross-border blockchain business platform for a supply chain network of merchants, exporters, merchants and end customers, but not from others banks.
DBS has put this together with Agrocorp International, the global agro-commodity trading company, and with Distributed Ledger Technologies, a blockchain supplier.
Among other things, it provides participants with real-time supply chain updates on commodity prices and delivery information, as well as approval of commercial financing for incoming orders.
DBS says that it cuts the cycle of Agrocorp's average working capital by about 20 days.
In the beginning, the solution focuses on Australia, where approximately 4,500 farmers in the Agrocorp network will be connected to end customers such as supermarkets and restaurants.
Using it, customers can access prices and supply information in real time and can perform transactions in real time, tracking the delivery of orders.
From the point of view of payment, once a triggering event has been reached – as confirmation that the goods have been sent – the blockchain platform activates the instructions to DBS to request funding from Agrocorp, or to release the payment to the farmer. There is a small manual intervention, which makes it faster.
What problems does this problem solve with Agrocorp?
"There are some challenges," says Vishal Vijay, head of Agrocorp's business development.
"First, we rely on an old-fashioned system that was developed a few hundred years ago by Dutch business houses: a system of bills of lading and letters of credit, all paper documents."
The digitalization of this process not only brings convenience, but "security to all participants in a supply chain, from farmers to processors, to shippers, to end customers, to the fact that goods are handled and payments made".
Second, says Vijay, traceability.
"Increasingly in this environment, our customers want to know exactly where their product comes from," he says. "They want to be able to go back to the farm, which is something we're working out with this."
Therefore it allows sustainable practices and monitoring of this sustainability.
And the third is time – which generates business.
"Paper documents take time to be generated, as well as being sent from one side of the world to another, and time is money," says Vijay.
The generation of documents in real time and the execution of faster payments entail a reduction of the working capital cycle from five to ten days. This translates into more business and savings of interest.
The plan expects Agrocorp to extend its blockchain platform from Australia to other key source markets including Canada, Myanmar, Ivory Coast and Ukraine.
The range of products traded on it will also grow, from legumes such as beans and chickpeas to cereals, cotton, nuts and edible oil seeds.
Alongside all these private sector initiatives, the regulators have also been involved, in particular HKMA in Hong Kong and the MAS in Singapore.
"Government-sponsored activities are essential, as government initiatives generally foster an effective collaboration from market participants," says John Laurens, head of global transaction services at DBS. "This impulse is clearly valuable for achieving broad involvement and traction".
There is the feeling that Asia, thanks to these regulators and their proactive attitude towards the development of fintech, can be an engine of technological innovation of commercial finance. ING has just opened a workshop in Singapore dedicated to commerce.
"The potential is very big for Asia to drive this," says Olivier Guillaumond, global head of fintech at ING.
In July, HKMA announced the launch of a project that has been instrumental in its development: a new blockchain platform for commercial finance in Hong Kong.
The project, led by the Hong Kong Trade Finance Platform Company, includes as launch partners ANZ, Bank of China (Hong Kong), Bank of East Asia, DBS, Hang Seng Bank, HSBC and Standard Chartered.
The platform tries to digitize commercial documents and automate commercial finance processes using the blockchain. Ping An OneConnect Financial Technology is the technology provider, with Deloitte as a consultant.
On October 31, Ping An announced the delivery of the platform, called eTradeConnect, which initially linked 12 joint banks (the original seven, plus BNP Paribas and the arms of Hong Kong of the Agricultural Bank of China, Bank of Communications, ICBC and Shanghai Commercial Bank )) and some trade finance pilot customers to share business information using blockchain technology.
The first in line in any connection with Hong Kong will probably be Singapore, which has set its own innovations on commercial finance using the blockchain.
The main drive here was something called Project Ubin, which started in November 2016 as an industrial collaboration to use generalized accounting technologies for clearing and settling payments and securities. The first phase focused on the production of a digital representation of the Singapore dollar for interbank regulation and made the electronic payment system of the MAS interoperable with the methods of distributed accounting; the second phase focused on interbank payments.
The most important step in terms of commercial finance came in October when Singapore finance minister Heng Swee Keat formally launched the networked business platform, designed to be a one-stop digital commerce ecosystem.
Heng calls it a "transformation platform that will take us from a single traditional national window that offers traders a unique interface for all trade-related regulatory transactions, a one-stop interface that will allow them to interact with all commercial partners, stakeholders and regulators on commercial transactions ".
More he followed. In November, MAS announced with SGX that it had developed delivery-versus-payment capabilities for the liquidation of tokenised resources through various blockchain platforms, which will help simplify post-trade processes and shorten settlement cycles. This is perhaps a market initiative more than a commercial finance, but it all helps.
You are seeing new features coming with new protocols. What do you put your investment in? It could become redundant very quickly
– John Laurens, DBS
The connectivity between HKMA and MAS was formalized in a Memorandum of Understanding signed in Singapore in November 2017, called the Global Trade Connectivity Network. The goal is to build a cross-border infrastructure between the two to digitize trade and commercial finance, and from there, to expand into the region. A working committee presents the two regulators plus the office of the national trading platform (Singapore) and Hong Kong Interbank Clearing.
A joint commercial platform is expected to enter service in 2019, with existing national platforms entering it; if it works, the hope is that Japan, southern China (through Shenzhen) and perhaps Thailand will follow. All this, however, requires common ground between regulators; while it is easy to see Hong Kong and Singapore agree on the principles, any further expansion becomes naturally more complicated.
"It's no surprise that Singapore and Hong Kong are the first off-class taxis," says Laurens. "It is not so much the trade from or to those markets, it is the trade conducted through them." It is therefore very important for both to ensure that their role as a hub of global trade is maintained. "
China has its initiatives, both at the state and private levels. One is a blockchain-based commercial finance platform in Shenzhen, supported by the People & # 39; s Bank of China and plans to include the Greater Bay Area which spans Hong Kong, Guangdong and Macao. It is believed that the architecture on which it is based was built by Ping An.
Thus, at company level, the Wanxiang automotive parts group has initiated a number of blockchain initiatives, including not only services for its industry, but also a consulting service, acceleration and blockchain conferences.
"You have a huge domestic distribution business going on, with vehicles being shipped across the country with long national supply chains through small outlets," says Laurens.
Blockchain technology enables component monitoring and funding availability.
"The value here is traditionally transport has struggled to find sources of funding, largely due to the lack of information," says Laurens. "The provision of contracts and information via blockchain makes sense, because you are de-fragmenting what is happening at the national level."
The range of what is happening can be disconcerting and would benefit from a certain unity of direction and purpose.
"The classic use of blockchain is for the dematerialization of commerce," says Laurens. "Everyone sees the potential of this, but personally I think it will be a slow burning, some of the mystics of the early days are behind us now, but the problem is that now there are a myriad of protocols and options. a single blockchain protocol, around which the market meets and creates a network effect – much of this will have to be washed over time.
"You're seeing new features coming in with new protocols – what do you put your investment in? It could be redundant very quickly."
There is a widespread agreement that blockchain, in and of itself, is not a magic wand that solves everything.
"The way we think about the distributed register and blockchain is: technology is already there," says Geoffrey Brady, global trade and supply chain finance manager at Bank of America Merrill Lynch, speaking to Asiamoney at Sibos. "The question is implementation, not technology.
"And that's not a question of BAML, it's a question in the industry.The industry must decide what the standards will be so that we all operate within the same ecosystem."
But DLT and commercial finance are still the best combination possible.
"Nobody discusses the fact that DLT is really the answer in commercial finance," says Guillaumond. "It combines everything that DLT needs in one place: lack of transparency, lack of trust, too much paper, number of parts, geographical reach, too long cycle – all in one place.
"I'm not a big supporter of DLT as a solution to all the problems in the world," he adds, "but commercial finance? This is the place, and we believe things will increase even more in 2019."
After all, there is a lot to do.
A commercial finance banker remembers being in a meeting on a high floor of a Singapore tower, looking at one of the city-state vantage points: hundreds of ships moored off the south coast of the island, awaiting their turn to enter the port.
"The reason why everyone is here is the duration of the process," he says. "And this is a problem we have to solve: the most visible result of Marco Polo's work would be if most of those ships had disappeared in two years".
Banks look beyond the blockchain
While blockchain continues to dominate the discussion of innovation in commercial finance, it is not the whole story. At the October Sibos event in Sydney, it was surprising that one of the most important press conferences of the entire event had absolutely nothing to do with the blockchain. In it, seven banks – ANZ, Banco Santander, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered – are committed to building a digital platform called Trade Information Network by the end of 2018.
This is the last iteration of something formerly called Project Wilson, and is regarded as the first all-inclusive global multi-global network in commercial finance. It focuses in particular on the pre-financing needs in the supply chain, making it easier for companies to communicate commercial information directly with banks through a new platform, in the process of developing a new widely adopted industry standard. The intention is to grow beyond the already formidable range of supporters – at the time of launch more than 20 additional banks were involved in network development, and many companies committed themselves to take part in pilot projects. Specifically, companies will be able to present and verify purchase orders and invoices to request commercial loans from the banks of their choice.
The network, in providing this access, avoids the risk of double financing, makes it more difficult to transmit fraudulent commercial information, and therefore improves the risk assessment, possibly leading to a previous supply of commercial funding in the supply chain. This, in turn, facilitates the life of businesses, especially small and medium-sized enterprises. This is an open architecture system that uses a governance model similar to Swift, and companies will always have their own data – which makes everything easier to take off, since very little of what it does is under the responsibility of regulators ( no money actually changes hands on the platform, no transfer of ownership of data). But where is Blockchain here?
"We did not use distributed-ledge technology (DLP) to cut a corner, and we firmly believe that what we decided to do does not require the blockchain today to do it," says David Cooperman, global product manager for the treasure and commercial solutions of Citi, speaking at the launch of Sibos. "It was not necessary." He could follow the track, but the bankers found it easier to solve the problem without resorting to blockchain.
"We have seen the needs and requirements of our corporate customers," says Daniel Schmand, global head of commercial finance at Deutsche Bank. "We could run any cloud-based or intergalactic solution, but you could end up forgetting the needs of the customers, which was not specifically the point here, the point was to look at the sore points of corporate customers and solve them."
The simplicity of design is perhaps an equally important topic in commercial finance such as blockchain technology. "One of the main initial accomplishments was that when you look at the failed initiatives in the industry, they did it because they needed everyone to change," says Michael Vrontamitis, Head of Trade, Europe and America, at the Standard Chartered. "The moment you ask a large company to change, you fall to the bottom of the queue," he adds. "What you need is a network that does not require the company to change anything: it adapts to existing processes, there must be a positive result for everyone: suppliers, buyers and banks".
And this, at this stage, does not mean an automatic requirement for blockchain. This is far from the only example of new commercial finance initiatives that are developed without connection with blockchain. Another example in Asia would be Calista, launched by PSA International – the Singapore port operator that operates 40 terminals worldwide, state-owned but managed on commercial terms – and Global eTrade Services, with DBS centrally engaged in the provision of financial and banking services. Calista is synonymous with "cargo logistics, inventory optimization and trade aggregation" and the idea is that you facilitate trade with shipping. It is a global supply chain platform, designed to bring together all processes, documents and data – and their systems – that exist today in the commercial finance supply chains.
"We are increasingly witnessing this co-creation business," says Laurens, "working with the development of commercial platforms, in which we provide digital financing and regulation components." Calista is not blockchain, but it is very API [application programming interface] intensive. It is a tailor-made integration. Provides end-to-end data completeness without using blockchain. "