Bankers Race to Make Money on Trade Finance Platforms

After several years of development and testing, we’re see the first real life transactions taking place on blockchain platforms, indicating that banks are honing in on their goal of seeing a return on the various investments they have made into these blockchain based platforms.

Although, we’re still at a point where trade finance is still mostly paper based and bills of lending and letters of credit are being sent over fax or by post across the world, bankers are finally calling out for modernisation of the industry.

Blockchain technology can be leveraged to allow multiple actors in a transaction to have simultaneous access to a constantly updated ledger that cannot the changed without the other parties knowing when, where and by whom the changes were made.

The hope for blockchain, which verifies information from thousands of available sources, will eliminate the reliance on paper documents and reduce the risk and cost of the industry an eight year timeline.

The difficulty for this revolution has been to get a viable business of the ground. Getting the diverse range of parties to join the network that is needed has been a challenge and large companies such as AP Moller-Maersk and Hyundai Merchant Marine are building their own networks which may not be interoperable.

When banks invest in new systems, they traditionally expect to see returns within defined periods of time, or at least be able to predict when the first revenues will be generated, said Sen Ganesh, partner at consultants Bain & Company. A timetable for returns from blockchain trade finance, however, has proved uncertain.

“There’s a race to commercialisation now,” said Mr Ganesh. “After a year of proof of concepts, there is a lot of pressure to make money.”

Marco Polo, a platform designed for receivables financing and backed by another group of lenders, plans to launch in 2019, with another group of at least 6 systems planning to go live towards the end of 2019.

Large amounts of money are at stake. Global revenue for paper based trade finance is an estimated $25bn, while supplier-originated finance is another $25bn – $30bn, according to McKinsey. Bain & co estimates new products will boost annual revenue for bank by $2n in 7 years, while driving trade volume by $1.1tn.

“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, global head of product and propositions for trade and receivables finance at HSBC.
We’re still a while away from widespread commercial use. The Cargill soyabeans trade was considered a live transaction since it could be replicated if the same parties were involved but ports and logistics groups and insurers would not be able to until they adopt the technology, which will be costly and time consuming.

“You have the transporters, who have been forgotten by the banks but are also developing their own consortiums,” said Cécile André Leruste, managing director for banking in Europe at consultants Accenture.

Despite all of this, banks aren’t putting all of their eggs in one basket and are betting on multiple blockchain platforms. For example, Standard Chartered is involved in at least four different platforms.