Trade finance has been a very slowly moving space when it comes to embracing digital innovations. However, the coin is now flipping: new data sharing technologies and ambitious plans from major trade originators provide much hope for a new trade finance landscape to emerge in the foreseeable future. Will the new trade consortia succeed to scale, and by when?
Corporates were first to digitize trade flows
Half a century ago, large corporations started to adopt digital technologies to operate their business-to-business supply chain activities. The use of electronic data interchange (EDI) links was initially introduced in automotive and retail industries, and later expanded into manufacturing, healthcare, pharmaceutical, utility, and construction companies. The goal was then to accelerate the communication with suppliers with a focus on digitizing the corporate-to-corporate (B2B) information flows such as purchase orders, shipping documents, and invoices.
Whereas the corporate-to-corporate space, including the logistics space, was moving fast towards digital processes, the corporate-to-bank and bank-to-bank spaces remained wedded to their established paper practices. The only notable development during the first two decades of the 21st century was (1) banks starting to roll out their own single-bank portals to address their clients’ needs for online trade finance services and (2) bank-agnostic platforms emerging to bring innovative services such as supply chain finance.
Banks are betting big on data technologies
Fast forward to 2019 and the situation is very different as recent technologies such as cloud platforms as well as data sharing technologies known as Distributed Ledger Technology (DLT) have invaded all three key spaces of the trade finance market: corporate-to-corporate, corporate-to-bank, and bank-to-bank.
Among new technologies, DLT has emerged as the strategic data sharing and communications infrastructure for transaction banks. Use of DLT started primarily in the bank-to-bank space, but quickly expanded to the corporate-to-bank space, thereby enabling transactions to be tracked on the blockchain from start to finish.
DLT as the new technology for innovation
The various consortia that banks have set up represent huge opportunities to grow trade finance volumes whilst increasing efficiency and decreasing operational costs – thereby increasing trade business margins. Whereas digitization was traditionally implemented within bilateral relationships, blockchain technology brings all parties together to enable them to re-invent trade business processes. DLT has definitively reached the status of preferred infrastructure technology for innovating in trade and trade finance.
Specialization will make the difference
By focusing on specific value propositions, the blockchain consortia have the ability to re-invent and operationalize business processes in an end-to-end way, giving full visibility of the data and opportunities associated with each transaction. They can sometimes even re-invent business processes from the start. Business specialization is sometimes combined with a regional focus. We believe this is a winning formula for consortia to adopt.
Now comes the time for market-wide innovation in trade finance
Digitizing trade and trade finance is a very long journey. Most digitization initiatives in trade have delivered tangible value but never succeeded to scale. Now comes the time for blockchain-based innovations such as the multi-bank consortia mentioned in this paper to scale at a global level.
A major factor in scaling digitization and underpinning its success will be the creation of networks. These can be understood as ecosystems in which different commercial applications and entities (banks, non-banks fintechs, altfins, etc.) can interact freely though common standards and network services such as digital notaries and legal identifiers. There are very promising initiatives in this area with the vocation to create an internet for digital trade. Associations such as ITFA and the ICC are also working on standards and rules with industry-wide applications.
We believe that by 2025 we will see a thriving community of DLT enabled trade finance business with significant and meaningful milestones achieved before then. All aboard!