19 Oct 2018
In modern cross-border trade, paper and data moves from country to country as often as passengers on international flights - including transiting.
As the digitisation of trade finance grows, more organisations are turning to the increasingly popular marvel – the new kid on the block, if you will – of blockchain, distributed-ledger technology (DLT) which promises new opportunities for efficiency and creating value across the industry.
"Critically no player wants anyone to force these ecosystems to evolve or control how they do so.” - Vivek Gupta
Indeed this kind of partnership between banks, technology companies, non-banks – often ecosystems given the number and scale of institutions involved – based around DLT solutions is popping up regularly, a point articulated well, although just in part, here by CBInsights.
ANZ is directly involved in two such efforts in Singapore & Hong Kong - countries also working together on a single cross-border infrastructre with strong support from the respective regulators.
In addition to ANZ - the only Australian bank involved – other stakeholders in the Hong Kong DLT Trade Finance platform include the Bank of China, the Bank of East Asia, DBS Bank, Hang Seng Bank, HSBC and Standard Chartered.
In Singapore, the Networked Trade Platform (NTP) has had input from a number of banks and others alongside the Monetary Authority of Singapore – and will reportedly result in a collective $S600 million in productivity savings a year for those involved.
Additionally, ANZ has joined Banco Santander, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered in building a digital Trade Information Network by the end of 2018.
Big players HSBC and ING are part of a consortium involved in the fantastically named ‘Voltron’ DLT platform. In May HSBC concluded a soybean trade transaction on the platform which – thanks to the DLT – took 24 hours to compete, rather than the traditional three months.
It’s these kind of efficiencies which are attracting the big players. Research from the Asian Development Bank puts the amount of unmet demand for trade finance around the world at $US1.5 trillion. Developing Asia’s cut of that figure is 40 per cent.
A single company which processes around 1,000 export documents a year can save close to $A250,000 by moving to a digital trade solution.
But hang on, I can hear you ask: doesn’t the existence of dozens of blockchain ecosystems create the same problems a single one would solve?
The question is a fair one but in practice each effort ultimately works to the benefit of each other.
To take the plane analogy again; our planes of people (data) travelling between countries are divided by airlines (blockchains) but everyone lands, takes off and benefits from the shared services of the airport – or in this case, the broader digital trade finance ecosystem.
The data is coming in from different jurisdictions – Singapore, Hong Kong etc- but once it gets into the airport is able to make transit to different flights and airlines, moving amongst the ecosystem to the benefit of everyone – participants and customers alike. It’s a process being worked on by many, many initiatives right now.
So yes, there will be some disparate chains – but the point is not to fight it, to let it happen, develop innovations which will benefit everyone and eventually come to a common standard. As deputy chief executive of the HKMA Howard Lee said, a major aim of the Hong Kong platform is to “link up with other trade platforms in other jurisdictions to further facilitate cross-border trades.”
A lot of things are happening behind closed doors in the trade finance space within many organisations in regards to building these DLT ecosystems.
Banks in particular are coming together quite collaboratively in an attempt to address multiple aspects of the trade finance challenge - using blockchain as an operating platform.
Sibos, with the 2018 theme of ‘enabling the digital economy’, would seem to be a good opportunity in my view to publicly announce what's been bubbling behind the scenes.
The forum is a great opportunity for banks and fintech companies to further the conversation – and attract and recruit other institutions to participate in their ecosystems. I think that's where a lot of the focus at Sibos this year is likely to be.
Customers tend to have two supply chains. One is the physical supply chain – let’s say an Australian exporter using a logistics group to move goods to China (the size of the Asian opportunity for Australian businesses is roughly $A278 billion).
When the data (or paper!) emerges it is passed on to the exporter and/or the bank - the financial supply chain.
What we’re seeing in the sector is a lot of work and interest in DLTs across the physical supply chain - participants themselves, banks, non-banks in and even others.
The historical challenge has been innovation like this has predominantly been bank led - and banks as we all know are not necessarily very collaborative. But blockchain is changing this thinking in the trade space.
Critically no player wants anyone to force these ecosystems to evolve or control how they do so. These projects will get scale by creating a like-minded physical and financial supply chain and attracting participants for join. The trick is having interoperability between these disparate ecosystems who in themselves may or may not be DLT based.
Once we let these systems scale, then the challenge is assessing common standards and asking how we lay the pipe or the infrastructure which enables these seemingly disparate ecosystems - be it at an industry (shipping/Oil & Gas) or country level - to actually communicate with each other
We can’t stop the growth of blockchain. What we have to figure out as an industry is the interoperability while ensuring key aspects around Data Privacy have been well addressed.
Out in front
When it comes to bringing a blockchain-based trade ecosystem to a production environment I think it’s fair to say Asia is significantly leading the pack around the world.
Hong Kong is central to this movement. The Hong Kong Trade Platform is a great example of private and public sector partnership, thanks in part to very progressive regulator keen to build something which hasn't been done before (and quickly at that).
This partnership has been the key reason for successfully moving the platform’s evolution from POC to production ready in a short span of 15 months.
In Europe there have been good movement for quite some time but I think from a scalability point of view there is still a lot of work in progress.
An app for that
Smart contracts will ultimately prove to be an important part of the ecosystem. Built on top of existing DLT, as a bolt-on application for chain, this would further automate the way many standard contracts are entered into and performed.
These bolt-on applications - not necessarily limited to smart contracts- are a huge opportunity for innovation in trade finance – and not simply limited to existing players in the ecosystems. Indeed, an ambitious fintech group with a revolutionary smart contract system could make their way into the ecosystem with such tech, benefiting all parties and the customer.
The idea is to keep the technology open source and invite other bodies to participate. Platforms can provide the underlying rails but they will be a major source of innovation along the line.
Customers are likely to embrace anything which would make their operations significantly easier and cheaper and more importantly - most importantly – help them avoid getting mired down with paper or back-office systems, allowing them to focus on what they need to do which is focus on growing their business!.
Vivek Gupta is Head of Trade & Supply Chain, Greater China & North Asia at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
19 Oct 2018
19 Oct 2018