The digitalisation of the trade finance sector is long overdue. The need to obtain and effectively process trade data has never been more pressing – not only for banks and financial institutions, but for the corporates, businesses, and other supply chain participants they serve.
The reasons for this are manifold. Firstly, trade partners require faster processing speeds, which can only be achieved through a more digital approach and independence from paper documentation. Secondly, supply chains are in desperate need of stability after two years of pandemic disruption. Furthermore, there is a greater focus on providing practical solutions to the industry’s evolving environmental, social, and governance (ESG) requirements and help address the climate emergency.
Blockchain is a potential game changer
To this end, digital solutions such as blockchain can have huge potential for the world of trade finance. In what is still an overwhelmingly manual and paper-based industry, blockchain can provide the technological infrastructure to handle large quantities of data quickly, efficiently, and securely, while connecting the various individual stakeholders through a decentralised network.
Obtaining trade data that encompasses both the physical and financial aspects of the supply chain opens up myriad opportunities for trade participants. In the case of banks, it allows us to provide intelligent, tailor-made trade finance solutions for our clients.
Blockchain technology also allows stakeholders to create digital ecosystems more easily – within which bank, non-bank, and fintech players can collaborate to create new solutions and provide value. Such ecosystems enable deeper relationships and broader client interactions extending beyond what would traditionally constitute banking services.
Through blockchain, we can achieve the optimisation the industry has been asking for, leading to greater levels of transparency throughout the supply chain while addressing essential time and cost-cutting requirements. In terms of trade finance, for instance, eliminating paper-based processes may even improve relations between parties across supply chains.
The next step: accessible blockchain technology
Making blockchain technology and data handling much more accessible to market participants is an important next step in the digital evolution of trade finance.
For example, the Marco Polo Payment Commitment was devised to enable corporates to process trade finance based on digital data. Connecting trading partners and participating banks via a decentralised platform allows users to exchange and automatically match trade data, thereby providing an irrevocable payment commitment from the buyer’s bank to the supplier. The entire operation excludes the use of paper documents and makes the process of digitalisation far more accessible across all parties.
Building on the past
The Marco Polo project is not the first time, however, that large-scale digitalisation of trade finance processes has been attempted. Many will remember the Bank Payment Obligation (BPO) almost a decade ago, touted as a next generation settlement solution and backed by the International Chamber of Commerce (ICC). It was a radical innovation, aiming to replace the manual checking of documents by automatically matching data.
Nonetheless, the network of participating banks was simply too small for it to gain sufficient traction and there was limited awareness of the solution within the corporate world. At the time, the pressure to go digital was not as urgent as it is today. There was a general market-wide lack of understanding of the benefits, and technology such as blockchain was largely seen as an experimental solution. This uncertainty led to delays as corporates waited to see whether the solution would catch on. These delays led to its ultimate downfall, but it was nonetheless a crucial step for the digital evolution of the sector.
It is important to build on the lessons learned from the BPO. Since then, new innovations – the incorporation of Corda blockchain technology, for instance – have been implemented to enhance its functionalities, including the integration of GPS data and improved use of application programming interfaces (APIs). With the publication of the new Uniform Rules of Digital Trade Transactions (URDTT) in October 2021 as well as a recently released guide on its implementation, the ICC is proactively supporting the use of payment obligations based on electronic records in the trade market.
Meanwhile, the ongoing pandemic essentially forced the hand of many market participants to seek digital solutions. For example, with workers unable to go into offices to physically check documentation, payments were delayed, and buyers could not obtain goods at the ports. Implementing a digital alternative became a matter of urgency.
Connecting supply chain participants
Following various pilots and simulations, Commerzbank went live with its first Marco Polo Payment Commitment transaction in October 2021, partnering with Turkey’s Isbank and fellow German bank LBBW, alongside selected corporate clients. More transactions followed, demonstrating the potential of this technology as an alternative solution to open account transactions and letters of credit transactions.
Blockchain technology brings boundless opportunities that can address many current industry challenges. For example, it is now possible for trade participants to connect with supplementary networks, such as platforms for electronic documents (eDocs) or GPS-based maritime shipping services that can physically track vessels along their route. The data collected can make trade routes more efficient – triggering payments and compliance checks when ships reach port and accurately tracking their carbon emissions to support sustainability and ESG goals.
Digital innovation in trade finance is gaining momentum as corporates look to find new ways of working, communicating, and connecting. At its best, blockchain technology can deliver speed, efficiency, transparency, and added functionality for banks and corporates alike. It is imperative, however, that market participants continue to work closely with their banking partners if we are to digitalise trade finance once and for all.
