BANKS RACE TO MAKE MONEY ON TRADE FINANCE PLATFORMS / THE FINANCIAL TIMES

Banks race to make money on trade finance platforms

Blockchain promises big returns for $16tn industry but revenues remain elusive

Don Weinland in Sydney


Banks are looking to a handful of platforms to help speed up, simplify and reduce risk in the $16tn in global trade done annually © AFP


When Texas-based Tricon Energy wanted to buy polymers from India’s Reliance Energy, the two companies avoided the usual rigmarole of phone calls, couriered documents and emails by logging on to a new blockchain system called Voltron.

Within minutes they had completed negotiations on the terms of the sale and then secured a letter of credit and advice from lenders ING and HSBC to complete the transaction, which was finalised on Friday.

This was one of the first examples of a real-life trade deal being handled by one of many new platforms being developed by banks to use blockchain technology— which underpins cryptocurrencies such as bitcoin — to save money and time in the centuries-old trade finance market.

HSBC, Standard Chartered, Bank of China, Deutsche Bank, Société Générale and UBS, among many others, are looking to a handful of platforms to help speed up, simplify and reduce risk in the $16tn in global trade done annually.

After several years of development work and testing, the first real-life transactions passing over these systems indicate that banks are getting closer to their goal of starting to make money from the investments they have patiently bankrolled.

Trade finance is still mostly based on paper, such as bills of lading or letters of credit, being sent by fax or post around the world, and seems to many bankers to be crying out for modernisation.

Combining shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a constantly updated digital ledger that cannot be altered.

Banks hope the decentralised nature of the technology, which draws on and verifies information from thousands of different sources, will eliminate vast piles of paper documents and unlock up to $2bn in extra financing business within eight years.

Yet getting viable businesses off the ground has proved challenging. The platforms are struggling to link up with the diverse range of parties that participate in global trade, many of which are developing their own technology. Shipping companies such as AP Moller-Maersk and Hyundai Merchant Marine are testing their own systems, which are not guaranteed to mesh with those of the banks.

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.”

The ability to eke out early returns on a system could depend on which segment of the trade industry it is focused on. Documentary trade, which includes letters of credit and involves banks taking on payment risks for the buyers of goods, already has a high level of standardisation that makes it more difficult to disrupt, said Alessio Botta, a partner at consultants McKinsey.

But supplier-originated finance, in which suppliers sell their accounts receivables to generate liquidity, has no common standard and platforms focused on this business are expected to find higher demand for new products, Mr Botta said.

“The area where blockchain is going to succeed will be different between these areas,” he said. “Banks are hedging on more than one platform.”

The Voltron platform, backed by eight banks, announced in May that it had moved from tests to live business, executing a soyabeans trade for US agricultural group Cargill. The system focuses on documentary trade products such as letters of credit.

Marco Polo, a platform designed for receivables financing and backed by another group of lenders, plans to launch this year. At least six other competing systems are expected to go into production this year or in 2019. We.Trade , backed by a group of European banks, and the Indian bank-backed Finacle Trade Connect, for example both do invoice finance.

Large sums are at stake. Global annual revenues for documentary trade finance are about $25bn, while supplier-originated finance comprises another $25bn-$30bn, McKinsey estimates. Bain & Co predicts new products for documentary trade will boost annual revenues for banks by $2bn by 2026, while driving up 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.

But the gap between a few live transactions and widespread commercial usage remains wide. The Cargill soyabeans trade, for example, was considered a live transaction because it could be replicated again if the same companies and banks were involved. But ports and logistics groups will not be able to join until they onboard the technology, which will be time-consuming and costly for smaller companies.

“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.

Banks, meanwhile, are betting on multiple blockchain systems. HSBC, for example, is involved in at least four different trade finance platforms, as is Standard Chartered. Bankers expect the most powerful systems to be able to connect with each other, while some platforms will eventually die off.

“The question is how we enable them to connect together seamlessly over time — and they will become increasingly interoperable,” said Michael Vrontamitis, head of trade in Europe and the Americas at StanChart. “And there will be a few that survive.”