Everyday produce from around the world is shipped and moved to the far corners of the globe for customers to buy with such ease that little thought is given to the inner workings of this trade industry. From French Champagne being purchased off the shelf in Spanish supermarkets to German Sausages available at the corner store in the United Kingdom; it has become a way of life.
However, global trade and exportation of such good is an intricate, complex, and often difficult task that hinges on financing; trade financing. Trade financing, much like many forms of credit providing, is a trial component of the success of small to medium enterprises (SME), but that trial is not always easy to obtain.
Trade finance transactions were worth over $9 trillion in 2017, but the industry is heavily paper-based and follows processes and procedures that have changed little in decades or even centuries.
For many SMEs, the financing of these trade deals has been primarily reserved for big companies, but that is changing, and it is changing thanks to the emerging technology of blockchain.
Traditionally, SMEs seeking credit for their endeavours, including, but not limited to, trade deals and exportation, relied on a linear relationship with a major bank. However, there is a change in the air that is being driven by enterprises the likes of IBM, as well as some of major banks who are buying in.
Big Banks building a trade finance blockchain network in Europe
Europe is an interesting case study of trade as the European Union is one of the more dynamic and fluid customs unions in the world, but it is also one with complex and differing regulations on trade. This Union opens up many doors to SMEs looking to trade their goods across the continent, but that also sparks a need for trade financing.
To this end, a company called we.trade is leveraging IBM’s blockchain solution and has managed to collaborate with 14 major European banks — CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale, UBS and UniCredit — to form a blockchain network for trade finance which was inconceivable just five years ago.
The claim from we.trade is that they, and the member banks, are “opening the door to trade finance for 70 percent of small and mid-sized business in Europe that previously did not have access.”
By enabling enhanced trust and transparency in the lending process, these banks have been able to work with IBM to solve a specific problem – providing more companies more efficient access to trade financing across Europe to allow them to grow their business by expanding into new markets and forging new trading partnerships.
trial to the potential success of a blockchain-powered financing market is that it can vastly expand the reach and opportunity of SMEs which are often regionally tied to their local banks.
Radoslav Albrech, the CEO of another European company, Bitbond, leveraging blockchain to provide financing to SMEs, explains:
“The trial advantage from the cost-effective and fast payment processing via the Stellar blockchain, in our case, is that one can reach many more markets than conventional lenders.”
“Lack of credit is one of the primary growth obstacles for small business owners so making credit accessible to nearly all business owners who have access to the internet is a big boost for these SMEs.
Roberto Mancone, CEO of we.trade, also expanded on this customer-first approach for businesses looking to lend money to achieve their goals. He explains how blockchain can break down the trust issues between lenders.
“For the first time, competitors are joining forces to solve all the complexities of trade finance,” he said. “We’ve moved quickly and deliberately to do it, and we’ve guaranteed a user experience that enables businesses to trade, seamlessly, simply and with trust.”
The crux of using blockchain to provide financing and credit to SMEs is that the customers are benefiting from increased efficiencies and co-operation. The technology allows banks, with very different ways of doing things, governed by very different regulations, to operate on a global market to the benefit of the customer.
Essentially, the customer has the pick of an array of global banking options – which we.trade is aiming to expand to 200 by 2020 – to best suit their trade financing needs. The banks are, in turn, opened up to a new marketplace of customers.
A behind the scenes blockchain
IBM’s Hyperledger, which is underpinning we.trade, and the use of Stellar in Bitbond’s case, seems to be in line with an important conclusion that is being reached when it comes to enterprise blockchain usage.
The technology itself may be revolutionary and impressive, but that does not necessarily mean it needs to be the primary marketing tool.
For instance, banks can benefit from the blockchain’s transparency but don’t necessarily need to operate the technology. Then, for the clients, there is almost no blockchain interaction – and no need for it either.
“The fact that we use blockchain for payment processing doesn’t play a role in our marketing strategy,” adds Albrecht. “We mainly use blockchain as a tool, and it is a very important tool in the technology stack that we use. We couldn’t provide a service in the same way if blockchain technology didn’t exist.”
“Customers are less interested in the types of technologies that are used to deliver the service. Instead, they care more about the availability, speed of approval and the total costs. Blockchain allows for this in an excellent way, and the results of that are what count for our customers.”
Building a truly global network
While Europe may be a good incubator for the creation of a blockchain financing network, there are plans to expand to other markets and to try and make this a truly global phenomenon.
eTradeConnect is another blockchain-based trade finance platform, developed by HSBC, Standard Chartered and ten other banks, as a similar product to we.trade in Europe. Their goal is also to boost efficiency in the multi-trillion-dollar funding of international trade.
Again, with this Hong Kong-based solution, the idea is to alleviate inefficiencies that customers and traders feel, as well as to make the business of trade finance more secure and straightforward.
Howard Lee, Deputy Chief Executive of the Hong Kong Monetary Authority (HKMA), said on the announcement of eTradeConnect:
“It is a remarkable moment to witness the birth of the first blockchain-based trade finance platform built by trial industry players in Hong Kong. It demonstrates the willingness of the financial industry to adopt new technology in the new era of smart banking.”
“Our next trial milestone is to link eTradeConnect with platforms from other regions in order to enable cross-border trade financing. The connection between eTradeConnect and we.trade platform paves the way for the digitalization of cross-border trades in the Asia and Europe trade corridor and will serve as a good reference for the future connection of eTradeConnect to other trade finance platforms.”
Mancone also added:
“The goal of this collaboration to connect these DLT networks is to speed up the proliferation of these platforms into new territories, also taking it beyond the bank-backed aspects of trade finance to ultimately create a convenient, frictionless user experience for clients involved in all areas of global trade,”
A globalized smart banking approach
Total globalization has been expanding rapidly for some time now. Trade of goods across borders has become normalized and expected with corner shops and supermarkets now essentially world markets.
But in that growth, the people and businesses trying to provide for this demand have been left behind somewhat, forced to make do with a banking and loaning system that is becoming outdated.
It is the technological boost from blockchain that looks to be changing things. Making the financing and loaning world for entrepreneurs and SMEs as global as the marketplace they are looking to operate in.