Hong Kong – 22 Oct. 2018 – Attempts to digitize documentary trade finance have consistently fallen short because each project focused only on a narrow slice of the entire process, and solutions have not communicated well with each other. However, new research reveals that blockchain-powered platforms hold promise to provide importers and exporters with an end-to-end digital process and an easier, faster, less expensive proposition.
A new report from Bain & Company and HSBC titled “Rebooting a digital solution to trade finance,”finds that blockchain could increase global trade volumes by $1.1 trillion by 2026, off the current base of $16 trillion. Additionally, blockchain-based solutions could provide a $2 billion annual revenue lift in documentary trade financing by 2026 for the global banking industry, on top of $7.7 billion in annual revenue without blockchain.
This lift in revenue would come from banks financing more documentary trade transactions, attracting new business not currently participating in cross-border trade, and companies shifting select transactions from open account to documentary for greater risk mitigation.
“Banks are stuck between a rock and a hard place when it comes to trade finance. The array of solutions to date are disconnected – like digital islands with paper often serving as a bridge between them – but banks want to avoid spending more on external systems on top of their existing investments in digital trade channels and back-office systems,” said Sen Ganesh, partner with Bain & Company. “Blockchain has the potential to address the current bottlenecks in trade finance, thereby radically redefining global trade processes.”
“The business case for adopting blockchain in documentary trade is clear cut: increase trade efficiency for established trading firms, mitigate risk and expand trade to smaller companies and regions with developing trade mechanisms,” said Joshua Kroeker who heads up Blockchain and DLT for trade finance at HSBC. “Moving forward, industry-wide collaboration, paired with interoperable blockchain platforms, will meet the demand for trade finance and allow global trade to reach its full potential.”
Specifically, blockchain delivers several key benefits:
- Improved service levels including faster turnaround times, extended cut-off times, and longer servicing hours
- Lower processing costs for banks and corporates
- More trade financing available by bridging the gap between perceived and actual risk
- Faster financing decisions
- A way for each participant to see all the steps involved from purchase order to payment, which improves how businesses manage their risks and cash flow
- A true and accurate representation of each record, which can be validated instantly
- Freed-up working capital through reduced friction
- Speeding up supply chain decisions for the clients
To realize the full potential of blockchain, industry participants will need to agree on business networks with common standards and business rules. Since these networks provide end-to-end digitalization from procurement to payments, each will need to develop common standards for the technology and for business processes.
Governance should be structured to encourage adoption and use by all participants in the ecosystem, rather than focusing on specific groups. And it will require significant investment to build out the technology and integrate it with existing bank IT systems.
The research also finds the need for certain institutions to play a role as “superconnectors” – large banks, government agencies or other trusted parties that will serve as a bridge among business networks to share critical information. These superconnectors will share information between, say, a shipping network and an oil and gas network. The shipping network tracks the flow of goods and deals with customs documents, while the oil and gas network tracks data pertinent to the producer sending the oil and the refiner receiving it.
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