Blockchain advances in receivables finance

Peter Mulroy Secretary General of FCI is discussing about blockchain and its developments related to the receivable finance industry.

I attended the SIBOS conference this past week in Sydney. It had been over 15 years since my last SIBOS event. For those who are not familiar with SIBOS, it is the annual conference on SWIFT Interbank activity, founded in 1973 to support the growth of cross border trade finance. The factoring and receivables finance industry is highly dependent on SWIFT, for processing of cross border remittances used as the source of repayment for advances made against receivables balances around the world. SWIFT has evolved into so much more since those early days, a testament to what I experienced in Sydney this past week.

The purpose of this article is to share my experiences from this intriguing event, but also to provide you with my own view of the evolution and development of blockchain technology and its potential impact for the factoring and receivables finance industry. At FCI we have been analysing the potential application of Blockchain/Distributed Ledger Technology (DLT). In fact, the FCI Executive Committee has agreed to launch a new effort to look at the potential for the deployment of DLT to potentially replace the environment. FCI recently announced its intention to hire a new Technology Director, as Harry Biletta will retire in 2019. So we anticipate that this new Director will help lead FCI’s investment in this fascinating green field and help augment and lead our members into the future.

The conference was held at the ICC Convention Centre in downtown Sydney and hosted more than 6,000 people from many of the 12,000 members of SWIFT from over 200 countries and territories worldwide. What was striking about the scenery was that the conference was basically split between two camps: the ground floor was the location for most of the major banks globally, where numerous bilateral meetings were taking place throughout the conference; and the upper floor, where the Technology/Innovation firms were located. There they held numerous seminars, demonstrations and presentations impacting the trade and receivables finance industry on such topics as (A) Artificial Intelligence, (B) Blockchain/Distributed Ledger Technology, (C) Cloud Computing, and (D) Big Data. Over the past few years, we have witnessed a number of break throughs with the speed of change in technology and its potential for the trade and receivables finance industries, addressing many of the critical requirements necessary for the DLT to potentially achieve industry wide adoption.

What is blockchain?

 Blockchain is a new type of database, invented in 2008 for bitcoin, that can be easily shared with anyone. The advantage is a distributed database, locked down by cryptography that enhances the security of the records. Transactions can therefore be verified and processed independently by multiple nodes, with the blockchain acting as a consensus mechanism to ensure those nodes stay in sync. Transactions are less vulnerable, more robust and extreme fault tolerance due to the notes that connect peer to peer.

The downside risk in comparing this with the traditional databases is confidentiality and performance. Confidentiality is by design absent (the platform is open based system for all parties to participate in) but is in development. And performance of the database is slower than traditional databases due to the peer to peer setup and complex nature of cryptography schemes and digital signatures.

Blockchain innovators:

The two parties that seem furthest along in the development of blockchain technology are R3 and IBM. R3 has cooperation agreements together with CryptoBLK and TradeIX under de names of Voltron and Marco Polo respectively. We.Trade and Batavia work together with IBM.

Below you will find a summary of these community platforms and associated banks that have joined  these networks:

  • Voltron
  • Voltron is led by R3 and CryptoBLK with tech supported by Microsoft’s cloud platform Azure. Voltron has onboarded 12 partner banks including Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB, and U.S.   Bank.

  • Marco Polo
  • A collaboration between TradeIX and R3 that has partnered with 14 major financial institutions including RBS’s NatWest, BNP Paribas, Commerzbank, ING, DNB, OP Financial, Bangkok Bank, SMBC, Standard Chartered, and Natixis.

    The collaboration combines R3’s Corda Enterprise solution and TradeIX’s TIX Core, an open infrastructure powered by DLT. The goal is to streamline accounting for businesses to track payment guarantees and expedite receivable discounting.

  • Batavia
  • A consortium between 5 banks (UBS, Bank of Montreal, CaixaBank, Commerzbank, and Erste Group) that is built on the IBM Blockchain Platform.

    Batavia has broader applications than the other projects and uses smart contracts to help all participants in a cross-border trade to track and monitor their open transactions.

    On 2-nd of Oct 2018, UBS, CaixaBank and Erste Group joined

  • We.Trade
  • A consortium between 9 banks including Rabobank, Deutsche Bank, HSBC, KBC, Natixis, Societé Generale, UniCredit, Nordea, and Santander. The platform is built on the IBM blockchain using Hyperledger Fabric.

    Targeted at SMEs in Europe, the platform offers suppliers faster factoring (or partial invoice financing), by using smart contracts (a protocol on the Ethereum blockchain) in place of a letter of credit.

    I had sat through two demonstrations during SIBOS, the first one with Marco Polo. They had decided early on to build its first functionality based on a factoring/ receivables finance platform. I have sat through numerous factoring system demos in the past two decades, and quite frankly I was expecting to witness something from the Jetsons (a futuristic animated sitcom about a family who lived in a comical version of the future, with elaborate robotic contraptions, aliens, holograms, and incredible inventions, made popular in the 1960s). You get the point, and I am certainly dating myself, however I did honestly expect a sea change in how such a futuristic platform is presented). However, I was brought down to earth, as I felt like I was looking at any other typical factoring system, with invoice processing, dispute management functions, collections data/ageing, receivables reports, and other typical functionality that you find in any other factoring software today. What I was told was that the difference in a blockchain based platform versus a traditional factoring   database system is the term “open”. What “open” really means is that multiple parties can connect with each other through an “open source” approach. Proprietary software refers to a commercial product licensed by a vendor to a customer normally for a fee.

    No one but the original publisher is allowed to see or touch the code. On the other hand, open source is software that anyone can download, view and alter. It creates greater interconnectivity with businesses, building an open network. So from a factoring perspective, where you have multiple software points that have to be created through linkages, the idea of an open source is to connect these various software points together. So the idea of credit, collections, and invoice factoring functionality coupled with clients and their customers accounting software all in essence talking to each other on an open platform concept is quite visionary. The Blockchain makes these opportunities possible, and my point about the Jetsons becomes a reality!

    The second demo was from TradeIX, a new Hyperledger technology. This works on an open DLT platform, but restricts data replication to only permissioned parties, creating data integrity and non-repudiation of transactions, without compromising data security. In the Hyperledger Fabric, it leverages the peer-to- peer strength of blockchain, as one party can insert transaction details for the other party to verify.  So for example, in a factoring scenario, if the system pulls invoices from the seller’s accounting software onto the platform, it would go through a verification process whereby buyers could validate the authenticity and legitimacy of the transaction and the invoices themselves. So the potential for fraud is nearly eliminated (unless of course there is seller and debtor collusion). It also helps Small to Medium Sized Enterprises (SMEs), as banks and factors would have an increased appetite if such risk controls could be enhanced as a result of this open network. And you can imagine how this could be elevated in buyer-centric programs applicable within SCF/reverse factoring/payables finance software solutions. When we were looking at building SCF models in the US at the turn of the century, IT companies were so far ahead of themselves, looking at bridging this important gap by marrying logistics data with finance. I remember one example, UPS Capital was one of the first to develop a platform to provide PO Financing and Factoring finance to companies based on logistical data used by their clients within in their supply chain. Unfortunately, blockchain/ DLT technology was not available then and the technology could not really support such ideas. But they had this vision, which if you can authenticate the delivery of the product, track the shipment from port of destination to delivery, and can effectively track the assets and control ownership, you can greatly enhance the legitimacy and authenticity of the transaction, and banks/non-bank financial institutions would be more willing to finance into potentially the entire supply chain. For banks, this also enhances the compliance effort, as they would know at all times the evolution of the trade itself!

    Blockchain: is it just hype or the future?

    The third presentation that I saw on the Blockchain was a presentation made by a company called Everis. It has a group of mostly Spanish and Latin American banks that have engaged them to build a Blockchain/DLT system. It is being built using Hyperledger as well. However, of the three, I must say from a factoring perspective R3 is ahead of the curve and is ready to bring to market a new way of transacting receivables finance business via the Blockchain.

    Blockchain is the future because it is a hype. Blockchain is a new database architecture that is not fully developed and introducing it as a potential replacement for edifactoring would certainly make FCI an early adaptor. As you can see from these demos, there is still a lot of testing (proof of concept) going on and using it will result in risks by adopting unproven technology. If you truly look at the advantages and disadvantages of blockchain, you don’t necessarily need the technology because you can build the feature into traditional databases. However, as you can also see from the above, the economies of scale, the interconnectivity   with an open source system, and the authenticity/legitimacy of the Blockchain truly makes it an investment worth considering.

    Migrating edifactoring to blockchain is from a technology perspective very challenging and unaffordable for many of the national banks/non-banks around the world. But this is already starting to change, as these platforms are being built and subsidized by the global banks. And it is possible to integrate blockchain in small incremental steps, together with edifactoring, and expand it over time. Having members on DLT would create efficiencies in conducting correspondent factoring business. And the big advantage here is the financial impact would be less burdensome in the short term and it would certainly demonstrate FCI’s intention to innovate and prepare the membership for this new capability. Also, if FCI does not move forward, these new communities that have been created by R3, IBM and others could create their own global networks that could potentially make the FCI network redundant. But with FCI’s 50 years of history, robust education and experiences, and the strength of the General Rules of International Factoring (GRIF) and Rules of Arbitration, FCI has the confidence of the membership to lead in this new technology effort as well. And with FCI’s recent announcement of FCIreverse, the new SCF/payables finance platform being rolled out to the members in 2019, the integration of this new DLT could have major benefits in the payables space as well. Thanks to SIBOS for providing the industry with so much knowledge and vision in terms of the future impact of technology on the trade and receivables finance industry. FCI will continue to collaborate with the global factoring industry to investigate this open source blockchain technology and potentially build a new foundation for the cross border open account receivables finance industry for tomorrow.

    BCR Publishing is holding a Consortia event for Blockchain and Trade Receivables Finance from the 1-st May 2019 to 2-nd May 2019.

    For more information please click here: