Blockchain technology has been adopted increasingly by major corporates over the last five years. Because it records and processes information transparently and securely enabling users to exchange and update information swiftly, it has been taken up particularly by banks and other financial institutions. According to Achraf Abourida, Head of Trade at ING, “the willingness of banks to join the consortia is in part driven by the realisation that trade finance will be disrupted in the future by emerging Trade platforms.” However, creating a blockchain trade finance platform is expensive, because to work well it needs to on-board other financial institutions, plus every party in the trade cycle as well as customs bodies and regulators. So groups of banks and other financial institutions have come together to create common platforms that can be used by each member of the network. Since 2017 more than 30 such consortia have been founded, most of them having between 10 and 15 initial members.
Operationally, these consortia are only just beginning to get under way, for these are collaborative ventures tackling complex technological issues in order to create products that members want to have. During 2019 and 2020 we will see these consortia picking up speed. As they do so they will start to impact the conduct of cross border trade.
According to Emmanuel Ganne, Senior Research Analyst at the World Trade Organisation (WTO), blockchain consortia have the potential to transform global trade. As she says in her recent report Can Blockchain revolutionise International trade?: “If the projects that are under development succeed, blockchain could well become the future of trade infrastructure and the biggest disruptor to the shipping industry and to international trade since the invention of the container.”
She adds: “However, much remains to be done. Such projects require complex integration work and a conducive regulatory environment. They also raise issues of interoperability and standardisation. The dialogue between all stakeholders, including regulators, is essential.” This is starting to happen. Consortia recognise that they must not only deal with their own internal objectives, but also create external relationships with other consortia, Industry bodies and regulators.
Consortia differ in their composition and purpose, but essentially a consortium is a group of banks, financial institutions and corporates that have come together to develop blockchain products that will streamline and massively reduce the cost of their trade and receivables finance activities. Achraf Abourida points out, “we believe there is a lot to gain for banks to streamline operations and become more efficient, be ready to integrate to emerging trade platforms and most important; deliver value to our customers”.
Cross-border trade today is cumbersome, involving many disparate channels of communication and is in many cases significantly paper-based. By digitising these processes with distributed ledger technology (DLT), which is what blockchain is, all the transactions involved in trade and receivables finance, especially cross-border trade, become faster, cheaper and more reliable. The trust factor is a key one: blockchain data cannot be distorted or tampered with.
The rationale behind a consortium is quite clear. As David Sutter, Chief Strategy Officer at TradeIX which helped to set up the consortium, the Marco Polo Network, explains: “The reason people start consortiums is because blockchain is a network technology, and networks require at least an initial level of critical mass to be valuable. You need at least a certain sized group of participants that can connect to a network and use it so that it actually has value. So people start consortiums as an attempt to bootstrap and jumpstart the network for the effects required. And that is what is happening now.”
Two factors are behind the very rapid rise in the number of consortia in the last two years. The first, says Sutter, is the growth of transaction banking revenues by financial institutions and the fact that their share of banks’ overall profitability is increasing. The second, he says, is that trade finance is becoming increasingly important for corporates. The trade finance market is said to be worth US$8tn and growing, but the current IT systems that support these services are struggling to keep up. Hence the drive to implement blockchain technology through blockchain consortia.
To a large extent these consortia are focusing on different kinds of trade financing, and sometimes different regions. Marco Polo for example is building a blockchain platform for open account trading with global corporates in mind, while we.trade’s platform is targeted at SMEs and was set up “to transform the entire trade finance industry,” and then there is Voltron which is creating a platform for banks and corporates that use letters of credit. Others include: Komgo which is creating a platform for trade finance in commodities, Hong Kong Trade Finance Platform, which was set up as a supply chain finance platform, ICC Trade Finance Platform, which is an Indian trade finance and remittances platform, and Digital Trade Chain Consortium designed to simplify trade finance processes for SMEs. These are just a few of the leading blockchain consortia.
Given that the major banks need to operate across different economic sectors, using different forms of financing, and covering a multiplicity of regions, they are members of – and have often helped to set up – not just one consortium but half a dozen. A lot of time, money and people are being invested in these consortia, which is indicative of how important they are seen to be.
What these consortia are currently doing is creating products for their members. These are decided and prioritised by members collaborating with each other, who have to keep in mind the needs of their clients as well as their own internal objectives. The process of collaboration and product design is lengthy and intensive, involving workshops, smaller face to face meetings, product proposal, (to solve a specific pain point in the trade cycle) ‘proof of concept ‘and finally production. While a ‘proof of concept’ may initially seem straightforward it can so often prove technologically challenging.
A key question for banks and corporates considering joining a consortium is what should their criteria for joining be? The most important factors will be: a) what is their most pressing ‘pain point,’ i.e. what is the one part of trade finance that most needs fixing; b) what is the structure of the consortium and who is the technology provider behind it and c) what is the consortium’s geographical focus? The choice of technology provider can be critical, especially if the bank or corporate is intending to join another consortium which has a different vendor. Will the products of both vendors be compatible?
In addition to that, they need to consider how advanced is their digitalisation programme, and whether their prospective consortium runs workshops for banks or corporates that are not as advanced as they need to be in order to benefit from membership. At least one consortium even has different types of membership tailored to members’ different levels of digitalisation.
Interoperability between the consortia is recognised as a key issue for the future. “We need to offer seamless customer experience to our clients. Therefore, we need to prevent creating new islands within the Trade ecosystem that are, in the end, incapable of communicating with each other,” according to Achraf Abourida. To deal with this challenge the Universal Trade Network (UTN) was set up about a year ago. The UTN brings together the major consortia, all the banks involved and the major industry bodies to create a forum for standards-based interoperability between the various consortia. One issue that it will have to consider, according to Oliver Belin, Chief Marketing Officer at Tradeix, is that “different blockchain protocols cannot currently share data, and even within protocols it is not always easy to communicate information.” He adds: “This is problematic because it involves so many parties across the globe. If you really want to have a significant degree of networking volume, and you really want to make that change, then you need to be able to do that.” The UTN is not yet a stand-alone legal entity, but it is expected to be in the near future.
Blockchain technology could add another US$1tn to world trade, according to the global management consultancy Bain & Co. Its proponents, especially the blockchain consortia, argue that it will be more far reaching than that, because for the first time it will put the cost of cross-border trade for SMEs and the big corporates almost on a level footing. As David Sutter points out: “Technology is the only thing that will allow you to do more with less. With blockchain you make the on-boarding and integration of data much more efficient, and by enabling the automation of financing decisions based on that data, you suck out all the manual processing and cost of servicing SMEs’ trade finance.”
If all these hopes are realised, blockchain consortia will make a dramatic difference to the growth and operation of global trade and receivables finance, making access easier, potentially cheaper, and faster. And all this at time when global trade is forecast to increase significantly. One to keep a close eye on.
People quoted in this article will be speaking at BCR’s conference Consortia: creating frictionless trade on May 21-22 will explore the many facets of blockchain consortia, with speakers from leaders of the industry.