B2B Payments

Trade Finance To Fuel Blockchain’s Rise This Year, Says IBM

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With so many consortia and internal development teams in play, it’s difficult to assess global banks’ progress on blockchain. But analysts assure progress is being made.

Last year, IBM released surveys of 400 financial institutions across the globe to examine exactly how they’re positioned in their journey to develop and release real-world, working blockchain tools. According to the data, adoption rates are “dramatically faster than initially expected,” IBM said when it announced the reports in September 2016.

Researchers at the time found 15 percent of banks expect to have a working blockchain-based solution up and running by the end of this year.

One of them is Japanese bank Mizuho. The FI recently announced with IBM that its new trade finance platform — powered by blockchain — will launch later this year. It’s a portal not just for B2B traders, but for all of the stakeholders that go along with them: shippers and logistics providers, insurance firms, port authorities, other financial institutions and more.

And, according to IBM’s James Wallis, VP Blockchain, the platform demonstrates how blockchain can enable more than just the transfer of money between businesses.

“Trade finance is one of the most popular use cases [for blockchain],” he told PYMNTS. “And there’s a good reason for that. Trade finance is a very inefficient process. Even if you look at trade overall, the shipping of goods and financing around it, it’s a very manual process, and there are a lot of errors.”

As Wallis noted, trade finance has earned the focus of blockchain developers; it’s no secret the area needs some help. Last year, IBM rival Microsoft struck a partnership with Bank of America to explore how blockchain could disrupt trade finance at a time when other key players, including Barclays, UBS and the Euro Banking Association had all begun to take on the blockchain use-case of trade finance too.

Part of the friction stems from the heavy dependence on paper, he noted. When two businesses conduct trade, every action from logistics to customs and payments must be documented. The letter of credit is, in particular, a document plagued by clumsy processes. The document is issued by an importer’s bank to send to an exporter and essentially assure that supplier it will get paid once terms of the trade have been met.

Efforts to improve the letter of credit can be traced back for years. In 2015, American Express published a white paper declaring that the global trade industry must improve the transfer of funds and information between businesses working internationally.

“There is no question that businesses are moving away from traditional methods of transferring currency and toward modern alternatives,” American Express wrote. “A clear and marked decrease in the use of letters of credit and an increase in corporate FX providers is evident — for good reasons: ease of use, speed and lower cost.”

But what explorers of blockchain are looking to do is inject that ease of use, speed and lower cost into the existing process of sending letters of credit, on which many globally trading businesses depend to get paid.

“If you break trade finance down, the one area that seems to be the most popular [for disruption] is the letter of credit,” confirmed Wallis. “There are all sorts of issues with the current process. Sometimes it’s double-sent, sometimes the exporter can’t get paid.”

He pointed to a common problem in which perishable items like products are left at the port because some error has been made on the letter of credit or in its hand-off process. But there are other ways physical documents get in the way of the global B2B trade and payments process, he said. Every transaction between logistics providers and shippers and the like includes some kind of document, and all of that paper requires manual processing — a task that can be quite expensive for everyone involved, said Wallis.

Amid the confusion and the work burden, there is also a lack of transparency across players in a trade deal to understand who has what information. Blockchain may be the key to illuminating this process for everyone involved, digitizing documents and enabling businesses to pay and get paid faster, explained Wallis.

“My vision here is that, through leveraging blockchain technology in the trade and trade finance space, exporters will get paid more quickly and that money will get used to reinvest,” he said. “Importers will be confident of when they will get receive the goods. It really is a win-win, and I think there is a macroeconomic benefit as well, helping exporters and importers in running more efficiently. There’s a bigger picture.”

Mizuho’s new platform is slated for launch this June, meaning the FI would be among the first with a working blockchain-based solution. But IBM is expecting more to come out — and trade finance will undoubtedly hold a strong presence with these new solutions. According to the company’s 2016 survey, 80 percent of banks cited trade finance, corporate lending and reference data as holding the greatest potential for seeing new business models emerge as a direct result of blockchain.

Japan, especially, has been one of the strongest explorers of the technology, Wallis noted. And as a nation that stands as a prominent global hub in the cross-border trade sphere, it’s no wonder Japan will likely see many of the initial blockchain-based trade finance solutions IBM predicts will surface this year.

“2017, I think, is the year that things will start to happen,” Wallis said.

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Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out the February 2019 PYMNTS Digital Fraud Tracker Report

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