Blockchain-based solutions have only just begun to launch in the financial services market, but considering the volume of interest in deploying blockchain tools to address the massive $1.5 trillion trade finance gap, it appears as if the niche could quickly become saturated with distributed ledger technology (DLT). Companies using DLT to facilitate trade finance are going to have to differentiate themselves from the competition — fast.
That’s particularly true for smaller FinTech firms, which — while they have been met with rising interest from large financial institutions (FIs) to collaborate on blockchain solutions — are still going to have to compete with those FIs as the banks deploy their projects. Earlier this year, HSBC announced it completed its first trade finance transaction using blockchain technology, while we.trade‘s blockchain supply chain solution went live earlier this month in collaboration with nine banks across Europe, including HSBC.
Emerging from pilot and introducing a working solution to the market is no longer enough to capture banks’ attention, though. So, how can industry players stand out from the crowd?
According to Rammohan Prabhakar, founder and CEO of Canada’s Citrusxchange, these tools have to prove their return on investment (ROI) to banks, have a global presence and demonstrate reduced friction for trading businesses. The company has recently launched Kwikxchange, a blockchain-powered platform to facilitate small and medium businesses’ (SMBs) access to supply chain and invoice financing. Though the solution is business-facing, the tool can only work with the participation of lenders. So far, Prabhakar said that FIs’ reaction to the tool has varied.
“The response has been mixed, and very country-specific,” he told PYMNTS.
There are many banks that have invested significantly in blockchain already, and Prabhakar said he predicts that rollouts of more blockchain tools connected to banks will accelerate toward the end of the year and into next. Smaller banks, too, are quickly embracing the technology in an effort to reduce administrative costs, he said. However, bank participation requires a bit of convincing for the developers of solutions that are not already part of a bank’s internal R&D efforts.
“Once a clear ROI emerges and benchmarks are set, larger banks will follow,” said Prabhakar. “With new deployments and POCs, the banking industry has started to understand the value of blockchain, and apprehension is facing away.”
Kwikxchange’s strategy includes setting up shop in places with the biggest market needs. The company plans to expand into India, Kenya, Indonesia and the UAE. According to the company, citing World Bank data, the East Asia and Pacific regions of the world have the highest rate of micro, small and medium enterprises (MSMEs) — both formal and informal — facing a trade credit gap, followed by South Asia and Sub-Saharan Africa.
“We are seeing new financing options emerge in developing and high interest rate countries with partnership and refinancing models,” explained Prabhakar. Lenders in these regions are eager to have a transparent view of their borrowers, and need transaction-level data for SMBs, he added.
There may be a major trade funding gap across the globe today, but unless it’s profitable, lenders aren’t going to fill it. Prabhakar said he’s seen traditional banks find value in shifting from paper-based to electronic financing, which has also led to increased access to valuable data. The management and movement of that information is becoming cheaper, too, thanks to the rising adoption of API technology.
Data, Prabhakar explained, is at the heart of trade finance. As such, it’s at the heart of banks’ adoption of trade finance solutions.
“Movement of data, and use of APIs to aggregate and preset data in a structured manner, is a crucial part of any supply chain,” he said. “For example, verification of goods moved and invoices certified from government tax sources increase the credibility of the borrower, and will result in an invoice being considered a verified asset.”
Digitization of supply chains are empowering parties with more data, too. Rising Internet of Things (IoT) adoption in the logistics space, for instance, means real-time tracking of goods as they move from point A to point B — that’s good news for trading partners, but it’s also valuable to lenders, Prabhakar said.
Blockchain’s role in increasing access to data to facilitate trade finance still remains uncertain, but for the companies that have already deployed — or are about to deploy — working solutions, confidence is high for bank adoption. With more solutions slowly making their way to the market, the winners and losers of blockchain in trade finance will reveal themselves. One thing is for sure, however: with the massive trade finance gap enduring, the friction currently plaguing the SMB trade finance space needs fixing.
“Supply chain financing comes with its own set of challenges,” said Prabhakar, adding that the buyers’ bank dictates costs and interest rates, leaving no room for negotiation. “There is a lack of transparency in transactions, resulting in a lack of trust between parties, resulting in the inability of the buyers to improve cash flows for their upstream supply chain.”
Visibility into data of trading partners, financing options, shipping progress and other elements of global supply chains will be key for lenders to fill the trade finance gap. Whether blockchain is the tool to provide that visibility remains to be seen.