Blockchain was the talk of Sibos 2014 in Boston, and the movement toward distributed ledger technology (DLT) was off and running. As Sibos 2018 opens in Sydney, application programming interfaces (API) and open banking will be high on the agenda alongside blockchain, showing once again that the technology continues to gather momentum.
Over the last four years, many blockchain proofs of concept have emerged, but as yet, few global industrialized banking functions using DLT have emerged. During this time, Bitcoin, which introduced blockchain to the world, has yet to be hacked (though several Bitcoin exchanges have). With cybercrime rivaling drug trafficking as a major criminal activity, the inherent security of DLT is a powerful incentive for its adoption. Cybercrime is a major threat to the banking industry and thrives on manual, paper processes that are supported by legacy systems not built to withstand the rise of cybercrime.
DLT could offer great advantages to trade finance, an area targeted by many financial institutions. Why the bull’s-eye? Supply chain finance is a growth market, one that’s expected to increase in size by 15% in the coming years. And yet, recent CrowdStrike report reveals that supply chain attacks have increased as cybercriminals focus on exploiting weak links; the average cost of an attack is estimated at more than $1.1 million.
The rising demand for trade finance services is being driven by a shortage of working capital across the global supply chain. Current processes rely heavily on messaging between many parties, and there’s a lack of interoperability between partner systems, which stifles liquidity. For example, most banks’ core bank accounts, trade ledgers and invoice finance systems operate as standalone business units. This is frustrating for both corporate clients and the bank’s own relationship managers attempting to manage working capital.
A New, Open Approach to Payments
By using open banking built on API interoperability, organizations can bridge the gap by collecting the data elements needed and presenting an accurate working capital picture for all connected on a blockchain network to see. The transparency provided by DLT (i.e., the removal of the gatekeeping central authority) can eliminate the potential of double exposure of the bank to a corporate that is using a number of working capital components – i.e., a letter of credit (180 days) – and adding further credit through import loans (100 days) and invoice finance (120 days) for the same trade.
The need to improve liquidity, where the buyer wants the longest time to pay an invoice (90 days) and the seller seeks the shortest time (30 days or less) is becoming critical. The UK government is looking to enact laws to increase liquidity by enforcing a payment schedule of five days for small and medium-size enterprises (SME). Currently, £266 billion of SME turnover is locked up in late payments of 30 days or more – equivalent to 15% of the average annual turnover.
The real-time payments capability is here. The UK has led the way with Faster Payments, the fastest growing payment channel in the UK, and now there are more than 40 countries with projects underway. SWIFT’s global payments innovation (gpi) enables international payments to be paid more quickly and transparently, by tracking them end-to-end through a cloud-based service and an API. The old adage “the check is in the mail” from the buyer can be changed to “zap it to me now” by the seller.
Paving the Way to a New Future for Trade Finance
Secure payments made in real time using new technologies are coming of age. The next step is to join these payment flows to the trade finance supply chain and working capital, which is promised via the arrival of DLT “bank clubs” such as Marco Polo and we.trade.
Trade finance is complex, with many moving parts and often with many different suppliers. New technologies can improve the situation, but to get the greatest benefit in the shortest time, the best approach is to break the modernization of trade into pieces. Working capital can be one piece, the flow of documents another, and an ecosystem including insurance and logistic companies a third. The glue between them can be secure APIs, and DLTs can supply the security.
Join us at Sibos, Oct. 22-25, in Sydney, Australia. You can visit us at Stand K19, and attend James Burrows’ session, Post-Trade. Optimized. Simplified. on Oct. 25, 10:45 – 11:15 am, Level 1A, Open Theatre 1. We look forward to seeing you there!