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Bank of America Merrill Lynch taps into the potential of blockchain for trade finance

Friday 4 March 2016 | 10:14 AM CET

The corporate and investment banking division of Bank of America, Bank of America Merrill Lynch (BofAML), has reportedly started a blockchain-based pilot for trade finance transactions.

The pilot is being developed with another, unnamed bank for possible testing later this year, according to the head of BofAML innovation for global transaction services, Jason Tiede (quoted by

To put things into perspective, the World Trade Organization (WTO) estimates that approximately 80 to 90 % of world trade relies on trade finance, while private banks account for approximately 80 % of the trade finance market. Hence, banks play a critical role in international trade by providing trade finance products that reduce risk.

What’s more, an independent report by the Boston Consulting Group shows that trade finance revenue for banks make about USD 45 billion globally in 2014. The United States Department of Commerce estimates that the direct and indirect costs of trade financing that a US company would have to pay to import goods valued at USD 1 million from overseas - on a cost, insurance, and freight basis - is USD 43,568.

A separate report by Accenture explained that trade finance has proven to be a recurrent and interest rate independent source of revenue for banks, with the added benefit of low default rates, “up to 10 times lower than for traditional corporate lending.” For instance, for a USD 1 in trade finance fees can bring an additional USD 1.70 in foreign exchange and cross-border payment fees, and another USD 2.25 in other transactional banking revenue. Not only is trade finance lucrative, but it also help banks build lasting and profitable relationships with their corporate clients.

Therefore, to reduce costs and increase efficiency, corporates are increasingly replacing paper document flows with digital data flows. Bank Payment Obligation (BPO), a collaboration between SWIFT and the International Chamber of Commerce (ICC) is one tool that provides an alternative means of settlement in international trade, in a fully digital way, therefore improving speed, flexibility and reduced complexity. However, according to Boston Consulting Group only 20 banks were offering BPO as of October 2015, including just six of the top 15 trade banks.

Bank of America is one of the three banks in the North America testing BPO on the SWIFTNet Trade Services Utility (TSU) platform, although the Director and senior product manager in Global Trade and Supply Chain Finance, Paul Johnson, has stated that the bank's adoption of BPO has been slow.

In addition to starting this trade finance blockchain project, Bank of America is also part of the R3 CEV consortium. In recent news, the consortium has completed a trial of five different blockchain solutions. Forty banks took part, drawn from the collection of banks that have thrown their support behind the R3-led consortium. A number of those banks have launched trials of their own in addition to the work conducted as part of R3.

The new BofAML trade finance project is not related to their involvement with R3.

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