Trade Finance Global says trade finance accounts for 3% of global trade, valuing some USD 3 tln annually. How do banks and trade finance consortia encourage both competition and expansion in the trade finance market?
The trade finance industry characterises itself by a great need for collaboration, and requires interoperability between thousands of banks in hundreds of countries. For instance, Rabobank participates together with tens of other European banks in two blockchain consortia: we.trade for trade finance, and Komgo for trade commodity finance. These two initiatives try to kickstart a new age of trade finance, enabled by blockchain technology, to facilitate more speed, comfort and ease of use in daily trade finance transactions. As there are no more documents in play, comfort and speed are increasing. Next to this, trades can be programmed that payments are executed the moment the goods arrive, facilitating an even faster process with less manual steps. The end goal of our efforts is to facilitate more trade for our customers, to help them grow internationally.
When it comes to export, ‘access to trade funding’ was cited as the second-largest obstacle in 2016 by the World Economic Forum. How did we.trade work to overcome this hurdle? What are some lessons learned from a bank’s perspective after joining the trade finance network?
The we.trade platform connects the buyer, seller, and the banks of the buyer and seller. Customers can find their counterparts via the we.trade platform and register their trades with them. The banks can offer payment guarantees or financing options for this trade. The we.trade platform ultimately provides transparency in trade agreements, trade statuses and counterparts, which enables banks to offer a better risk assessment. In summary, we can more easily answer the question: ‘what are the chances that this trade goes wrong?’ Through this transparency, banks can finance more trades, and thereby increasingly overcome the hurdle of ‘access to trade funding.’
Parm Sangha, GBS Blockchain Leader, IBM has stated that we.trade has proved the power of blockchain in an enterprise setting. What is your take on this? Does blockchain still need to convince the sceptics of its efficiency in cross-border payments?
Blockchain is a shared, non-manipulable administration and enables companies to work better together. Through the blockchain technology underneath we.trade, the participating banks can collaborate to facilitate a trade deal for their customers. On the platform, customers enter in a trade agreement, while their banks sign off on payments guarantees and financing.
The blockchain smart contracts provide assurance that everything follows the right processes and payments are executed according to the right conditions. Blockchain is a relatively young technology, and with advancing technological developments and rising adoption, we expect it to have a great role in connecting enterprises to collaborate more efficiently.
One of the advantages promoted by the we.trade platform is that invoice settlement is automatically triggered by smart contracts, though payments go via SWIFT or SEPA, and not blockchain. How does technology advancement couple with banking infrastructure legacy in the context of current trade finance?
Quite easily, actually. Each bank integrated the we.trade platform to its own proprietary payment system. If the we.trade platform signals that the payment conditions for a trade have been met, it will send a message to the buyers’ bank that the payment can be initiated according to the agreement. The we.trade blockchain platform does not facilitate payments yet. Digital payments have stricter technological and regulatory requirements, and the blockchain technology is not ready yet to facilitate this.
As the EBA made clear in 2018 that emerging tech still faces potential risks as applicable law remains uncertain at the moment, how does we.trade mitigate regulatory differences across the EU and what do you see happening with DLT in trade finance in terms of regulatory frameworks?
The we.trade platform needed approvals from several central banks in European countries. we.trade has created a rulebook where all banks have to apply to. This was created by all participating banks with a UK law firm to iron out all the details. Banks participating in we.trade are also participating in ICC work groups to bring our rulebook to a new international standard.
Currently, we.trade can be used within 11 member states of the European Union. In 2018, you estimated the platform will be expanded to cover Eastern Europe and Asia in 2019. What can you tell us about the progress so far, the market strategy and the tech innovation that we.trade is basing the growth on?
We.trade is currently being rolled out by all participating banks in the European Union, and customer pairs of these banks are already using the platform. Next to making sure that every bank and its customers are well connected, we will expand the platform in terms of functionality and participating banks. Recently, we successfully experimented with connecting the European we.trade platform with the Hong Kong eTradeConnect platform. This gave us insight into how we can make two blockchain platforms interoperable, and the first results are very promising.
This editorial was first published in the B2B Payments and Fintech Guide 2019 - Innovations in the Way Businesses Transact, which offers insightful editorials and use-case analyses on how to envision a proper regulatory and technological framework for safe and effective cross-border and instant B2B payments.
About Chris Huls
Chris Huls is Lead Tech Labs at Rabobank Netherlands. Being educated as a Business Information Technologist at the University of Twente, he started working at Rabobank as a blockchain specialist. Currently Chris holds the position of Lead Tech Labs, and is responsible for exploring emerging technologies and taking care of the adoption of these technologies.
About Rabobank
Rabobank is an international financial services provider operating on the basis of cooperative principles. It offers retail banking, wholesale banking, private banking, leasing and real estate services. As a cooperative bank, Rabobank puts customers’ interests first in its services and is committed to being a leading customer-focused cooperative bank in the Netherlands and a leading food and agri bank worldwide. Rabobank Group is active in 40 countries.
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