Blockchain holds considerable promise, but all too often it fails to find sustainable use cases. Trade finance is one significant exception. This traditional revenue source for banks is ready for disruption. A whole new approach, informed by blockchain logic, could bring the very transformation an established yet restricted business is crying out for.
The trade finance scene today, if compared with an automobile factory, is producing Bugattis: ultra-high-end, high-spec machines that require a great deal of labour-intensive effort. And the market for Bugattis, even if lucrative, is strictly limited. Meanwhile, there is another, much bigger, market out there. Tens of thousands of customers would buy something that was closer to a VW Golf: high quality, reliable but with a much, much more accessible price point. The problem is that the “factory” is inflexible in its current configuration. It can only make Bugattis and would produce the Golf at a ruinous loss. What to do?
An actual automobile plant would plan a move to a whole new production platform. One that would simplify process, adopt new workflows and manufacturing techniques, and handle much higher volumes of output. Yes, the margins on each new unit would be lower. But production costs would be lower too. And the sales volumes accessed in new markets would be orders of magnitude higher. In the end, offering a product much better suited to the realities of the modern market would make more money. Can the same logic and practices be carried over to the trade finance market? Yes they can. But only if and when three pre-conditions are met:
How can they meet these pre-conditions and start to reap the rewards of trade finance transformation? The commercial decision around margins will be for each institution to assess. But no bank can afford to dismiss “democratisation” of their service out of hand, if they are serious about breaking out of the current limitations. The second two points are more practical.
Placing the end-to-end trade finance process on a new platform would have a very clear objective: to offer all exporters and importers fast and easy access to credit issuance and advisory services. This is a radical shift but it is within reach. An open, automated and transparent trade finance platform, that replaces cumbersome trust mechanisms with automatic checks and assurances, is a technical possibility right now.
Today, “classical” trade finance relies on a whole series of complex and disparate checks to ensure trustworthiness. Even with these in place, fraud is still a real possibility. And banks can be exposed to substantial risk. Blockchain is a perfect candidate approach for assuring a business critical sequence of events that minimise risk. For example, a network of multiple nodes, respecting pre-determined business logic, while eliminating any scope for tampering. This, surely, is an accurate top line description of the trade finance environment. And a blockchain underwritten “shared truth” environment is a technical possibility today.
Transformation won’t arrive overnight. But the blockchain technology that enables it, cannot be overlooked. Banks themselves are currently best placed to lead their own transformation, from the front. But if they don’t engage, there’s little doubt that innovators and disruptors from “outside” will intervene. Many established banks are already assessing the potential of blockchain, but they need to move fast. Unless they seize the nettle, they risk being badly stung.
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André Brunner is a Partner leading the Capital Markets practice at Capco Switzerland. He has over a decade of investment banking and asset management experience gained through industry and management consulting roles, leading projects for major financial services providers. André’s main areas of expertise lie within the delivery of large scale IT platforms and the transition of related business processes.
Nourdine Abderrahmane is a Principal Consultant at Capco. He has multiple years of experience within retail, private and investment banking, and substantial knowledge of capital markets products. He is an expert on trade lifecycle processes, such as financial accounting, risk management, P&L reporting, settlement processes and corporate actions.
Arjun Muralidharan is a Senior Consultant at Capco with a background in business innovation and more than eight years of experience in managing projects and teams. He specialises in fintech, functional architecture, project management, design thinking and digital innovation. Arjun currently leads Capco's blockchain campaign in Switzerland.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.