Can you please elaborate on the importance of blockchain in trade finance?

Global trade is heavily reliant on financial institutions to provide trade and receivable finance products and services to support both buyers and sellers with trade cycle funding as well as delivery and payment assurance.  Between 80 and 90 per cent of global trade transactions rely on trade finance. ¹

Historically, trade finance involved complex processing and a large volume of physical documentation flow. Banks are looking for opportunities to address a number of critical pain points associated with trade finance with the objectives to:
•Improve visibility of the end-to-end process;
•Increase speed of information flow through digitisation of physical documentation; and
•Simplify access to trade finance products.

We believe that use of blockchain based technology can provide these benefits and as a result reduce barriers to international trade and support growth.

Blockchain based technology are databases distributed across many users that utilise a sequence of blocks, which contain transaction details, to keep track of transactions between users. The information in these blocks is shared using cryptography with everyone in the network so that it can’t be tampered with.

Private blockchain technology, used in trade finance, allows transaction information to be shared with relevant parties only, enhancing the privacy standard as required. Based on the we.trade platform experience, we have already demonstrated that blockchain based technology is a commercially and operationally viable solution to trade digitisation.

How will blockchain technology such as we.trade, impact some of the business processes associated with trade finance?

we.trade is a private blockchain platform that seamlessly connects buyers, sellers and their respective banks, providing a single source of information which is visible in real-time and on a need-to-know basis to each participant of each transaction. It aims to makes cross-border and domestic open account²  trade transactions fully digitised, easier to manager and faster to execute.

We have already completed multiple trade transactions using the we.trade platform, where our clients were able to create purchase orders, confirm shipment of goods, raise invoices and confirm that agreed settlement conditions have been met, the buyer’s banks have also undertaken the auto-settlement on the payment due date, all on a paperless basis and on a single platform.

Additionally, the platform allows access to unique digitised bank products, such as Bank Payment Undertaking (BPU), available from the buyer’s bank, providing assurance to the seller that a payment will be executed on a due date, once all settlement conditions have been met and BPU Financing, available from the seller’s bank, providing financing to the seller if a BPU has been issued by the buyer’s bank for the benefit of the seller.

There are clear benefits for buyers, sellers and their banks from using the we.trade platform as it significantly improves the speed of open account transaction processing, by eliminating any paper documentation. It also increases the visibility of the end-to-end transaction by tracking its status real time, thus improving the trust between the buyers and sellers.

We aim to create an ecosystem that connects all parties involved in the trade transaction, including regulators and governments, logistics providers, insurers, etc. as well as to expand the reach beyond the current consortium of nine banks³ thus allowing trade transactions to be completed via a single platform. Growing the network is critical to our success and we would welcome large and small banks alike to join the platform.

Could you please explain how blockchain fits into the current banking landscape?

We can evidence an increased interest and investment into blockchain based technology across various financial services areas.  We’re not talking about crypto currencies, rather looking into the private permission based blockchain technologies. For example, insurance companies are looking to utilise the smart contract functionality to improve risk modelling and reduce fraudulent claims. At the same time, investment banks are exploring the opportunities for post-trade clearing and settlement process improvements as it currently requires manual reconciliations. There is also a plethora of practical use cases for blockchain based technology to be utilised for customer verification and identification, payment processing, syndicated loans, etc. Various consortiums are being created by many different banks and financial institutions. If these initiatives prove to be successful, we will see the industry reshaping the way it currently works.

However, the lion’s share of these consortia are being formed and adopted within the trade finance space as the processes are complex, cumbersome and slow, therefore widely adopting blockchain based technological solutions, can dramatically change and simplify all aspect of global trade and supply chain. For example, HSBC has invested in a number of trade finance related platforms where each of them addresses a different part of the puzzle. we.trade deals with open account trade transactions, whereas the platform we are working on with R3 and eleven other banks deals with digitised Letter of Credit transactions. These platforms can provide complementary services. We expect there to be some convergence over time, but during the rapid growth phase we expect banks will need to support several platforms.

What is your future vision for blockchain in trade finance?

Blockchain is maturing rapidly and we’re already seeing that it has great potential to support a secure global network, that doesn’t include some of the data-risks seen from past centralised database breaches. There is likely to be multiple networks launching over the next few years, and large institutions will need to be members of several networks to support their customer base. The industry will also need to explore the concept of connecting various decentralised networks so they can generate greater value for all parties involved in trade transactions but most importantly the buyers and sellers. For the majority of exporters, importers and others involved in the wider trade ecosystem the change can’t come soon enough but we expect it to take 5-10 years for this technology to be adopted at scale. 

What would you like to achieve by attending the Digitalising Trade, Commodity and Supply Chain Finance?

As we are seeing an increased number of digitised trade finance use cases being developed, trialled and launched by various market players, it is very important for us to share the experience and learn from one another to stay on top of the game. At the same time, I believe that this event will allow us to deepen our understanding about how our clients would like see the development trajectory of technology and innovative solutions to better address their needs. This will help HSBC to ensure we provide relevant and value added solutions to our clients.

¹ World Trade Organisation, Work with other international organizations, Trade finance
 https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm 
² Open account trade transaction is a sale where the goods are shipped and delivered before payment is due.
³ we.trade Innovation DAC is a joint-venture company incorporated in Ireland with its own operations established by HSBC, Deutsche Bank, KBC, Natixis, Nordea, Rabobank, Santander, Societe Generale and UniCredit.