While there is not nearly enough trade finance to plug the US$1.5trn annual gap, technology could be the answer to unlocking bank liquidity. Flow reports on Deutsche Bank’s progress so far
At the ICC Banking Commission annual meeting in Jakarta five months ago, delegates agreed with chair Daniel Schmand (also Deutsche Bank’s Global Head of Trade Finance) that “we are on the verge of a the digital revolution in trade finance.”
Such an inflection point presents a unique opportunity to do something about the level of unmet demand for trade finance – currently estimated at more than US$1.5trn annually at a time when banks continue to face capacity constraints in plugging the gap and fintech firms are actively looking to apply innovative solutions to trade financing.
In addition, client demand is being shaped by new technologies and business models – for example some have built 3D printing factories, rolled out Internet of Things and cloud-based platforms as a service, and started to extend their value chains.
Less paper, more efficiency
The 2017 ICC Banking Commission report, Rethinking Trade and Finance notes that the elimination of paper from trade finance transaction processing could reduce processing time by two hours per transaction and reduce compliance costs by 30%.
Already since the ICC Banking Commission’s task force in 2000 had identified the need for a greater focus on electronic trade, the industry has been exploring how new emerging technology and the digital opportunities can benefit from a transformation.
Why? The dependence of trade finance on a paper environment while logistics such as container shipping have electronic architectures, is holding back trade – given than more than 80% of it is financed by some form of credit, the industry has a responsibility to sort out a solution.
Established technologies include the electronic version of the Uniform Customs and Practice (UCP) Documentary Credits rule set in the form of eUCP600. While the technology is agnostic to ensure as wide a reach as possible, more needs to be done on connecting up the different stages of digital trade finance – this means working with other parts of the supply chain such as customs authorities and ports so that all information goes into a cloud that has a critical mass of users and is trusted. Some good work has already got underway with the electronic bill of lading (eBL) but that is just one part of the transaction journey.
Changing the game
In an interview with Helen Sanders of Treasury Management International (TMI), Schmand explains how distributed ledger technology “is one of a number of technologies that we assume has the potential to reduce the cost of trade finance provision and for this reason the banking industry is supporting its development in pilots and proofs of concept”.
DLT, he says, “can provide auditable data, digital synchronisation by design, and is considered secure and tamper proof. It offers the opportunity to connect participants with real time access to monitor and manage transaction flows using ‘smart’ contracts that give oversight and control over trade guarantees.
This means many of the issues and challenges associated with the physical storage, update, transportation and submission of key documents could be eliminated as DLT makes possible new levels of efficiency, transparency simplicity, and security to the often cumbersome and paper-heavy manual processes companies have to undertake after buyers have agreed to purchase goods and a suppliers delivered these to them.
He adds that Deutsche Bank believes the full power of DLT is in a “convergence of technologies” e.g. when DLT is combined with the internet of things or artificial intelligence. Imagine a container that could self-monitor its routing and when realising a potential late arriving or conflict link up to the internet, research alternative routing ensure shipment in time and avoid production delay – and in addition and fully automatic transfer of related payments and transaction flows.
Progress so far
Deutsche Bank is running a set of initiatives across the bank to explore the potential of emerging technologies and the impact they could have on our and our clients’ business. Internally, we are focused on understanding and validating implications on our core products and where we expect the highest client demand in line with our business model.
Our innovation centres, the Deutsche Bank Labs are the docking station to bring new technology into the bank. They are the eyes and ears into the innovation ecosystem and provide connectivity to start-ups into Deutsche Bank.
Externally the bank collaborates with other market participants and fintechs such as R3 to test practical proposals and obtain an understanding of which market structure implications (such as the adoption of DLT) could have. We see fintechs as clients, partners and competitors alike. Success is based on understanding what (both) parties can offer when looking to bring new innovative solutions to the market.
We also form targeted partnerships on a smaller scale such as the Utility Settlement Coin (USC) project which focuses on the exploration of the potential of new digital concepts such as e.g. ‘digital cash’ (FIAT currency delivered via DLT). While not central bank money, the USC has many of those properties and while not a new currency in its own right, is a digital representation of paired currencies and asset backed with real-world cash at a central bank (Central Bank Digital Currency).
In April 2017 the bank announced the acquisition of 12.5% share interest in the receivables auction platform TrustBills, an electronic true sale market place for national and international trade receivables. Based on a digital auction platform, TrustBills offers a fast and easy to operate digital auction platform for trade receivables and enables investors and asset managers to directly access the asset class without prior securitisation. So while this is not DLT it is an example of how technology is being deployed to broaden access to liquidity from investors.
We also have joined a Blockchain consortium where together with HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit we collaborate on the development and commercialisation of a new product called Digital Trade Chain (DTC) based on a prototype solution originated by Belgium-based KBC and tested to ‘Proof of Concept’ stage.
DTC aims to simplify domestic as well cross-border commerce for SMEs by leveraging Blockchain/distributed ledger technology. It will enable authorised SME clients to initiate transactions on a paperless and secure basis, and track the transaction at each stage of the transaction lifecycle, through to the point of settlement/payment - online and via mobile devices
Making it all happen
The leap from proofs of concept and pilots to going live is always tough in a climate where there is increased scrutiny on risk, and the challenge is, as always, being innovative while managing risk. The following obstacles to commercialisation were set out in Schmand’s interview with TMI:
- Standardisation and Interoperability: Standardised data and file formats, data exchange and security protocols etc., Integration with legacy systems, including digitalisation to ensure effective (backward) integration of local systems and processes
- Scaling: Real time processing of high volumes across multiple systems in different locations – the distributed ledger - including real time clearing and settlement, Financial viability for a critical mass of stakeholders
- Regulation: Acceptance and approval from local and regional regulators and central banks, Compliance with multiple KYC, Anti Money Laundering, sanctions, embargoes and tax reporting requirements
- Security: Secure, controlled access to data, including tailored data access privileges
Even if the technology is viable, significant collaboration is required across multiple stakeholders before solutions can be deployed in scale. This will take time.
Solutions to overcome the obstacles take the form of different approaches that need to be run in parallel:
- Active and regular engagements with central banks and regulators.
- Leverage ICC Banking Commission and other trade organisations to create standards that allow for easier adoption, ICC Banking Commission rules will evolve under the aegis of the Digitalisation Working Group to ensure there is a framework in place that everyone has confidence in, There is a momentum and a will to digitise trade and supply chains and the work that has been done by the banking sector with SWIFT on payments in the form of gpi is an example of how an end-to-end transaction could look. But while gpi simply involves counterparty banks and possibly an API, the moving parts in trade are more complex. It is our responsibility at the ICC Banking Commission to bring these together.
- Engage in consortia not only cross industry but also across other industries in order to create solutions fit for purpose.
- Ensure that stringent testing is executed in order to create trust in new technologies and also ensure that there is an interoperability not only between DLTs but also with legacy systems
Daniel Schmand’s comments appeared in an article entitled “Waking the Sleeping Giant” by Helen Sanders, Editor of TMI (Issue 253, August 2017)
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