After a reluctant start, the trade finance industry is beginning to open its eyes to the opportunities offered by fintech. Increasing numbers of institutions are announcing partnerships, consortiums, hackathons and accelerator programmes. Aleya Begum highlights some key initiatives.
The trade ﬁnance industry is often referred to as being old and traditional. On the one hand, that denotes established, experienced and quality institutions, but on the other hand it can also mean resistance to change. Despite a reluctant start, the sector now appears to be opening up to innovation.
A wave of announcements have recently been made, with partnerships and collaborations declared and various “industry ﬁrsts” claimed. One clear distinction from the old way of doing things is a new-found willingness to work with external innovation. The days of legacy systems and silos of proprietary data are increasingly challenged by both regulators and disruptors, pushing organisations to adopt more collaborative and standardised approaches.
“It’s almost like the perfect storm – you’ve got regulatory drivers that are pushing banks to better understand what their exposure to risk is and holding senior individuals personally accountable. But you can’t do that easily with legacy systems in silos. You need more agile globally systemic perspectives and this is leading to great disruption,” Bill Blythe, business development director at transaction processing software provider Gresham, tells GTR.
Gresham started out six years ago, and as a slightly more mature start-up, the company has been around long enough to witness the change in attitude from banks.
As an industry that is weighed down by paper, trade ﬁnance is often described as highly inefﬁcient and open to risk and fraud. Replacing paper processes with digitalised operations has been the focus of the latest round of innovation. While e-documentation has been on the agenda for a while, the use of distributed ledger technology (DLT), more famously known as blockchain, has captured the limelight over the last year.
“There is a huge opportunity [for innovation] within trade ﬁnance and a lot of it is around shipping [documentation],” says Lawrence Wintermeyer, CEO of ﬁntech advocate group Innovate Finance. “Ultimately, if you can get all counterparties onto a distributed ledger, you digitise the liquidity and the ﬁnance that’s embedded in the transaction.”
More recently, some in the industry have also publicised exploratory work on how the internet of things (IoT) can be adopted in the sector – namely how the use of sensors and trackers that communicate data on the physical location and conditions of goods and commodities can be deployed along the supply chain – offering more transparency and thus potentially reducing the risk and fraud.
“On the trade front, there are fascinating possibilities around IoT and combining it with blockchain technology,” says the head of Standard Chartered’s eXellerator lab, Phil Gray. “With 28 billion devices forecast to be connected by 2020 this is an area we have started to explore and ask: ‘what does this mean for us?’” he says.
GTR takes a look at some key bank consortiums and accelerator programmes driving digitisation forward.
R3 CEV (R3) was originally a consortium of 15 ﬁnancial institutions that was formed in September 2015 to deliver DLT to the ﬁnance sector. Today, in what represents the biggest collaborative effort in the industry, it consists of over 50 member banks and ﬁnancial organisations. The consortium believes that “DLT has the potential to change ﬁnancial services as profoundly as the internet changed media and entertainment”. It has ofﬁces in New York and London.
R3 has been developing the Corda platform, which it hopes will become the industry standard. After ﬁrst showcasing it publicly in April this year, the consortium announced in October that that it would make coding for the platform open-source.
“We want other banks and other parties to innovate with products that sit on top of the platform, but we don’t want everyone to create their own platform… because we’ll end up with lots of islands that can’t talk to each other,” says chief engineer, James Carlyle, addressing the elephant in the room, around the otherwise welcomed developments. “Given that the power of this technology lies in its network effect, the consortium model is the ideal method to get it off the drawing board and into the wholesale ﬁnancial markets.”
In August, R3 announced that it successfully completed two prototypes that demonstrate how DLT can be used in trade ﬁnance. Over 15 banks were involved in designing and utilising self-executing transaction agreements, known as smart contracts, on Corda, to process accounts receivable purchase transactions and LC transactions. R3 estimates the technology has the scope to reduce the operational and compliance costs of paper-based trade ﬁnancing by 10 to 15% and provide a platform for banks to grow revenues by as much as 15%.
BofAML, HSBC and IDA Singapore
Despite being members of R3, HSBC and Bank of America Merrill Lynch (BoAML) have separately teamed up with Infocomm Development Authority of Singapore (IDA) to investigate how blockchain can simplify the LC process.
The Asia-based consortium announced in August that it had developed a new prototype that proved, in theory, that the LC could be brought onto a private distributed ledger. It detailed how the trade deal can be executed automatically through a series of digital smart contracts. Parties involved in the transaction can also visualise data in real time.
The consortium says its next steps involve further testing of the concept’s commercial application with selected partners, including corporates and shippers.
“Our challenge is to take this from concept to commercial use; making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad,” says Vivek Ramachandran, global head of product for HSBC’s trade ﬁnance business.
Standard Chartered, DBS and IDA
Standard Chartered, DBS Bank and IDA teamed up to develop a proof of concept (PoC) for a blockchain-based invoice trading platform in December last year. It was the ﬁrst application of blockchain technology to the trade ﬁnance space developed by banking institutions.
The project uses Ripple’s distributed ledger technology to provide a platform for tracking invoices, backing loans to suppliers and reducing risk of invoice duplication while retaining client conﬁdentiality. The platform allows banks to convert invoices into digital assets on a distributed ledger. The initiative is envisioned as an open ecosystem where neutral third parties can participate and verify the authenticity of the trade documents being ﬁnanced.
Standard Chartered’s global head of digitisation and client access for transaction banking, Gautam Jain, tells GTR: “We will be concentrating on extending the views of this initiative to other organisations so it will become a community effort. We look forward to working with more collaborators as we widen the project scope and are very optimistic on quick commercialisation.”
CBA and Wells Fargo
In October, Commonwealth Bank of Australia (CBA) and Wells Fargo announced they had piloted a trade transaction combining blockchain, smart contracts and IoT. The transaction saw cotton shipped from the US to China through the use of Skuchain’s distributed ledger platform.
The trade not only involved an open account transaction that mirrored a letter of credit between the buyer, seller and their respective banks, but it also introduced the use of a tracking feature that conﬁrmed the geographical location of goods – allowing all parties to see in real time when the goods were shipped, follow them in transit and eventually see when they arrive at the location, with the need for fewer intermediaries.
CBA general manager of cashflow and transaction services, Michael Eidel, tells GTR that in the next phase of development the partners are looking to work with insurance companies, as the project will work on developing tracking capabilities. For example, the use of temperature or humidity sensors will allow more transparent monitoring of the likely quality and condition of goods on arrival. Furthermore, it will be easier to identify when any deviations from the terms of the contract occur and liable parties.
Other key consortiums to watch
In July, a group of Russian banks announced a private sector consortium focused on blockchain applications. The consortium includes B&N Bank, which focuses on corporate banking, as well as QIWI, Khanty-Mansiysk Otkritie Bank, Tinkoff Bank, MDM Bank and Accenture. The launch came just months after QIWI expressed its hopes to create the “Russian R3 CEV”. The consortium, which represents the ﬁrst such collaboration in the commodities-rich nation, is working jointly with domestic regulators and policymakers.
In April, over 30 ﬁnancial and technology ﬁrms formed the Financial Blockchain Shenzhen Consortium. Areas of focus for the members include capital markets technology, trading platforms and banking. Speciﬁc plans are reported to include the development of a prototype for a securities trade platform and exploration of services for offering credit, digital asset registry and invoice management.
Rise – Barclays accelerator programme
The Barclays accelerator programme is a 13-week programme in partnership with Techstars. Barclays does not take any equity from participating companies, but Techstars takes a 6% share. The programme, which was initially launched in London, is now being run in New York, Cape Town, Tel Aviv and Mumbai. It provides access to Barclays’ network and knowledge base as well as mentorship and insights from others in the start-up and ﬁntech space.
First launched in 2013, the programme is in the process of selecting its fourth cohort of start-ups. In this round, Barclays says it will seek out companies that can help
solve strategic priorities in areas including trade ﬁnance, information security and payments.
In the trade ﬁnance space, two interesting companies that have already come out of the accelerator thus far are Wave and Tallysticks. Wave connects all stages of the supply chain to a decentralised network to allow a direct exchange of documents. The application, which is targeted at SMEs, manages ownership of documents on the blockchwain, aiming to replace traditional bill of lading documents used by trading partners and “eliminate disputes, forgeries and unnecessary risks”.
Barclays announced in September that it had conducted a live trade transaction using blockchain technology on the Wave platform. It took less than four hours to create digital-only documents; send them to the bank’s back ofﬁce in India for checking and screening; send all cryptographically-signed documents to the recipient bank; and for the latter to issue the LC before transferring everything to the importer.
Tallysticks uses blockchain technology to enable businesses to automate invoicing and invoice ﬁnancing processes in order to make it “easier, cheaper, faster and more transparent”. Speaking to GTR earlier this year, the company emphasised that in addition to streamlining and automating processes it is also focused on making invoice ﬁnancing more accessible to companies and sectors previously deemed too risky. The company is working with a number of lenders to create a marketplace where any ﬁnancier can lend against individual invoices – opening up the market to underserved sectors.
Citi accelerator programme
Citi opened its doors to start-ups in Tel Aviv in 2013. The four-month accelerator programme, which has two rounds every year, is now in its ﬁfth wave. The accelerator is part of Citi Ventures, which also includes numerous innovation labs and partnerships across the globe. The four-month programme offers a workplace, “tailored” mentorship and access to Citi’s networks. Citi does not promise to invest nor must start-ups give Citi equity in order to participate. To date, 53 companies have graduated from the programme, and successfully raised around US$200mn.
In December 2014, Citi Ventures partnered with renowned US accelerator Plug and Play to expand its offering to the US, Germany, Singapore, Brazil and Spain. The bank has also launched Citi Mobile Challenge, a virtual accelerator programme that combines a virtual hackathon with an incubator and is focused on the Asia Paciﬁc region.
Emea head of trade ﬁnance at Citi, Sameer Sehgal, explains to GTR that Citi’s approach is a business-wide one: “We have a growth board that meets on a regular basis and we invite external participants to come and talk to us about subjects as diverse as data protection, compliance and trade solutions. Ideas are then shortlisted and entered into the innovation lab. We then try to build on the idea, develop it to take it mainstream [within the bank]. Every idea has a designated owner whose responsibility it is to deliver or kill if there is no clear upside.”
Commerzbank’s main incubator
In Germany, Main Incubator has been running in partnership with Commerzbank since 2013. Different focus themes are picked by the incubator and entrepreneurs are then invited to apply with ideas. The six-month programme is run out of Frankfurt and offers start-ups access to the bank’s corporate clients, as well as connecting them to a network of experts in the sector. The ﬁrst ﬁve months are spent building the product with the support of venture capital funding, ofﬁce space and expert know-how before an investment committee reviews and decides on further support.
In June, the incubator announced the launch of peer-to-peer funding platform, Main Funders. The platform helps clients of Commerzbank’s Mittelstandsbank business division, which caters for SMEs, to present investment projects to potential investors and secure ﬁnancing.
Other accelerators to watch
UBS and Credit Suisse
Switzerland’s two biggest banks UBS and Credit Suisse announced in March that they are launching an accelerator programme in partnership with Swiss Com, Swiss Life and Ernst and Young. The programme started in mid-2016 with blockchain – namely DLT and smart contracts – as one of three focus areas.
The programme, which will run as part of the ﬁnance segment of Kickstart Accelerator, will see successful applicants receive ﬁnancial assistance for three months, a workplace in Zurich, mentoring and introductions to investors. Companies are not required to give equity stakes to participate.
Among its ﬁrst round of participants is trade ﬁnance-focused start-up Gatechain, whose mission is to “redeﬁne trade ﬁnance with blockchain”. The founders of the company, who come from a shipping and logistics background, tell GTR: “We’ve been suffering personally from this paper and manual handling for decades from our experience in the logistics space. We hear the suffering and want to remove this pain.”
Gatechain is currently working on a minimum viable product (a development technique in which a new product is developed with sufﬁcient features to satisfy early adopters) to build end-to-end secure and trusted document flow between multiple trade partners. It is working with various corporates that it got access to through the accelerator programme.
The company says what differentiates it from other players working on similar digitisation processes is that its platform will be open to different back-end and storage solutions and won’t “lock in” users.
“The technology stack is going to change multiple times over the next couple of years,” explains co-founder Wassilios Lytras. “[By not locking them into one solution] we provide our customers the security that their investment in the adoption is secure.”
Standard Chartered and Supercharger
Standard Chartered has invited companies to apply for its second round of cohorts for the Supercharger accelerator programme, of which it is the main sponsor, in Hong Kong. Neither Standard Chartered nor Supercharger take equity stakes from participants. The 12-week programme provides access to market entry resources, mentors, technology advice from industry experts and joint venture opportunities.
The accelerator programme works closely with the bank’s eXellerator lab which was launched in Singapore in March this year. Phil Gray, who runs the lab and is actively involved in the accelerator, says the ﬁrst cohort was a learning curve for the bank.
“Last year was a great learning opportunity for us. We played a more passive role but we have built a better understanding and this time we will have a far more engaged and focused approach,” he says. “We have had senior staff present during the roadshows and strengthened our commitment by making sure the right level of support and access to them is available throughout the programme. We will also be leveraging our cohorts from the bank’s Hong Kong-based international graduates programme to work with the start-ups, giving our next generation of bankers exposure to innovative start-ups.”
Two of the focus areas for the selection panel this year will be supply chain and trade ﬁnance, as well as DLT.
Bank of England
In June, the Bank of England announced that it will launch its own accelerator programme. It also announced that it had completed a DLT proof of concept exercise with PwC to better understand the technology. The exercise involved the ﬁctional transfer of a ﬁnancial asset on the Ethereum protocol, which included several participants, among which a central authority, and could establish the supply of the asset and permissions to access and use the ledger.
The bank noted that the technology is still relatively immature, and that it was important to gain further experience in the area. In particular, it highlighted that it was interested in exploring scalability, security, privacy, interoperability and sustainability.
While its accelerator programme, which is currently reviewing the ﬁrst round of applications, will seek innovation for unique central bank issues, the Bank of England’s involvement could result in a more favourable regulatory environment for parties involved in distributed ledger technology.