Do you know your trade finance fintech alphabet? Sanne Wass spells out the most important concepts.
A – Artificial Intelligence
Simply put, AI refers to the simulation of human intelligence processes by machines. One sub-set of artificial intelligence that has caught the attention of the trade finance industry in particular is machine learning, which involves computer systems learning from data and improving this learning over time in an autonomous way. This allows for large data sets to be analysed to reveal patterns, trends and associations with minimal human intervention.
For example, some technology firms are using machine learning in the field of compliance to help banks monitor and screen transactions for unusual activity, while others are leveraging the technology to carry out more accurate credit scoring and risk assessments.
B – Blockchain
Blockchain is a form of distributed ledger technology that enables transactions between users to be recorded in a digital, decentralised ledger. Every transaction is essentially recorded in a ‘block’, which contains a reference to the block that came before, hence the name ‘block-chain’. This makes it nearly impossible for a user to tamper with previously recorded transaction data. The uniqueness of this technology is also that it allows for a peer-to-peer network that is updated in real time without the need for intermediaries.
While blockchain first became known as the technology that underpins cryptocurrencies, many applications today involve recording assets other than currencies. In trade finance, the technology is being explored for the exchange of documentation, the checking of duplicate financing and KYC registries, among other uses.
C – Corda
Released in 2016, Corda is an open source blockchain platform built by R3, designed specifically for the banking, financial services and insurance industries. Importantly, Corda is a blockchain framework, meaning that it’s made for applications to be built on top of it by other players. A range of blockchain applications relevant to trade finance are based on Corda, including Voltron, Marco Polo and Fusion LenderComm.
An enterprise blockchain, Corda falls under the category of private permissioned ledgers, similar to Hyperledger Fabric and Quorum. This means that, as opposed to cryptocurrencies and other public blockchains, it requires an invitation and must be validated by the network participants or owner.
D – Data
The use of alternative forms of data is becoming increasingly relevant in the trade finance space for assessing the risk of SMEs, with a range of non-bank players now utilising data that most traditional banks would never touch. This is crucial in bringing financing to otherwise under-served small businesses.
For example, a solution by IBM’s research lab in Kenya leverages alternative data such as purchase history and repayment data to better predict the creditworthiness of a microbusiness. Germany-based Modifi, meanwhile, a technology platform for digital import and export finance launched in Europe and India, uses customs data to assess if an SME exporter might be fraudulent.
E – eTradeConnect
eTradeConnect is a Hong Kong-based blockchain platform launched by 12 banks in October 2018 and aimed at digitising open account transactions. Based on Hyperledger Fabric, the solution is built by OneConnect, the fintech arm of Chinese insurance firm Ping An Group, and run by Hong Kong Trade Finance Company, a special vehicle set up by the Hong Kong Monetary Authority.
Through the live platform, banks and their corporate clients can submit and record purchase orders, invoices and applications for financing.
F – Forcefield
Forcefield is a blockchain-based commodity trade finance platform driven by internet of things (IoT) technology. In May, the consortium behind it, which includes global commodity firms and banks, launched an independent legal entity to finalise the platform deployment and operate as a market utility.
The solution will enable firms and banks to manage and trace commodities throughout the supply chain lifecycle and also facilitate financing. Smart IoT sensors will be used to monitor inventories, making the physical handling processes more secure while reducing costs.
G – gpi
Short for ‘global payments innovation’, gpi is a payment service delivered by Swift that went live in 2017. Features include a payment tracker, giving companies and banks an end-to-end status on their payments, as well as faster settlement times. According to Swift, half of gpi payments are, on average, credited to end beneficiaries within 30 minutes, and almost all within 24 hours – down from what could take days with Swift’s previous solution.
By the end of 2018, more than half of Swift cross-border messages were sent using gpi, with Swift aiming to move all of its 10,000 member banks to the service by 2020.
As part of the gpi initiative, in 2017 the organisation also started to experiment with the use of blockchain technology for real-time nostro reconciliation. However, Swift has thus far not taken it further than a proof of concept. Instead, the company has more recently commenced a proof of concept with R3 to see how gpi can connect with blockchain-based solutions.
H – Hyperledger Fabric
Hyperledger Fabric is an open source blockchain platform hosted by the Linux Foundation. Like Corda and Quorum, it is a private permissioned ledger and works as a framework for other applications.
IBM has chosen Hyperledger Fabric as the foundation for its own blockchain platform, meaning that blockchain-based solutions built by IBM are based on this framework. In the trade space, this includes projects like TradeLens and we.trade.
I – Internet of things
IoT refers to devices and sensors connected to one another that automatically collect and exchange data. In the world of trade, firms have started using this technology on cargo to track anything from the location of the goods, to vibration and container openings, as well as conditions such as humidity and temperature.
This is changing the way trade is being financed: by enabling financiers to obtain real-time information on the physical flows that they are financing, they can better assess working capital funding risks rather than rely solely on balance sheet strength. Arviem, for example, recently became one of the first companies in the world to integrate logistics IoT data into a commercial trade finance service.
J – Joint venture
As banks are joining forces to innovate, a growing number of consortia have decided to create joint ventures that can own and operate their new solutions. we.trade was one of the first trade finance blockchain initiatives to take this route when it was incorporated as an independent legal entity in Ireland in April 2018, with banks as its shareholders. This model has since been adopted by other consortia, with the formation of komgo in Switzerland and Forcefield in Singapore. Equally, the banks behind Voltron are looking to establish a joint venture by the end of the year.
While some consider this approach an efficient model to bring innovative solutions live, others have raised questions around whether the creation of centralised organisations counters the goal of blockchain (which is based on the idea of being decentralised).
TradeLens, a global trade platform built by IBM and Maersk, is an example of a project that had to ditch an original plan to form a joint venture, after industry players had expressed worry over too much Maersk control.
K – komgo
komgo is a blockchain-based platform powered by Quorum that digitises and streamlines commodity trade finance. It was founded as an independent venture in August 2018 with 15 large traders and commodity finance banks as shareholders. This followed two experiments carried out on ING’s Easy Trading Connect platform.
komgo facilitates letters of credit (LCs), standby LCs and receivables discounting. It also standardises the know your customer process, enabling the exchange of documents on a “need to know” basis and without using a central database.
L – Legal challenges
The legal recognition of electronic instruments remains a big question mark in the world of trade and is crucial for blockchain-based trade finance to realise its full potential.
In the US, for example, letters of credit have been allowed in electronic format since the UCC Article 5 was revised in 1995. However, negotiable instruments continue to be governed by UCC Article 3, which tethers legal jurisdiction to exclusively paper instruments. According to Alisa DiCaprio, R3’s global head of research and trade, it could be an estimated three to five years before revisions of this article might be enacted, due to bureaucratic barriers.
Challenges around the legal recognition of electronic trade finance mean that rulebooks are being pursued by most blockchain solutions in trade finance in order to provide assurance in the enforceability of agreements. Such rulebooks typically include agreed-upon rules around the rights and obligations of negotiable instrument transactions on a blockchain, residual rules for the governance on unresolved issues and a choice of forum, according to DiCaprio.
M – Marco Polo
Marco Polo is a blockchain-based open account trade finance platform powered by Corda. The application simplifies and speeds up the processes behind open account trade finance services, with receivables finance and payments commitments being the first products tested.
Launched in September 2017, the project is led by TradeIX and a consortium of banks. Continuously growing, the network had 22 bank members as of July 2019. In March, the platform facilitated its first live, commercial pilot transactions. Production is scheduled for the second half of 2019.
N – Natural language processing
A branch of artificial intelligence, natural language processing helps computers understand and interpret human language. It is particularly useful in the compliance space, where professionals conducting due diligence screening typically have to manually trawl through significant volumes of content.
Natural language processing can help search every corner of the web, breaking down search results by extracting names and associated attributes, to create a comprehensive profile about an individual or business involved in a transaction. DDIQ, which is owned by global financial crime and compliance company Exiger, is one solution that does just that. Programmed to think like a financial crime investigator, the engine can read 70 languages and spends just a few minutes to investigate thousands of websites and documents in order to expose bad actors and potential risks.
O – Optical character recognition
OCR is a technology that converts documents such as scanned paper, PDF files and images into a digital format. Trade finance is a particularly good use case for OCR, given its traditionally paper-heavy nature. Banks are increasingly using the technology to digitise and interpret trade documents such as purchase orders, packing lists and bills of lading.
Traydstream, Conpend and Tradesun are examples of firms using OCR technology to help trade finance banks read, scan and structure paper-based information digitally in order to automate compliance checks.
P – Production
While ‘pilot’ and ‘proof of concept’ have been the big trade finance tech buzzwords of the past couple of years, the focus of 2019 is around when the many technology solutions will be ready to move into production.
In a software context, the phrase “enter production” typically refers to when the software is being implemented in an organisation’s systems and becomes operational in a live environment. This usually follows development and testing phases. So far, only a few trade finance-specific blockchain platforms have reached this stage.
Q – Quorum
Quorum, a blockchain framework similar to Corda and Hyperledger Fabric, is the enterprise-focused version of Ethereum.
Ethereum itself was launched in 2015 as one of the first public blockchain frameworks used to create applications beyond supporting a digital currency. JP Morgan later launched Quorum, an enhanced version to support enterprise needs around privacy and confidentiality.
As opposed to Ethereum, Quorum is a private-permissioned blockchain. It powers a range of blockchain applications in the trade finance space, including komgo, Vakt and JP Morgan’s internal cryptocurrency JPM Coin.
R – Regtech
An abbreviation for ‘regulatory technology’, regtech is a term that covers innovations to help banks and firms resolve regulatory issues and manage compliance risk. This category has drawn particular interest from banks as they continue to try and cope with the tsunami of regulation that has hit them since the financial crash of 2008.
Examples of regtech are AI and machine learning, which can be used to identify and flag suspicious activity, while natural language processing tools and know your customer utilities can help undertake due diligence.
S – Smart contracts
Smart contracts refer to software programmed to automatically complete transactions once certain conditions are met. For example, a smart contract could automatically ensure that a supplier is paid once the goods have arrived at their final destination.
A recent report by law firm Allen & Overy suggested a range of use cases for smart contracts in finance, such as the settlement of securities, payments under a derivatives contract, the recording of financial data and proxy voting.
A smart contract doesn’t have to be a legal contract and, although it is often associated with the term blockchain, it doesn’t need blockchain to work. It’s also not a new concept: it was first invented backin the 1990s.
T – Trade Information Network
TIN is an initiative driven by seven large trade finance banks to build a multi-bank supply chain finance data exchange. Originally known as Wilson, it launched under its new name in October 2018.
The solution, which is currently being built by CGI, will work as an aggregation platform where corporates can submit and verify purchase orders and invoices to request trade financing from the banks of their choice. By gathering this data in one place, banks will be able to check whether a document has already been financed.
While the involved banks are all engaged in separate blockchain initiatives, they have opted for cloud technology and not blockchain on this occasion. TIN is also different from other technology initiatives in that the financing itself will happen outside of the network, using banks’ existing systems. It also doesn’t connect banks to each other.
U – Universal Trade Network
The UTN is a project run by some of the largest trade finance banks, industry bodies and fintech firms to connect the growing number of detached blockchain networks in trade finance. Its primary aim is to create open trade and technology standards to promote interoperability among blockchain and other B2B networks.
The project was initiated in early 2018 by blockchain firms TradeIX and R3 together with banks involved in Marco Polo. Today, UTN members also include banks from Voltron and other consortia, and the initiative is looking to attract further players across the trade ecosystem, including logistics providers, companies, insurers and fintech firms.
V – Voltron
Voltron is a blockchain-based application aimed at making the exchange of trade finance documentation digital and more efficient. The solution is built by CryptoBLK on Corda and run by a consortium of eight banks. It first made global headlines in May 2018 when HSBC and ING executed a blockchain-based letter of credit together with trading giant Cargill.
Since then, the members have completed multiple live pilots in different industries and geographies. The consortium is now looking to establish an independent legal entity that can bring Voltron into production.
W – we.trade
we.trade is a blockchain-based platform that streamlines open account trade finance. It is targeted at SMEs in Europe, helping them to manage, track and protect open account trade transactions.
Backed by a consortium of 12 shareholder banks, we.trade is one of the first blockchain-powered trade finance platforms to go live. The project was first launched in January 2017 – at the time under the name Digital Trade Chain. It later rebranded to we.trade and was incorporated as a legal entity in April 2018.
Earlier this year, we.trade announced it had signed its first licence agreements with 14 banks, who are now actively using the platform. The company is currently working with eTradeConnect in Hong Kong to explore how the two solutions could work together.
X – xRapid/xCurrent
xCurrent is a blockchain-based real-time messaging system provided by Ripple. The solution is used by a range of financial institutions around the world to instantly send and confirm payment details with end-to-end tracking. xCurrent is today the most prominent blockchain-based alternative to the 1973-founded Swift, the dominant player in the global payments messaging space.
Another product offered by Ripple is xRapid, a cryptocurrency-driven payments solution. It provides on-demand liquidity to financial institutions for international payments without requiring them to have correspondent relations. It does so by using XRP, a cryptocurrency created by Ripple, as a ‘bridge’ between fiat currencies. This fact has meant that many banks have so far been more wary of using this solution.
Y – You
Yes, you, the customer. The days of bank-led solutions are over, as the trade finance industry is taking a much more client-centric approach to technology than it previously did. Case in point is the recently launched Trade Information Network, where the consortium behind the project interviewed 35 large corporates before deciding to go ahead with it. Another example is Marco Polo, which came out of a client use case back in 2017.
This is an important change for the industry in light of past attempts to digitise trade finance that failed to gain corporate uptake (spoiler alert: you will find such an example under the next letter).
Z – zzz
The constant emergence of new fintech solutions in trade finance has prompted some banks to hit the snooze button on older digital trade initiatives. One of them is the bank payment obligation (BPO).
Launched amid great fanfare in 2013, the BPO is a hybrid instrument between the letter of credit and open account, which combines legally-binding rules with electronic messaging and matching capabilities through Swift’s trade services utility (TSU).
But despite being an elegant solution in theory, take-up has been sluggish, mostly due to lack of client uptake. And after the news emerged in April that Swift is scrapping the TSU by 2020, it seems doubtful that banks will seek to push more life into the now decaying BPO.