R3 has partnered with fintech firm TradeIX and 12 international banks to develop an open account trade finance platform powered by distributed ledger technology (DLT).
The application will allow banks to automate pre- and post-shipment financing and risk mitigation for corporate buyers and sellers around the world. It will help simplify trade, improve visibility into trade flows and simplify access to credit and risk mitigation services throughout the trade lifecycle.
The banks involved are Bangkok Bank, Barclays, BBVA, Bladex, BNP Paribas, Commerzbank, CTBC Bank, ING, Intesa Sanpaolo, Shinhan Bank, Royal Bank of Scotland and Wells Fargo.
TradeIX, which recently launched a trade finance-specific open-source blockchain platform, will build the application, and pilots are expected to begin early next year. The initial development phase will create standard trade finance smart contracts on R3’s distributed ledger infrastructure Corda.
“The underlying DLT infrastructure is Corda, and then the APIs and all the trade finance specific applications and tools come from our platform,” David Sutter, head of platform strategy at TradeIX, tells GTR.
As previously reported by GTR, TradeIX started building its platform using Hyperledger Fabric. However, Sutter says the company made the decision to place their focus on Corda because it was technically a better fit for the purpose.
The application that TradeIX is building with R3 is an infrastructure on which banks and third party providers can develop specific solutions, Sutter explains.
“The initial project is about connecting buyers, sellers, banks, trade service providers in the open account ecosystem, connecting them all on one single information layer that collects critical trade data around purchase orders, invoices, financing activities. Then solutions are built on top of that.”
He says that current open account technology “is ageing” and that DLT can solve many of the challenges that exist in the market today.
“Within open account trade finance, we have some big and pressing issues. We have total lack of standards and interoperability in trade today, which has created a fragmented, tangled mess of open account systems that have a hard time speaking to one another.
“These systems end up blocking all the open account trade data and silos, making it harder to verify the data. And that drives real big fraud, compliance and other risks, which limits the market segments and types of customers that the banks can service on the open account side,” Sutter says.
DLT-powered infrastructure, on the other hand, would provide standardised processes for the entire sector, with a higher degree of interoperability and the ability to integrate with existing platforms. With improved transaction times, the reduction of risk and a real time visibility into “a single source of truth for trade data”, Sutter says, banks will be able to offer open account services and financing to more customers.
R3 and TradeIX are expecting the first pilots of the application to begin in February next year, following which they will expand the services and onboard additional members.
Speaking to GTR, Sophie Wiberg Holm, project lead at R3, says the application will be co-developed with logistics companies and industry parties such as the International Trade and Forfaiting Association (ITFA). However, the early users of the application will be only banks and their corporate clients.
“Right now we are working with a number of corporates from the different financial institutions, preparing them for the pilot and validating come of the assumptions we are making and testing hypotheses. We will probably pilot first with six corporates or so and then expand the pilot slowly,” she says.
At a later stage, she adds, the application could be expanded to also involve other parties such as credit insurers.
Sutter adds: “In terms of when it goes to production still remains to be seen because that question depends entirely on how many banks are involved. If we hit our target of 20 to 25 banks, it will be quite some time before every bank gets into production,” he says, referring to the amount of banks the duo hopes to have onboarded by the end of 2018.
The launch of the open account application comes just two months after R3 announced that had worked with 13 banks to build a prototype application to streamline the processing of sight letters of credit. Some banks are engaged in both projects.
“The two applications complement each other nicely, and obviously down the road there is a larger strategy to see how these different trade finance initiatives can merge into a larger ecosystem of trade products,” Wiberg Holm says.
Meanwhile, banks participating in the project have claimed the initiative is ground-breaking and will enable them to provide flexible and efficient working capital finance solutions for their clients.
“We see this initiative as complementary with other initiatives and trade platforms. Building smart contracts to capture the supply chain finance business logic on DLT is an essential step that will significantly boost the trade finance ecosystem,” says Marguerite Burghardt, global head of the trade competence centre at BNP Paribas, which is also involved in R3’s letter of credit application.
“We are very excited about this new initiative, which has the potential to significantly boost the trade finance ecosystem,” adds Bernd Laber, group executive, trade finance and cash management corporate clients at Commerzbank. “Together with R3, other bank members and TradeIX, we aim to bring trade and supply chain finance business to the next evolutionary stage.”