Big banks team up to retake trade finance
A group of large banks is using its considerable size and influence to build standards for trade finance, including agreements on payments processes, documentation and risk—giving the consortium its own ecosystem to counter the myriad forces in technology and e-commerce that threaten to upend traditional practices.
ANZ, Banco Santander, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered will build the “Digital Trade Information Network” by the end of 2018 The founding banks are joined by 20 other banks and several corporations that are participating in pilots.
The network contends there’s unmet demand for financing early in the supply chain, and that this demand can be met by supporting the easy and secure flow of information from corporates to banks.
In practice, that means corporates will use the network to submit and verify purchase orders and invoices to request trade financing from the banks of their choice. By providing those banks with access to trade information, the network hopes to combat double financing and fraudulent trade information.
There’s a trade gap of $1.5 trillion dollars, said John Ahearn, global head of trade for Citi Treasury and Trade Solutions, citing numbers from the Asia Development Bank.
“One of the primary reasons for this gap is the lack of an industry standard for trade information exchange and the risk of fraud such as false documentation and double financing," Ahearn said. "The network will address these issues. This will enable banks to better support corporates earlier in their supply chains, as early as when purchase orders are issued. Our goal is to transform international trade.”
This solution will automate significant parts of a transaction by receiving information directly from existing ERP/EDI data feeds and does not require buyers to change any process, Ahern said.
“This is critical as the network will be able to handle any combination of bank, buyer and supplier as long as they are already on the network,” Ahearn said.
There’s lots of companies and projects trying to wring inefficiencies and fraud out of international supply chains.These efforts include cloud-delivered technology, distributed ledgers, and an international project led by China called the Silk Road, a digitally-driven rebirth of the ancient trade route between Asia and Europe. There are also technology companies such as Ripple, Stripe, Square and WePay (a unit of JPMorgan Chase) that have technology in place to digitize international sourcing.
“The banks realize they have to collaborate if they want to seriously move ahead with the idea of digitizing trade,” said Enrico Camerinelli, a senior analyst at Aite Group.
There’s also a competitive impetus, not just from the blockchain plays and fintechs like Square, but from the fulfilment ecosystem in e-commerce.
“Banks need to look at Amazon, Alibaba and Ariba,” Camerinelli said. “These are competitors moreso than the fintechs. The [e-commerce companies] are already exchanging information and monetizing it.”
Most of these competitive initiatives involve banks in some form, either as partners or payment processors or to hold deposits. But the trade information it is different in that it was set up by banks for banks, said Ahearn.
“It was not an initiative set up by a tech vendor to sell their technology … We know what the issues are that are faced by the industry and our clients," Ahearn said. "We have created a solution to these problems. We are not tied down to one type of technology or any vendor."
The banks will rely on technology projects underway to fuel improvements. Citi, for example, has made investments to automate trade, a mix of internal efforts such as AI and OCR (Optical Character Recognition for invoice management); and client facing products such as CitiDirect and Citi Supplier Finance.
The technology does not currently use distributed ledger technology (DLT) or blockchain, which the consortium sees as fitting the problem around a predetermined solution.
While blockchain is behind a lot of the efforts to automate sourcing, the technology doesn't necessarily address challenges such as how collaboration between companies will work in a decentralized environment. The banks' approach is to create an open system that adheres to standards that are existentially centralized in that all of the participants agree to them.
"We started with a business problem and then designed a solution to that problem," Ahearn said. "We did not start with a technology that was in search of a problem. After designing the solution we agreed that DLT was not necessary to solve this business problem. We continue to watch DLT and if needed we would explore it as an option in the future but at this point it is not necessary or better. We would need a compelling reason to do so."