International trade has long been hampered by multiple pain points impacting the different stakeholders in the transaction. Standing between the buyer and the seller are intermediaries such as banks, manufacturers, transportation companies, and regulators. The paper-intensive process has resulted in high operational costs that often mean delays in the manufacture and delivery of goods.
Fortunately, in recent years participants in the transaction have accepted open account transactions where goods are shipped and delivered before payment is due. However, the paper-intensive nature of the transaction remains a key challenge.
The 2016 Euro Banking Association (EBA) whitepaper “Applying cryptotechnologies to Trade Finance” proposed the use of crypto technologies, like distributed ledger technology (DLT) or blockchain, to facilitate the exchange of trade data and financing.
In late 2016, the R3 and over 15 member banks in the consortium designed self-executing transaction agreements, referred to as smart contracts, and using R3’s distributed ledger platform to process accounts receivable purchase transactions – invoice financing or factoring – and letter of credit (LOC) transactions.
In Hong Kong, Standard Chartered Bank announced the successful delivery of a proof of concept (PoC) demonstrating the application of DLT in trade finance. The PoC is a collaborative effort with four other banks, including Bank of China, Bank of East Asia, Hang Seng Bank and HSBC, and Deloitte Touche Tohmatsu.
Standard Chartered is the lead bank of the DLT Trade Finance Working Group under Hong Kong Monetary Authority’s Fintech Facilitation Office.
As with the R3-led project in the US, the goal of the Hong Kong PoC is to bring better customer experience, enhanced operational efficiencies, and reduced potential frauds for financiers, importers and exporters.
This PoC marks a significant milestone in the digitization journey of trade finance. The DLT platform prototype is the foundation for an open eco-system for multiple parties in trade finance.
It features of real-time data update and the transparency between intermediaries can help importers and exporters mitigate payment and non-performance risks respectively; reduce cost through document digitization and automate labor-intensive processes through smart contracts.
Third parties, including freight forwarders, banks, regulator and government, benefit from enhanced operational efficiencies as a result of the shared information on the platform and the reduced risk of fraudulent financing through duplicate financing detection.
The PoC project scope also covers the consideration of the commercialization, potential business, operating and governance models when adopting the DLT solution.
Gautam Jain, Global Head, Digitization and Client Access, Transaction Banking, Standard Chartered, affirmed the bank’s recognition of the value of DLT in transforming trade finance systems, to deliver improved efficiency and greater transparency to its clients and their ecosystems.
“We see significant potential in the application of Smart Contracts in Trade Finance and will continue to work with industry partners and regulators to make this a reality in the near future,” he added.
Standard Chartered’s Regional Chief Information Officer for Greater China and North Asia, Peter Clark noted DLT in trade finance is not just about digitizing the processes, but also standardizing the data models and enabling more collaboration among industry participants.
“In the POC, we proved DLT could facilitate information sharing among different entities while preserving client privacy and confidential business information. Furthermore, DLT could mitigate fraud-related risk and improve processing time significantly. We see this as an opportunity to break the traditional silo and to develop the standard together with other industry players,” said Tommy Fung (photo right), Head of Country Technology Management, Standard Chartered Hong Kong.
In the next phase of the project, Standard Chartered will be looking at inviting clients and a number of intermediaries to join the pilot stage.