Trade Finance.

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Blockchain meets Trade Finance. What Does This Mean For Medium Sized Banks?

 

Author: Matthias Maucher

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Essential Insights.

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Platform "Digital Trade Chain"

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# innovation: blockchain smart contracts speed up settlement and administration

# innovator: Deutsche Bank, HSBC, Unicredit, Rabobank, Société Générale, KBC, Natixis

# focus clients: small and medium corporates

​# focus markets: Germany, Belgium, Luxembourg, France, Italy, Netherlands, GB

# start planned for 2nd half of 2017

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Grade of innovation

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# high

# first mover acquire an important competitive advantage

# pro: higher efficiency for the bank and faster process for the corporate client

# challenge: technology, new processes, regulation

# risk: cybercrime

# future potential: trade finance represent 1,5% to 18,7% of global banks' balance sheet

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Being a first-mover assures the pole position in changing economics of trade finance business models.

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The future is now. Digitally enabled business models will reshape the movement of data and money. New KPIs' will be required to adequately manage market divisions.

Using smart contracts for trade finance transactions allows for the digitalization of paper invoices, shipment and other documentation. Extensive authorization processes can be automatiszed. Money can be transferred instantly to the producer/seller, according to the contractual terms.

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Strategic rationale.

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Trade finance is an important business. Historically, it has a low loss rate, especially on the short term products. It is also an important source of fee income for incumbent banks. In terms of balance sheet volume, trade finance assets of global banks such as Deutsche Bank, Unicredit, JPMorgan, HSBC and others amount from 1,5% to 18,7% of total assets.

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Global annual flow on short term bank-intermediated trade finance markets is estimated at about US$ 6.5 to 8 trillion.

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As the Bank of International Settlement (BIS) states, "bank-intermediated trade finance performs two vital roles: providing working capital tied to and in support of international trade transactions, and/or providing means to reduce payment risks." Data on the size of the market is not systematically reported. Bank-intermediated trade finance supports about one-third of the global trade volume, according to estimations of the BIS working group. Most of it is short term with an annual global flow of US$ 6.5 to 8 trillion (2011). A closer look shows wide regional variations , e.g. China (871 billion), US (270 billion), Italy (300 bio.), Germany (187 bio.), France (175 bio.). 

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The future of national banks in trade finance. 

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Traditionally, the largest global banks appear to account for a quarter or a third of the global supply of bank-intermediated trade finance, with local and regional banks providing the remainder (BIS estimate, July 2014). Blockchain technology will certainly put more pressure on national banks as their international competitors do not predominantly focus on technology, but mainly on their medium sized and large corporate clients. 

One way to address this issue are strategic partnerships. National banks could get access to the digital network of an international bank with the last one acting as a service provider. As not only the service fee but also increasing competition from international banks will negatively impact national banks' margins, they should also assess the option to establish an own consortium. To build an independent service provider allows medium-sized banks to keep the client in their own network. Further, cost sharing and limited management effort of the participating banks will be positive for their business case.