No Silver Bullet — Blockchain’s Future Impact on Trade & Supply Chain Finance

I have been asked repeatedly by many banks about blockchain developments around trade and supply chain. Blockchain applications around global trade finance are being planned or piloted in a number of areas. Here is a sample:

  • Global receivables marketplaces
  • Intercompany money transfer
  • Electronic letters of credit via smart contracts
  • Supply chain and payables finance
  • Multitier supply chain finance via tokens

Bank boards are increasingly pushing management to go beyond just getting their names out in this new, cool fintech space. Many financial institutions have blockchain as part of their five-year plan, and some are aggressively acting now on pilots. Trade and supply chain apps represent prime test cases given global trade is complex, paper intensive, fragmented and filled with working capital inefficiencies.

A recent report by Citibank concluded that while blockchain is not an immediate or even near-term strategic threat to the trade and supply chain finance businesses, the hype from blockchain stems from the fact that it is easy to lay out a high level use case to solve many of the sources of “friction.” The researchers from Citibank saw several fruitful applications around trade and supply chain finance (although when I chatted with the head of SCF for Citibank, he was never contacted by his research arm — maybe a bit of Chinese wall but strange nonetheless).

Trade as a standalone business is under increasing pressure from lower commodity prices, regulatory capital, movement away from letters of credit, increased costs due to compliance and increased non-bank competition. Banks need to look at ways to find future profitability.

Click here to contact us about upcoming study Blockchain and Beyond: Trust, Transparency and the Future of Trade Finance

For now, blockchain probably is not going to change a trade and treasury banker’s world over the next two to three years, maybe even longer. Clearly we are still in an educational phase, and we know there is no silver bullet to blow up the current ecosystems and replace with better tech. The industry is awash with distributed ledger technology hype. And creating shared distributed ledgers will not be a no-brainer. What happens when some of the players won’t share it?

The problem with bank blockchain apps is they are closed loops until you get a viral network of participants. In addition, just as in biology, understanding ecosystem and inter-ecosystem interaction matters greatly. How does it matter? There needs to be incentives for corporations to use applications. Just look at what happened when SWIFT went out and launched the Bank Payment Obligation (see here, here and here).

For a bank, developing solutions in isolation without the backing of industry bodies is futile.

The bottom line for global trade is this: Are there business problems that blockchain can solve in trade and supply chain that add incremental revenues to banks, and solve real pain points for others in the ecosystem?

The reality is you don’t blow up the status quo just with technology.

Click here to contact Global Business Intelligence about the upcoming study Blockchain and Beyond: Trust, Transparency and the Future of Trade Finance

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