European banks developing Digital Trade Chain

Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit recently signed a Memorandum of Understanding in Brussels, agreeing to collaborate on the development and commercialization of a new product called Digital Trade Chain (DTC).

The project is based on a prototype trade finance and supply chain solution originally created by KBC, and already tested to the Proof of Concept stage. The platform is designed to simplify trade finance processes for small and medium-sized enterprises (SMEs), by addressing the challenge of managing, tracking and securing domestic and international trade transactions.

KBC’s original DTC prototype won the October Efma Accenture Innovation Award for best new product or service of 2016. The annual awards contest and ceremonial gala dinner was held in Barcelona by the European finance industry nonprofit Efma, in order to “recognize best practices in the retail banking distribution and marketing arena.” KBC was one of 216 institutions from 61 countries.

The bank described their platform as,  “intended to seamlessly connect the parties involved in a trade transaction (i.e. buyer, buyer’s bank, seller, seller’s bank and transporter), online and via mobile devices.”

According to the announcement, DTC will be launched in seven European markets, with a “focus on building critical mass.” Belgium-based KBC Bank will focus on customers in Belgium and Luxembourg. French banks Natixis and Société Générale will both target customers across France. Germany will be covered by Deutsche Bank and UniCredit, the latter of which is an Italian bank that will also cover the Italian market. The Netherlands will be Rabobank’s territory, and UK customers will be served by HSBC. “By pooling expertise and resources the consortium members will jointly explore the development and launch of a scalable version of DTC,” the announcement explained.

The shared platform is intended to allow European SME businesses to make both domestic and cross-border payments. The consortium believes that harnessing the power of a blockchain will allow them to address, “the challenge of managing, tracking and securing domestic and international trade transactions.”

SMEs typically use a type of credit payment that large corporations do not. Known as commercial letters of credit, or documentary credit, this finance option is an area of trade that many blockchain startups are pursuing. Unfortunately for SMEs, documentary credit isn’t well suited for SME businesses as they typically use open accounts for direct credit.

The DTC platform is being designed to offer these small and mid-sized businesses end-to-end transparency, which will boost confidence both locally and abroad. The move may give SMEs some of the features that only documentary credit offers.

“By maintaining secure records on a digital distributed ledger DTC will accelerate the order-to-settlement process and decrease administrative paperwork significantly.”
— – Digital Trade Chain

HSBC published a research paper focused on trust in the UK export market last October. While the bank did not mention blockchains nor distributed ledgers as a solution in the paper, it states “our research has found that some SMEs do not try to export because they believe it will be complicated or risky.”

The bank suggested four areas that need addressing in order to help SMEs find the resources they were looking for. The first was regulation, such as laws that are holding SMEs back from finding and using the loans that are already available. HSBC suggested targeted incentives designed to encourage exports, including tax credits.

The next area referred to customs and taxes, which are a major stumbling block for SMEs during trade negotiations. HSBC suggested the formation of an Export Advisory Committee, made of businesses, whose sole purpose would be to give feedback to governments about how their proposed laws would affect new trade agreements.

The third and fourth reasons both had to do with the lack of data sharing and support between businesses, which newer SMEs feel is holding them back. “71 percent of those surveyed said they are looking to learn from SMEs that are already trading internationally,” the report claimed. Encouraging best practices for sharing information was all HSBC could suggest to help ease this situation.

While blockchain-based solutions may not be able to help with these cases directly, KBC’s plan to build trust between SMEs using the DTC platform may deliver the trust these companies need in order to address each of them more easily.

The European Banking Association (EBA) was among the first to suggest using a blockchain to solve the SME trust problem. In their May 2016 report, “Applying Cryptotechnologies to Trade Finance,” the EBA proposed both blockchains and smart contracts as solutions worth researching for big corporations and SMEs alike.

Liquidity, reconciliation, product development, and overall efficiency gains were major benefits described by the EBA, for corporations, SME’s, and their banking partners. Banks would be well served by actively exploring blockchain and smart contract technologies, the report says, since they are due to go live in the next one to two years.

“By offering products and services that help increase working capital, reduce risk, ease reconciliation, and lower costs, banks stand to retain existing customers and potentially attract new customers.”
— – European Banking Association