How the concept works

Step 1: Importer creates an LC application for the Importer Bank to review and stores it on the
Blockchain.
Step 2: Importer Bank receives notification to review the LC and can then approve or reject it
based on the data provided. Once checked and approved, access is then provided to the Exporter
Bank automatically for approval.
Step 3: Exporter Bank approves or rejects the LC. Once approved, the Exporter is able to view
the LC requirements and is prompted to view through the application.
Step 4: Exporter completes the shipment, adds invoice and export application data and attaches
a photo image of any other required documents. Once validated, these documents are stored on
the Blockchain.
Step 5: Exporter Bank approves or rejects the application and documents.
Step 6: Importer Bank reviews the data and images against the LC requirements, marking any
discrepancies for review by the Importer. When approved, the LC goes straight to completed
status or is sent to the Importer for settlement.
Step 7: If required due to a discrepancy, the Importer can review the export documents and
approve or reject them
A step-by -step approach is needed to move from paper to a safe, secure and compliant digital
trade world.
Step I Data Extraction (moving information into a structured, machine readable format)
The very first problem to overcome in Trade is the sheer scale of paper documents. Many Trade
Banks manually check every document and the processes are based around the physicality of the
written word. The documents need to be moved to an electronically format. The conversion has
to include the entire wording across the paper-flow. The paper and PDfs are left behind leaving
electronic layers that can be analysed anywhere.
Step 2 Date Verification (showing the key aspects of the trade)
The documents have to be validated. All the important clauses, including the terms and
conditions, are highlighted and accounted so nothing in missed. The more data that is moved into
electronic format the better as AI and ML expertise grows with volume. The greater the volume,
the better the accuracy of the output from these systems. Early ML tests show the accuracy rising
to that of a human far quicker with greater data volume.
Step 3 Rules (comparing the requested trade details to the standards and policy requested)
Electronic links to centres of expertise is needed to confirm the rules of engagement are being
followed. For example, Commercial Codes of Conduct are being used ensuring best practises.
There are now Fintechs with electronic libraries, which are continually being updated, that can
verify the documents electronically.
Step 4 Compliance (showing the mismatches in what is happening to what should be happening)
Each country has its own form of regulations on trade as do the individual banks. These rules are
constantly and quickly changing. The use of tariffs has become a key driver with the US
President tweeting ‘I am Tariff Man’. Sanctions, likewise, are part of the methodology of how
one country deals with certain other countries. Similarly, banks may support different trade flows
over others, e.g. Rabobank is strong in agriculture using a guiding governance framework.
Links to companies or authorities maintaining current information is key. The ability to be
constantly compliant is vital. Regulators are increasingly expecting a reporting structure that
informs them quickly that the parties are in compliance.
Step 5 Fraud Detection
Any time an industry has so much paper and manual processing the potential for fraud is high.
Having completed steps 1 to 4 the algorithms used to detect fraud can be employed across the
sea of information. The ensuing heat maps can be then investigated impartially.
Technology makes the above come to life. Blockchain is ideal for trade as in the Blockchain
environment information cannot be altered, a full audit trail exists and with smart contracts terms
and conditions can be embedded. Blockchain could well be the future but volume of trade in the
blockchain schemes are tiny compared to the Trade Finance Market. The incumbent technology
and processes current in use also has to change to accommodate Blockchain

Why Blockchain for Banking?

Why Blockchain for Banking? — Image Source

The current day banking systems are highly reliable on paper and outworn process. The
Need of the hour is to have an upgraded system embedded with reliable and trust-able
technology that could withstand frauds, scalability and security issues. The blockchain
technology and its decentralized nature can give the banking systems the much-needed
edge they’re on the lookout for.

Banks cannot be termed as independently operating self-sufficient entities as any

transactions made through them still involve intermediaries. Moreover, the rate through
which money is transferred on an international scale can still take up to 5 days along with
entailing risks. With a blockchain system in place, banks would be able to make transfers
real quick without even having to take the burden of risks as the system would be self-
sufficient to resolve it all on its own.

The world is going digital and with this progress, even small transactions and payments
are happening digitally. The economic activity rate is increasing and there’s no doubt in
assuming that the rate will keep picking up in the coming days. The blockchain
technology will make small transfers feasible and fast along with the aid of lower fee and
scalability of transactions.

Financial services other than banks are constantly evolving their systems with the aid of
the latest technology in order to secure the markets by providing economically available
services at cheaper rates. Banking and other financial institutions should look forward to
the adoption of new blockchain technology too in order to secure their place in the
ecosystem.
they may perish
The partnership imperatives and opportunities for banks and FinTechs

The Role of Fintech in Import-

Export Trade Finance Today
Fintech companies operating in
trade finance typically focus on
cost-reduction initiatives such as
digitization and automation,
including blockchain and
alternative lending options (e.g.,
peer-to-peer (P2P) lending). The
trade finance effects on global
import-export traders.
Trade Finance represents the
financial instruments and
products that are used by
companies to facilitate
international and domestic trade
and commerce. Trade finance
makes it possible and easier for
importers and exporters to
transact business through trade.
Trade finance is an umbrella
term meaning it covers many
financial products that banks and
companies utilize to.
Trade finance is focusing on
injecting liquidity and mitigating
credit risk in both domestic and
international trade transactions.
Trade finance usually involves a
seller or exporter of goods and
services, a buying organization
or importer and various
intermediaries such as banks and
financial institutions and service
providers. Sellers and buyers are
constantly looking to improve
their working capital and cash
flow, while reducing the risk of
supply chain disruptions
Trade finance will benefit from
blockchain
Blockchain technology is
dominating the news around the
world. It seems that a constant
list of projects and pilots have
been battling to be noticed, while
the digital transformation is
developing day by day. While
blockchain is being used in
multiple different use cases
ranging from manufacturing,
healthcare to real estate or
government application,
SWOT Analysis
Strengths
Operational Efficiency
Facilitates easier sharing of
information about certain
products or trades. No more
documents that have to passed
along. We can now register
everything on the blockchain.
Secure encryption and tamper-
proof data storage
Eliminates central authority who
has full access to the data.
Opportunities
Provides a platform for Big Data
and analytic research.
Gives back control to the user
e.g. instead of Google and
Facebook using your data, you
can control who gets access to
your data. All these permissions
will be stored on the blockchain.
The world is becoming more
digital, so more people will
accept the concept of blockchain
in their daily lives.
Threats
Scalability issues: too many
transactions (overload), although
several solutions are present.
Unwanted centralization: mining
pools and large mining farms
Quantum computers (in the
future) who have the ability to
decrypt data.
Hype and fast changing
environment
There is always the possibility of
mining attacks, and hacks.
Weaknesses
Business rules change frequently,
blockchain doesn’t.
Blockchain is mostly not
modular. An old encryption
module cannot easily be
replaced.
What if business rules change
and we want to export data to a
new blockchain with the correct
data models? A blockchain
doesn’t provide an immediate
out-of-the-box exit strategy.
Potentially in conflict with
existing approaches to regulatory
compliance, for example GDPR
regulations.
Concept isn’t easy to grasp for a
newcomer. We need good
education to make mass adoption
possible.

is the financing of international

trade flows. It exists to
mitigate, or reduce, the risks
involved in an international
trade transaction.
There are two players in a trade
transaction: (1) an exporter, who
requires payment for their goods
or services, and (2) an importer
who wants to make sure they are
 paying for the correct quality
and quantity of goods

https://www.gtreview.com/magazine/volume-17-issue-3/abc-trade-finance-fintech/

The ABC of trade finance fintech

FINTECH, TOP STORIES / 23-07-19 / BY SANNE WASS

Do you know your trade finance fintech alphabet? Sanne Wass spells out the most important
concepts.
A – Artificial Intelligence

Simply put, AI refers to the simulation of human intelligence processes by machines. One sub-set of
artificial intelligence that has caught the attention of the trade finance industry in particular is
machine learning, which involves computer systems learning from data and improving this learning
over time in an autonomous way. This allows for large data sets to be analysed to reveal patterns,
trends and associations with minimal human intervention.

For example, some technology firms are using machine learning in the field of compliance to help
banks monitor and screen transactions for unusual activity, while others are leveraging the
technology to carry out more accurate credit scoring and risk assessments.

B – Blockchain

Blockchain is a form of distributed ledger technology that enables transactions between users to be
recorded in a digital, decentralised ledger. Every transaction is essentially recorded in a ‘block’,
which contains a reference to the block that came before, hence the name ‘block-chain’. This makes
it nearly impossible for a user to tamper with previously recorded transaction data. The uniqueness
of this technology is also that it allows for a peer-to-peer network that is updated in real time without
the need for intermediaries.

While blockchain first became known as the technology that underpins cryptocurrencies, many
applications today involve recording assets other than currencies. In trade finance, the technology is
being explored for the exchange of documentation, the checking of duplicate financing and KYC
registries, among other uses.

C – Corda

Released in 2016, Corda is an open source blockchain platform built by R3, designed specifically for
the banking, financial services and insurance industries. Importantly, Corda is a blockchain
framework, meaning that it’s made for applications to be built on top of it by other players. A range of
blockchain applications relevant to trade finance are based on Corda, including Voltron, Marco Polo
and Fusion LenderComm.

An enterprise blockchain, Corda falls under the category of private permissioned ledgers, similar to
Hyperledger Fabric and Quorum. This means that, as opposed to cryptocurrencies and other public
blockchains, it requires an invitation and must be validated by the network participants or owner.

D – Data
The use of alternative forms of data is becoming increasingly relevant in the trade finance space for
assessing the risk of SMEs, with a range of non-bank players now utilising data that most traditional
banks would never touch. This is crucial in bringing financing to otherwise under-served small
businesses.

For example, a solution by IBM’s research lab in Kenya leverages alternative data such as purchase
history and repayment data to better predict the creditworthiness of a microbusiness. Germany-
based Modifi, meanwhile, a technology platform for digital import and export finance launched in
Europe and India, uses customs data to assess if an SME exporter might be fraudulent.

E – eTradeConnect

eTradeConnect is a Hong Kong-based blockchain platform launched by 12 banks in October 2018

and aimed at digitising open account transactions. Based on Hyperledger Fabric, the solution is built
by OneConnect, the fintech arm of Chinese insurance firm Ping An Group, and run by Hong Kong
Trade Finance Company, a special vehicle set up by the Hong Kong Monetary Authority.

Through the live platform, banks and their corporate clients can submit and record purchase orders,
invoices and applications for financing.

F – Forcefield

Forcefield is a blockchain-based commodity trade finance platform driven by internet of things (IoT)
technology. In May, the consortium behind it, which includes global commodity firms and banks,
launched an independent legal entity to finalise the platform deployment and operate as a market
utility.

The solution will enable firms and banks to manage and trace commodities throughout the supply
chain lifecycle and also facilitate financing. Smart IoT sensors will be used to monitor inventories,
making the physical handling processes more secure while reducing costs.

G – gpi

Short for ‘global payments innovation’, gpi is a payment service delivered by Swift that went live in
2017. Features include a payment tracker, giving companies and banks an end-to-end status on
their payments, as well as faster settlement times. According to Swift, half of gpi payments are, on
average, credited to end beneficiaries within 30 minutes, and almost all within 24 hours – down from
what could take days with Swift’s previous solution.

By the end of 2018, more than half of Swift cross-border messages were sent using gpi, with Swift
aiming to move all of its 10,000 member banks to the service by 2020.
As part of the gpi initiative, in 2017 the organisation also started to experiment with the use of
blockchain technology for real-time nostro reconciliation. However, Swift has thus far not taken it
further than a proof of concept. Instead, the company has more recently commenced a proof of
concept with R3 to see how gpi can connect with blockchain-based solutions.

H – Hyperledger Fabric

Hyperledger Fabric is an open source blockchain platform hosted by the Linux Foundation. Like
Corda and Quorum, it is a private permissioned ledger and works as a framework for other
applications.

IBM has chosen Hyperledger Fabric as the foundation for its own blockchain platform, meaning that
blockchain-based solutions built by IBM are based on this framework. In the trade space, this
includes projects like TradeLens and we.trade.

I – Internet of things

IoT refers to devices and sensors connected to one another that automatically collect and exchange
data. In the world of trade, firms have started using this technology on cargo to track anything from
the location of the goods, to vibration and container openings, as well as conditions such as humidity
and temperature.

This is changing the way trade is being financed: by enabling financiers to obtain real-time
information on the physical flows that they are financing, they can better assess working capital
funding risks rather than rely solely on balance sheet strength. Arviem, for example, recently
became one of the first companies in the world to integrate logistics IoT data into a commercial trade
finance service.

J – Joint venture

As banks are joining forces to innovate, a growing number of consortia have decided to create joint
ventures that can own and operate their new solutions. we.trade was one of the first trade finance
blockchain initiatives to take this route when it was incorporated as an independent legal entity in
Ireland in April 2018, with banks as its shareholders. This model has since been adopted by other
consortia, with the formation of komgo in Switzerland and Forcefield in Singapore. Equally, the
banks behind Voltron are looking to establish a joint venture by the end of the year.

While some consider this approach an efficient model to bring innovative solutions live, others have
raised questions around whether the creation of centralised organisations counters the goal of
blockchain (which is based on the idea of being decentralised).
TradeLens, a global trade platform built by IBM and Maersk, is an example of a project that had to
ditch an original plan to form a joint venture, after industry players had expressed worry over too
much Maersk control.

K – komgo

komgo is a blockchain-based platform powered by Quorum that digitises and streamlines commodity
trade finance. It was founded as an independent venture in August 2018 with 15 large traders and
commodity finance banks as shareholders. This followed two experiments carried out on ING’s Easy
Trading Connect platform.

komgo facilitates letters of credit (LCs), standby LCs and receivables discounting. It also
standardises the know your customer process, enabling the exchange of documents on a “need to
know” basis and without using a central database.

L – Legal challenges

The legal recognition of electronic instruments remains a big question mark in the world of trade and
is crucial for blockchain-based trade finance to realise its full potential.

In the US, for example, letters of credit have been allowed in electronic format since the UCC Article
5 was revised in 1995. However, negotiable instruments continue to be governed by UCC Article 3,
which tethers legal jurisdiction to exclusively paper instruments. According to Alisa DiCaprio, R3’s
global head of research and trade, it could be an estimated three to five years before revisions of
this article might be enacted, due to bureaucratic barriers.

Challenges around the legal recognition of electronic trade finance mean that rulebooks are being
pursued by most blockchain solutions in trade finance in order to provide assurance in the
enforceability of agreements. Such rulebooks typically include agreed-upon rules around the rights
and obligations of negotiable instrument transactions on a blockchain, residual rules for the
governance on unresolved issues and a choice of forum, according to DiCaprio.

M – Marco Polo

Marco Polo is a blockchain-based open account trade finance platform powered by Corda. The
application simplifies and speeds up the processes behind open account trade finance services, with
receivables finance and payments commitments being the first products tested.

Launched in September 2017, the project is led by TradeIX and a consortium of banks. Continuously
growing, the network had 22 bank members as of July 2019. In March, the platform facilitated its first
live, commercial pilot transactions. Production is scheduled for the second half of 2019.
N – Natural language processing

A branch of artificial intelligence, natural language processing helps computers understand and
interpret human language. It is particularly useful in the compliance space, where professionals
conducting due diligence screening typically have to manually trawl through significant volumes of
content.

Natural language processing can help search every corner of the web, breaking down search results
by extracting names and associated attributes, to create a comprehensive profile about an individual
or business involved in a transaction. DDIQ, which is owned by global financial crime and
compliance company Exiger, is one solution that does just that. Programmed to think like a financial
crime investigator, the engine can read 70 languages and spends just a few minutes to investigate
thousands of websites and documents in order to expose bad actors and potential risks.

O – Optical character recognition

OCR is a technology that converts documents such as scanned paper, PDF files and images into a
digital format. Trade finance is a particularly good use case for OCR, given its traditionally paper-
heavy nature. Banks are increasingly using the technology to digitise and interpret trade documents
such as purchase orders, packing lists and bills of lading.

Traydstream, Conpend and Tradesun are examples of firms using OCR technology to help trade
finance banks read, scan and structure paper-based information digitally in order to automate
compliance checks.

P – Production

While ‘pilot’ and ‘proof of concept’ have been the big trade finance tech buzzwords of the past
couple of years, the focus of 2019 is around when the many technology solutions will be ready to
move into production.

In a software context, the phrase “enter production” typically refers to when the software is being
implemented in an organisation’s systems and becomes operational in a live environment. This
usually follows development and testing phases. So far, only a few trade finance-specific blockchain
platforms have reached this stage.

Q – Quorum

Quorum, a blockchain framework similar to Corda and Hyperledger Fabric, is the enterprise-focused
version of Ethereum.
Ethereum itself was launched in 2015 as one of the first public blockchain frameworks used to create
applications beyond supporting a digital currency. JP Morgan later launched Quorum, an enhanced
version to support enterprise needs around privacy and confidentiality.

As opposed to Ethereum, Quorum is a private-permissioned blockchain. It powers a range of

blockchain applications in the trade finance space, including komgo, Vakt and JP Morgan’s internal
cryptocurrency JPM Coin.

R – Regtech

An abbreviation for ‘regulatory technology’, regtech is a term that covers innovations to help banks
and firms resolve regulatory issues and manage compliance risk. This category has drawn particular
interest from banks as they continue to try and cope with the tsunami of regulation that has hit them
since the financial crash of 2008.

Examples of regtech are AI and machine learning, which can be used to identify and flag suspicious
activity, while natural language processing tools and know your customer utilities can help undertake
due diligence.

S – Smart contracts

Smart contracts refer to software programmed to automatically complete transactions once certain
conditions are met. For example, a smart contract could automatically ensure that a supplier is paid
once the goods have arrived at their final destination.

A recent report by law firm Allen & Overy suggested a range of use cases for smart contracts in
finance, such as the settlement of securities, payments under a derivatives contract, the recording of
financial data and proxy voting.

A smart contract doesn’t have to be a legal contract and, although it is often associated with the term
blockchain, it doesn’t need blockchain to work. It’s also not a new concept: it was first invented
backin the 1990s.

T – Trade Information Network

TIN is an initiative driven by seven large trade finance banks to build a multi-bank supply chain
finance data exchange. Originally known as Wilson, it launched under its new name in October
2018.

The solution, which is currently being built by CGI, will work as an aggregation platform where
corporates can submit and verify purchase orders and invoices to request trade financing from the
banks of their choice. By gathering this data in one place, banks will be able to check whether a
document has already been financed.

While the involved banks are all engaged in separate blockchain initiatives, they have opted for
cloud technology and not blockchain on this occasion. TIN is also different from other technology
initiatives in that the financing itself will happen outside of the network, using banks’ existing
systems. It also doesn’t connect banks to each other.

U – Universal Trade Network

The UTN is a project run by some of the largest trade finance banks, industry bodies and fintech
firms to connect the growing number of detached blockchain networks in trade finance. Its primary
aim is to create open trade and technology standards to promote interoperability among blockchain
and other B2B networks.

The project was initiated in early 2018 by blockchain firms TradeIX and R3 together with banks
involved in Marco Polo. Today, UTN members also include banks from Voltron and other consortia,
and the initiative is looking to attract further players across the trade ecosystem, including logistics
providers, companies, insurers and fintech firms.

V – Voltron

Voltron is a blockchain-based application aimed at making the exchange of trade finance

documentation digital and more efficient. The solution is built by CryptoBLK on Corda and run by a
consortium of eight banks. It first made global headlines in May 2018 when HSBC and ING executed
a blockchain-based letter of credit together with trading giant Cargill.

Since then, the members have completed multiple live pilots in different industries and geographies.
The consortium is now looking to establish an independent legal entity that can bring Voltron into
production.

W – we.trade

we.trade is a blockchain-based platform that streamlines open account trade finance. It is targeted at
SMEs in Europe, helping them to manage, track and protect open account trade transactions.

Backed by a consortium of 12 shareholder banks, we.trade is one of the first blockchain-powered

trade finance platforms to go live. The project was first launched in January 2017 – at the time under
the name Digital Trade Chain. It later rebranded to we.trade and was incorporated as a legal entity in
April 2018.
Earlier this year, we.trade announced it had signed its first licence agreements with 14 banks, who
are now actively using the platform. The company is currently working with eTradeConnect in Hong
Kong to explore how the two solutions could work together.

X – xRapid/xCurrent

xCurrent is a blockchain-based real-time messaging system provided by Ripple. The solution is used
by a range of financial institutions around the world to instantly send and confirm payment details
with end-to-end tracking. xCurrent is today the most prominent blockchain-based alternative to the
1973-founded Swift, the dominant player in the global payments messaging space.

Another product offered by Ripple is xRapid, a cryptocurrency-driven payments solution. It provides

on-demand liquidity to financial institutions for international payments without requiring them to have
correspondent relations. It does so by using XRP, a cryptocurrency created by Ripple, as a ‘bridge’
between fiat currencies. This fact has meant that many banks have so far been more wary of using
this solution.

Y – You

Yes, you, the customer. The days of bank-led solutions are over, as the trade finance industry is
taking a much more client-centric approach to technology than it previously did. Case in point is the
recently launched Trade Information Network, where the consortium behind the project interviewed
35 large corporates before deciding to go ahead with it. Another example is Marco Polo, which came
out of a client use case back in 2017.

This is an important change for the industry in light of past attempts to digitise trade finance that
failed to gain corporate uptake (spoiler alert: you will find such an example under the next letter).

Z – zzz

The constant emergence of new fintech solutions in trade finance has prompted some banks to hit
the snooze button on older digital trade initiatives. One of them is the bank payment obligation
(BPO).

Launched amid great fanfare in 2013, the BPO is a hybrid instrument between the letter of credit and
open account, which combines legally-binding rules with electronic messaging and matching
capabilities through Swift’s trade services utility (TSU).

But despite being an elegant solution in theory, take-up has been sluggish, mostly due to lack of
client uptake. And after the news emerged in April that Swift is scrapping the TSU by 2020, it seems
doubtful that banks will seek to push more life into the now decaying BPO.
 take me back

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