GLOBAL / 14-06-17 / BY
With every new technological development, it is claimed that banks will become redundant. Yet, in 2017 – in the age of internet and information – there are more banks than ever before.
The debate over bank disintermediation has stepped up a notch in the past couple of years, however, in light of the strides made in blockchain and its possible use in trade.
Banks are hungrily eyeing blockchain technology – whereby all transactional detail would be logged and stored on an immutable, shareable, digital ledger – as a way of speeding up transaction time and cutting costs. It is also seen as a fool-proof way to stop large-scale fraud, such as the warehouse receipt scandal at Qingdao Port in 2014.
“Trade today is prone to fraud. Whether it’s supply chain finance where you have invoices, or Qingdao where you have warehouse receipts or bills of lading… wherever there’s a document, there can be fraud. and blockchain, while it’s not ‘fraud-less’, reduces the options,” Adnan Ghani, global head of trade at Westpac, told GTR’s Australia Trade Forum in Sydney last month.
For industry figures too, trade finance processes are frustratingly old school and open to manipulation.
“The sector is ripe for disruption because it’s so antiquated. It’s a paper-laden process, there’s still message formatting created in the 70s such as Swift and EDI [electronic data interchange]. It’s pre-internet and it’s not current,” says Mark Pryor, CEO of US commodity trading software company The Seam.
Cutting out the middle man
But while banks are looking to use blockchain to improve their profit margins, others are talking about cutting them out of the equation altogether.
“Blockchain is inherently P2P. It cuts out the middle man, lowers transaction costs, provides visibility throughout the supply chain. You can track fleets, goods, store documents and make payments, all without a massive room of manila envelopes and 20 bankers,” Collin Thompson, the co-founder of Hong Kong-based blockchain consultancy Intrepid Ventures, tells GTR.
He adds: “Companies like Olam could finance their own supply chain. There’s a spectrum of constituents that would be able to transact business seamlessly, then there’s downstream finance, where you can finance suppliers. You could provide a letter of credit for them to purchase seeds, or create financial solutions for them to hedge their harvest, or even insurance. Imagine Olam providing crop insurance to the farmers.”
Already, some of the blockchain companies in trade are offering downstream financing solutions as part of the package.
As well as working with Commonwealth Bank of Australia and Wells Fargo on the first trade finance deal conducted on multiple blockchain platforms last year, Skuchain has been offering supply chain financing as an incentive for more suppliers to sign up to use its blockchain solution.
While some will be onboarded by the buyer at the top of the chain (which has actually invested in the blockchain technology), others need more coaxing.
Vice-president for business development and strategy at Skuchain Rebecca Liao explains: “We have a supply chain financing solution that allows for a secure, immutable, auditable ledger. It’s collaborative because all the parties to the transaction can write on the ledger. You have a transaction that’s only as risky as the goods themselves.
“We have our own special purpose vehicle, a wholly-owned subsidiary of Skuchain. We buy the goods from the supplier, we take title to the inventory. They get immediate working capital relief, at a rate that’s better than the terms the buyer had to offer or that any bank would offer. Once you have that working capital relief you’re much more likely to adopt the technology, particularly one that’s so lightweight.
“On the other end, we say to the buyer: ‘Don’t put this inventory on your balance sheet until you’re ready to use it.’ That’s possible because Skuchain owns title to it. On the buyer’s side, they can put off recognising the liability. When they are ready to recognise it, it’s generally 90-100 days, into the next quarter. Plus they get a discount on the goods. It’s a financial win for everyone involved. That’s the combination of fintech plus the security of the blockchain.”
This carrot and stick approach also removes bank charges and speeds up transaction time. The average paper-based trade finance transaction takes three weeks to complete. Paperless trade companies like Bolero’s do a great job by all accounts, cutting transaction times to three or four days, but this, theoretically, could be done much quicker on the blockchain.
Bext 360 is another start-up that is using blockchain to make supply chains more efficient. They have built a robot that analyses coffee beans at farms in Africa, grading them on the spot. This data is entered onto the blockchain and can be viewed by buyer and seller alike, who can transact instantaneously.
Previously, farmers would leave their crops at the market, where it would be manually sorted and would be paid months later.
As well as the ethical problems this helps solve, there’s a clear financing opportunity.
The company literature reads: “By making digital payments for loans and interest directly to lending organisations, while they analyse and collect goods, Bext 360 machines will literally pay for themselves. This process provides critical capital to entrepreneurs by reducing the cost for lenders to monitor and collect on capital equipment loans. This investment stimulates new businesses by providing capital to process commodities in the market of origin.”
Is it a step too far for the buyer to provide downstream financing itself? No, but the logicial counter-argument is that a bank will be involved at some stage, even if it’s in a reduced capacity.
US blockchain company Stellar developed that part of the solution for Bext 360, and their co-founder Brit Yonge is keen to dampen talk of full bank disintermediation by blockchain.
He tells GTR: “You have to be careful. You don’t want to push people into the informal economy. That’s negative: you don’t have the same protection. Banks, as much as we like to beat them up, are regulated and are held accountable when they do screw up. The idea is not to push people into the informal economy. But it is true that there are services banks provide today that will be provided by other entities in the future.”
Disintermediation is, to an extent, already underway through the likes of Facebook payments, WeChat payments in China, and AliBaba’s digital bank.
A bankless future?
It’s worth pointing out that even in the case of AliBaba, it needed a financial arm to underwrite the risk of transactions, rather than operating as a non-financial entity. With blockchain, the thinking goes, this will be no different.
“It goes back to the nature of banks. It is pricing risk in general. Unless there’s a part in the blockchain that can price credit, market and liquidity risk and charge back to the client in the ecosystem, you will still need a financial institution.
“Blockchain is just distributing data. It can eliminate some of the fraud, but the data distribution doesn’t remove need for risk underwriting. Even if the money is small the banks still need to get social data, their Facebook info for example. I don’t think a data distribution platform can replace a data analysis platform,” Paul Sin, the lead partner in Deloitte’s fintech practice in China, tells GTR.
This doesn’t mean there is no concern among banks. In Sydney, ANZ’s head of transaction banking Alan Huse said that the disintermediation of banks was a “philosophical question”.
He said: “If banks don’t wake up to the opportunities of partnering with organizations in the space, there’s a risk. They could be bypassed or used only for financing, take their money in a different form and pass it on. Being alert to the threat will help us minimize it.”
Reducing their role is the opposite of what many big banks, in Asia at least, are trying to do. Talk to senior people at HSBC or Citi and they’ll regale you with plans to “deepen relationships”, saying they can’t compete on price with aggressive local operators, but they can on scale and comprehensiveness.
All of this is, of course, speculative. But for banks in trade it should be food for thought. In such dynamic times, nothing should be taken for granted. The attitude should be: evolve or die.