European banks upgrade blockchain cooperation, seven major banks jointly develop blockchain trade finance platform for SMEs

Seven of Europe’s largest banks have reportedly signed a memorandum of understanding (MOU) to develop a blockchain-powered cross-border trade finance platform for European small and medium-sized enterprises.

The seven banks include HSBC of the UK, Rabobank of the Netherlands, Societe Generale, the largest commercial bank in France, Natixis of France, UniCredit of Italy and KBC of Belgium.

The newly formed banking group aims to better improve domestic and cross-border trade for European businesses and will jointly develop, deploy and promote the adoption of the "Digital Trade Chain (DTC)".

The initial DTC proof of concept is based on a prototype solution developed in partnership with KBC Bank of Belgium as a trade finance and supply chain solution.

The banking group’s blockchain solution

DTC intends to simplify the trade finance process and will seek to provide efficient management and security for domestic and international trade transactions of European small and medium-sized enterprises (SMEs). Essentially, this distributed ledger will digitally connect all participants - buyers and sellers, personal banks and logistics transporters, etc. - through online interfaces and mobile applications to record, track and protect transactions.

The project is targeted at SMEs because they prefer a more straightforward open account solution (product dispatch and delivery before payment is due) transaction process.

This form of trade finance payment generally takes 1-3 months to complete. In comparison, larger companies will choose a documentary credit or a letter of credit process (a letter of credit: a bank guarantees that the buyer's payment will be delivered to the seller on an agreed date).

DTC will help achieve end-to-end transparency, and the banking group also claims that DTC can significantly reduce administrative duties, including paper documents and accelerate the order-to-settlement process. The new alliance also believes that SMEs trading with their partners will also benefit from this seamless, transparent and secure platform, thereby promoting a better trading ecosystem in Europe and beyond.

Trade finance and the blockchain boom

Although proponents of blockchain technology believe that this innovation will trigger systemic disruption in the financial industry, the trade finance industry in particular may become one of the earliest adopters of this disruptive technology. The current industry process is plagued by inefficiencies due to the large number of manual factors in error-prone and time-consuming supervision. Automation of manual processes and almost instant settlement times are direct advantages of blockchain technology.

Reducing counterparty risk, improving operational efficiency and enhancing transparency on a global scale will benefit global trade and auditors, and will benefit the $4 trillion trade finance industry.

In September 2016, a shipment of cheese and butter worth $100,000 exported from Ireland to the Seychelles was reportedly the world’s first trade finance transaction completed using blockchain technology. In the same month, Microsoft revealed its intention to use blockchain technology in conjunction with Bank of America to “provide a boost to the transformation of trade finance transactions.”

Earlier, the R3 blockchain consortium revealed that it was developing two blockchain prototypes to improve the global trade finance industry. R3 CEO David Rutter said that a total of 15 bank members participated in the development, and he also called trade finance "a vital source of income for banks."

Trade finance solutions based on blockchain will also help reduce or even prevent the risk of fraud that is common in international trade. An obvious example is that two years ago, Standard Chartered Bank lost $200 million due to fraud at Qingdao Port in China. Now Standard Chartered Bank is developing an electronic invoice ledger with Singapore's DBS Bank.