Couple of years back, Anand and I were discussing few digital disruptions in the financial world that have made a phenomenal impact on the banking sector. We have alternate payment channels that challenge the traditional brick and mortars - immediate payment services (IMPS) transactions, renewed contextual mashups, dashboards, to name a few. Then he threw a question at me - Is there any such disruption happening in the trade and supply chain finance world? Can we eliminate / diminish the monopoly of SWIFT by providing an alternate, safe, secure, cost-effective, and transparent channel? Trade finance is infamous for its process inefficiencies and notorious for cost escalation. Also, not that charming while comparing with retail banking segments. I could not read his mind clearly to derive a conclusion but he knew exactly what he was talking about. Now, two years later, the world is talking about that disruption. Most of the Ivy League banks have either partnered with a consortium to develop this channel or developing in-house model.
The players involved are so excited about this innovation, and what more, SWIFT has predictably sensed the danger of their existence, hence started developing a prototype to make it exclusive for them.
You would have guessed it already, it is none other than blockchain technology. The history of distributed ledger evolved from 90s, however the distinct development has begun from 2008-09 onwards when the ever mysterious Satoshi Nakamoto presented the bitcoin idea based on distributed ledger theory. The world has seen a systematic evolvement of blockchain technology after that, and banks are now keen to add more use cases to improve their operational efficiency. A recent survey done by distributed ledger professionals revealed that majority of banks do not want to miss this blockchain disruption, even if it may challenge some of their successful business models.
Blockchain provides a transparent framework for all relevant parties to communicate transparently. The documents are stored arithmetically to make it available for all. Matching and approvals can be automated unless for exceptions. This makes the whole process significantly faster and secure.
Blockchain driven Trade Finance use cases, any example?
What is disruptive in this? Just an advanced mode of transmission, isn't it?
That is quite interesting to be justified! Let us understand more, what is fascinating beyond cost optimization and speed factors:
1. Significant change in current business model - Risk-free deals provide better negotiation power to both importers and exporters. Predictability of funds, document management, and shipping are significantly improved. Option of discounting, bills rediscounting, purchases, etc., can be relooked
2. New business models may emerge - Even a technology company (let's say fintech here) can facilitate entire trade transactions since the process is much simplified but digital driven (already modeled this in payment segment and now they can expand their business line). Banks really have to wonder, who moved their cheese!
3. Moving in parallel with retail transactions due to its near real-time behavior - This excitement will definitely bring in more incremental disruptions in the future
4. The sheer change in technology may force some of the talent to be redundant - Take for instance, we can avoid the expertise in message type (MT) format as the process is now much simplified across the life cycle. A renewed talent philosophy may emerge amidst the chaos!
5.Advance analytics - It can play a vital role in defining the predictability and pitfalls by analyzing the transaction pattern. Isn't that quite exciting?
Are we ready to be part of this positive disruption?
1.The existing business use cases should be simplified to leverage the advantages that blockchain offers. E.g., an average life cycle of a typical trade transaction may take around 20 - 25 days to complete, whereas a distributed ledger network will help the trade to complete in few hours, potentially.
2.Banking Industry Architecture Network (BIAN) standards should be in place to strengthen process inclusion and innovation. We cannot wait for another three decades to have the next set of disruption! Let the experts across the globe participate in this refreshing change management process. It is the era of open source, the best will survive only through a cohesive-distributed platform wherein corporates, fintechs, SWIFT, and the beautiful minds across the world coexist.
3.Revamp of International Standard Banking Practice (ISBP) and International Chamber of Commerce (ICC) rules? For e.g., banks may take 5 - 7 days to respond once they receive document after verification. In this case, benchmark for bank response would be few hours (or more real-time perhaps!) if everything is acceptable. Existing rules and practices may have to customize.
4.SWIFT is definitely facing an existential crisis. Remember, what happened to Kodak and Nokia in the smartphone era? The likes of Tesla are challenging the 'better car next time' theory of traditional car companies, and the same is happening to SWIFT in the financial world. SWIFT, with more than 8,000 banks in their network originally designed from pre- Internet era, is still surviving even after 40 years without much changes to their protocols. It always provides a better version than a disruptive version and is getting challenged by blockchain. They have come up with a prototype that can create exclusive blocks for the members, but has its own limitations due to initial higher cost of investment and continued exclusivity by SWIFT.
5.Blockchain as a service (BaaS) is a great step to resolve this uniqueness issue and cost optimization. Implementing BIAN standards will be an added advantage here.
Technology companies should leverage the current disruption wave to amplify its business opportunities. These are time bounded opportunities; Winners and early adopters will take it all, others may just wipe off from the scene. Future is bright for those who constantly challenge the conventions. Blockchain is indeed doing this, and is here to stay for long.