Bank consortia look to distributed ledgers and smart contracts to rewire trade finance

Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore have claimed success in demonstrating the application of distributed ledgers to replace paper-based Letters of Credit in trade finance transactions.

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Bank consortia look to distributed ledgers and smart contracts to rewire trade finance

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The consortium utilised the Linux Foundations open source Hyperledger software for the prototype app with IBM Research and Services providing technical and program assistance.

The application mirrors a paper-intensive Letter of Credit (LC) transaction by sharing information between exporters, importers and their respective banks on a private distributed ledger. This then enables them to execute a trade deal automatically through a series of digital smart contracts.

A report by Bain in July estimated that about 50% of banks' costs for a Letter of Credit arises from manual document handling and checking, which creates delays, errors and expense.

Vivek Ramachandran, global head of product for HSBC’s trade finance business, says: “Letters of Credit are an important part of the trade system, but they are based on 20th century technology, not 21st. Our challenge is to take this from concept to commercial use; making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad.”

He says the partners now plan to conduct further testing on the concept’s commercial application with selected partners such as corporates and shippers.

Not to be outdone, bank-backed blockchain consortium R3 rushed out news of trials by 15 of its consortium member banks to use the Corda distributed ledger platform to process accounts receivable (AR) purchase transactions and letter of credit (LOC) transactions.

Estimates suggest that such technology has the scope to reduce operational and compliance costs of paper-based trade financing by 10 to 15% and provide a platform for banks to grow revenues by as much as 15%.

Over 15 R3 consortium members were involved in the trials including Barclays, BBVA, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natixis, Nordea, Scotiabank, UBS, UniCredit, U.S. Bank and Wells Fargo.

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Comments: (2)

Dinesh Katyal

Dinesh Katyal Director Product at Financial Data Exchange

Is the blockchain used to track transactions on a particular A/R asset? I wonder how it is then associated with line of credit asset?

A Finextra member 

For a variety of reasons - depth of the problem, specific problem, nature of building a community - I think this is the best initial application for financial services.

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