FinTech Big Leaguers Place Their Bets On Blockchain-Based Trade Finance

The possible use cases for blockchain are seemingly endless, but when behemoths like Microsoft and Bank of America Merrill Lynch (BAML) offer their take on how to harness its potential, the industry tends to pay attention.

This week, the two announced a partnership to develop blockchain-based solutions for a targeted space: trade finance. They may be some of the biggest, but Microsoft and BAML aren’t the first companies to land on this use case for distributed ledger technology. Startups like Fluent and Wave are part of a growing ecosystem of innovators focusing on the trade finance sector to apply distributed ledger technology, while other big players, like Barclays, UBS and the Euro Banking Association, have all narrowed their blockchain focus to this segment.

Whether disruption of trade finance processes via blockchain will actually come to fruition is yet to be seen. But in a chat with PYMNTS, Marley Gray, Principal Program Manager for Azure Blockchain Engineering at Microsoft, and Chris Bozek, head of Global Product and head of North America, Global Trade and Supply Chain Finance at Bank of America Merrill Lynch, emphasized that, as the FinTech ecosystem gradually integrates blockchain into its inner workings, trade finance is an obvious place to start.

“Trade finance is historically a very paper-based business, so the potential for blockchain to create efficiencies in trade finance transacting is very high,” Gray explained. The combination of blockchain with cloud technology — leading to the rise of Blockchain-as-a-Service — can be particularly useful for all parties in global trade: buyers, suppliers and banks, he added.

Enabling these players within a trade transaction to access blockchain tools via the cloud, Gray said, makes for an “interesting path” for the market to overcome any barriers to adoption.

Microsoft and BAML’s partnership will see the two exploring distributed ledger-based solutions for trade finance processes using Microsoft’s Azure platform. Among their goals is to complete what they say would be the first transaction between a treasury (Microsoft Treasury) and a major financial institution (BAML) that would be powered by Azure and integrate blockchain technology.

Their collaboration was announced shortly before CGI revealed its own plans to launch an innovation lab specifically focused on developing blockchain-based trade finance solutions. Only yesterday (Sept. 29), UBS revealed its own prototype that uses blockchain technology to host an entire lifecycle of a cross-border trade transaction.

Earlier this month, Barclays, working with the aforementioned Wave, completed what it also claimed was a first when it made a trade finance transaction using distributed ledger technology over SWIFT infrastructure. The transaction saw the transmission of a letter of credit between an Ireland-based food company and one of its buyers.

The letter of credit, a necessity in global trade deals, sees a buyer’s bank issuing the document to a supplier’s bank to ensure that a supplier will get paid. This, said BAML’s Bozek, is just one of many sheets of paper that companies need to handle to complete their deals and is a top motivator behind shifting this process onto the blockchain.

“Converting the multiple, complex documents inherent in a trade transaction from paper to digital, then placing the digital ‘documents’ in a distributed manner, would be a game-changer for trade finance,” he stated, adding that digitizing the paper workflow means trade not only happens more securely but the payments resulting from that trade occur faster.

“Digitizing all the accompanying documents accelerates the processing, reduces risk and increases transparency for all parties in the transaction — enabling both the buyer and supplier the ability to optimize working capital,” he noted.

(BAML has targeted the letter of credit before in its blockchain dealings, partnering with HSBC and Infocomm Development Authority of Singapore earlier this year to explore letter of credit transmission over distributed ledger.)

But just as players in the FinTech big leagues sound off on their plans and aspirations for blockchain solutions in the trade finance space, some analysts are also looking at whether distributed ledger technology is simply a hyped-up concept, and that adoption of any solutions that emerge is far from guaranteed.

Bozek told PYMNTS that, indeed, the financial services space isn’t yet close to making blockchain-based trade finance a widespread reality.

“While blockchain has created a significant ‘buzz’ specific to trade transacting, we are in the early days of understanding the technology’s capabilities and limitations,” he said. But working with a large corporate treasury unit, like Microsoft Treasury, is bringing the industry a step closer to that reality, he said, and allows corporate clients of BAML, Microsoft and other firms the opportunity to explore their interests in this area.

According to Gray, BAML and Microsoft have already created a successful proof of concept. Their next step, he said, isn’t yet defined, but the team operating under the partnership is in the process of moving closer to using their POC for a live transaction.

“The proof of concept was a success,” Gray said, “demonstrating how trade transacting through blockchains and smart contracts can digitize the end-to-end standby letter of credit processing, benefiting both corporates and the banks.”

UBS, in its own latest blockchain-based trade finance venture, similar emphasized that it was in its early stages of the solution.

That shift from proof-of-concepts to actual, real-world application of blockchain-based financial services, like trade financing, is not only BAML and Microsoft’s big hurdle, it’s the entire industry’s and overcoming it will take the space to the next level of a distributed ledger reality.