Boiling point?

Opinion | 30 May 2017
Bubbles

Panellists at the TFR Cross Border Trade Forum discuss whether trade digitisation really is close at hand, and consider how the industry will answer the inevitable question of interoperability

 

 

The Panel:

Jacco de Jong

Managing director, essDOCS Consulting

Ian Kerr

CEO, Bolero

Abhijit Prasad

Global product head, open account solutions, HSBC

Chair – André Casterman

Chief marketing officer, INTIX

 

André Casterman: Can you share your views on technology, trends and what you see (or what you would like to see) happening in the foreseeable future.

Ian Kerr: Our vision for the future of trade digitisation is about educating the market about its benefits. There are several things happening now that suggest that there's a tipping point about to start, certainly in ePresentation.

In terms of evolution, we see trade digitisation as being about interoperability and a networks of networks. There are various ways of managing this. One size does not necessarily fit all. It's all about working together on in an interoperable way and, as part of that, we work closely with adjacent space innovations and network, and have integrated with some of these organisations to provide straight-through data processing, which is the key foundation of digitisation.

Just to give a perspective, we absolutely see blockchain or distributed ledger technology (DLT) applications as being in that adjacent space. We see clear use cases where the technology would start very well. One of the topics of this discussion is about the evolution from proof of concept to an industrial-scale rollout. My view is that the proofs of concept that have been carried out so far haven't proven much. They've required a lot of manual intervention, and the underlying scalability has yet to be proved. What it has shown is, in our opinion, that it's not just about the technology. It's about the business process in completing trade transaction, and that involves the hard task of getting customers onboarded, bringing in place a legal framework around the transaction that all parties can trust, and the underlying technology is a facilitator of that.

Jacco de Jong: At essDOCS, we focus on the customer. How can we avoid problems? How can we make things easier? How can we make things quicker? Our core focus is the commodity finance players. That's energy, metals, agri, and chemicals. We ask why, from a business perspective, it would make sense to move away from paper.

These days, documents travel so far around the globe. First they're created, then processed by banks, then by other banks, then the carrier, then they reach the buyer - it takes so long. Then, upon arrival, some could be missing. That's the main driver for trying to move away from paper to the digital equivalent. From there, things evolve because you can do so much more with digital documents. Yes, they can be used under traditional bank transactions, like with LCs, under eUCP, under collections, but of course there's much more that can be done. I'm still a believer in the BPO.

In terms of what's going to happen over the next few years, we're probably going to hear a lot about R3 and blockchains. With R3 and blockchain, there are many proofs of concept that have been created, but when you scratch below the surface, you find it's not as innovative as it seems. So, I wonder if we'll see that in trade in the next few years. I think that there is still an opportunity for the BPO as well.

Abhijit Prasad: I thought I'd offer an insight into how we view new technologies. There's a lot of talk around new technologies. BPO has been around for a little while, and now there is blockchain. But, when we look at technology, we're looking at it through a few lenses.

First, does it solve a real problem with customers or with back offices, or how we process things? There must be a real application or use case that we see a need for. Second, does it meet the standards we set for ourselves? As banks, our standards are quite high. At HSBC, we've probably got higher standards than most in terms of information security and legal risk compliances. Does this particular technology disintermediate the most valuable commodity that we have, which is our relationship with our customers? And, finally, can it be scalable? Is it something that you can use for more than just this particular transaction? Has it got wider implications for us, or for the industry? If it ticks all these boxes, that's something we would pursue.

Obviously, we've got our own IT shops, we've got certain partners, and there's a combination of ways we use internal IT and external vendors. Increasingly, we're seeing the need for the quick adoption of technologies, and that's not something that banks have been good at traditionally. We like to build stuff on our own.

There's increasing acceptance of the fact that we must use external technologies. We don't have to reinvent the wheel. What we can do is use the technology that is built externally. If you combine that with the relationships that we've got with our customers, our teams can identify and unleash the power of technology with trade finance.

Arguably, trade finance has been slow at adopting technology. Our view is that it's going to skip one level of technology adoption and go from being manual and onerous to being something which is automated, or fairly automated. As a leader in trade finance, we consider it our responsibility to drive that adoption of technology so that we can move to a place that is better for our customers and for ourselves.

André Casterman: It's very encouraging to see your willingness to work with fintech companies. Let's now try to dig into each of your views. Can we have the first question from the audience please?

Audience question: I would like to know whether the fintechs on the panel complement one another or are competitors. If you are competitors, what are your differentiating factors?

Ian Kerr: I was asked that question a couple of years ago at a panel session in Singapore, when I was speaking alongside a guy from Cargill and a guy from BHP Billiton, who use both Bolero and essDocs. My view then, and still is, that we're an educational sales process, first of all. We are educating the market, and the more of us that are out there, evangelising the benefits of digitisation, the better. Second of all, if you're in a business with no competition, you should wonder what you're doing for a living. We see competition as a healthy thing. We would focus on differentiators. Where we came from was very much trade finance, LCs and I guess where essDOCS came from is more shipping documentation and document origination, and we've met in the middle around ePresentation. We're actually in discussion with one of our customers about integration as well.

Jacco de Jong: We do talk to each other and actually your chairman [Bolero's] and I worked together during our time at ABN AMRO. It's a small world. Because there are two companies out there, you keep each other sharp, so we're in friendly competition. Sometimes the customer will end up with us, sometimes with you, and sometimes they end up with both. I think interoperability is something that could be improved in the future,
but I think it's a good thing, mostly.

Audience question: My question is for Jacco. The document that you described was quite interesting and I think it works very well in terms of reducing significantly the time it takes for banks to review documents, and decide whether there's a discrepancy or not. I wonder if you could potentially take it further and get it to customs and central banks, who also, in most cases still see things from the old perspective of having paper documents. For instance, ports, if automated, would be able to see documents and that banks have approved them and consider them to be okay, and then the client should also be able to use it to clear goods without having to request them. But then, for people who have not adopted the solution, it might be difficult for them to see a customer approach them with an electronic document, so I'm wondering if you're taking this further.

Jacco de Jong: I couldn't agree more, and it's a gospel that we definitely have to preach. In terms of discrepancies from an electronic perspective, if you have discrepant electronic documents and the bank knows about the discrepancy, it's much easier to quickly return that to the beneficiary, return it back to the carrier and adjust the proportions to be in line with the truth. So, we can already reduce the discrepancy rate by using electronic documents.

Also, the world has not gone digital yet. So, we follow the customers and their business. Right now, we're active in 53 countries, 73 when testing is included. In each country, we go to the local port authorities and customs authorities and see how we can make it work in that country. Surprisingly, in some countries, we can go fully digital. However, many countries still require a paper version of the documents for customers at the end. So, depending on the location of the end receiver, we have a setup that makes it work for that country.

But, even if a locality does go fully digital, like Dubai, you must still come by in two weeks' time with paper documents. That doesn't make sense, so it as a transition. In trade finance and in shipping especially, people still tend to like paper, so it's a transition that takes time. We see this in Asia, where that transition is going much quicker than in Europe or the Middle East. The US is far behind for instance, in going digital.

Ian Kerr: There are still 16 countries in which the customs organisations want the original paper bill. It's got to be the original. The countries that accept copy bills can typically be persuaded to take that copy bill in digitised format. We can also switch the paper if we need to, which lets the process down a little bit, but, again, it's about education. The World Customs Organization is also evangelising digitisation. It's a guidance body so it's got no real power, but it's trying to encourage the industry.

Jacco de Jong: That's why we are focusing on commodity finance. That's the area that has the power to motivate certain countries or ports to find ways to digitise.

Abhijit Prasad: Gradually, as millennials start getting into positions where they make decisions, you're going to see an inflection point where things will change. Whether it happens in the next five or 10 years remains to be seen.

Audience question: Some countries accept electronic documents and yet ask for the paper equivalent, which is obviously for legal matters. The legality and the enforceability of an electronic document has been debated for years. It's a challenge to get it accepted. This has nothing to do with major trading houses or supply chain managers pushing it, it has to do with the culture of a country, so how do you deal with that?

Jacco de Jong: At first, you need a push, otherwise nothing happens. At least we now have customers pushing and they want to see a change. The ICC is now looking into digitisation with the eUCP, with the issuance of paperless LCs, but that's outdated already, so the ICC is looking into electronic bills of lading and how this is going to be done. So you need a push and the best push you can have is a client push.

Ian Kerr: The point about culture is an important one. Trade is the last bastion of paper manual process. It is embarrassing that, in 2017, certain countries around the world require paper. We've heard the phrase 'good old paper' many times. Everything else we do in banking, payments, FX, and securities is all digitised. So, it's about the new generation coming through.

I was in India moderating a panel with HSBC and Reliance industries, and we talked about what's happening there with digitisation, about potentially bringing a culture of digitisation to India, the initiative around digital identity, the UPI initiative in payments and people who are growing up there, hundreds of millions of people, to whom digitisation has become second nature.

When contactless cards were being introduced in the UK, there was a big push back. When Transport for London (TFL) started to accept contactless cards on buses and tubes, suddenly it became second nature, there was a switch to the adoption of the technology, and that's what we'd try to encourage.

Audience question: One of the things that always comes up in these conversations is that in places like India and some parts of Africa, they're able to implement digitisation at rapid speeds, and the reason for that is they don't have the same legacy issues that you find in Europe and the US. What's being done on a digitisation front to overcome that barrier?

Jacco de Jong: It's great if a country or an Indian port goes digital, but trade is global. There are so many parts involved in a trade transaction, it's not just the port or the country, it's the buyers, it's the banks, it's the insurance companies, it's the chamber of commerce, and it's the seller. All of those parties are part of trade deals that will eventually have to go digital, so there are so many parts to the equation. If one party moves fast, it doesn't solve the issue. Some will move quickly, for example, in South Africa, where some of the banks have gone from being far behind to becoming market leaders. But all parties would have to move.

Abhijit Prasad: You raise an important point because there are legacy systems out there that exist in some automated fashion, and what we're trying to do is make it fully automated. You've got this issue which is, can you move from something semi-automated to something fully automated? It's probably harder to do that than to do it from scratch. It is an issue.

Audience question: Is the technology behind contactless cards something that you're able to use within Bolero?

Ian Kerr: The contactless card was an example of how new technology gets adoption based on familiarity and trust. Are we mobile enabled? First things first, Rome was not built in a day. We are still trying to push through the issues we're talking about now, of getting adoption by the sellers, their buyer community, respected banks, and carriers. Some of the work we're doing in the carrier community, where workers are more mobile, we've changed our security mechanism to make that freely accessible. That's an area we're moving into.

Jacco de Jong: At the hotel I'm staying at, there are RFIDs in the towels so you don't steal them. That was totally new for me. There's so much you can do with technology and data nowadays, with the internet of things. We're looking to do a pilot now because, during my banking days, it was always hard to finance goods in transit. Where are they? Are they really there? What about quality? So, we're looking into what kind of data we can share while the goods are in transit. Then, you can use devices to send information to the bank, and the bank can see the goods are still there, what their moisture level is, what their temperature is. It can be financed while it's in transit. But, new technology can't be for its own sake, it has to solve a problem.

Audience question: What about how new technology platforms like Amazon and Alibaba are changing trade financing?

Abhijit Prasad: It's clearly something that's happening. Alibaba, for example, has financed millions of dollars of trade on their own balance sheet. These companies have a lot of cash and they're in touch with companies that sometimes banks are not in touch with, they've got a lot of data on their sites which helps them with credit assessments. Alibaba for example has started using credit scores created from the counterparties trading on its platform. That becomes something that is disruptive to the entire ecosystem, because that can change how companies finance themselves. As you move more towards B2B trading on portals, if portals can act as central hubs of financing more than just buying and selling, then you remove the need for an intermediary in any kind of financing.

So, clearly, there is an emerging trend of B2B portals, and in some cases B2C portals as well, looking to move into the financing space. But that's what you see in any industry where companies vertically and horizontally try to integrate. You've got one specialisation and you realise there's something you could expand into, which is beyond your current expertise and the other players have to adapt to that.

As banks, we have to adapt to situations where there may be new players that we didn't even think would come into this space at all. Where we previously thought of hedge funds and pension funds as competitors who could bring capital, you've got completely new players in the space who have portals, valuable information that can help in decision making, and they've got the desire and the appetite to fund. So, it's a disruptive trend. Whether we have an answer to that as banks and how we respond to that is a different thing.

André Casterman: The lesson here is that the one who owns the data, the buying and trading data, is the winner. So, if you combine the corporate-to-corporate hub, like Amazon, and apply it to B2B and add a balance sheet, you can avoid the traditional banking system. If there's any risk in that space, it may be coming from GAFA - that's Google, Apple, Facebook, and Amazon - when they apply their practices to the B2B world.

Audience question: It's correct that we have competition, that we must fight. But, the reality is that these players are coming in with different rules to banks. They can use the data and you cannot. We cannot go into their accounts and deposits. You know everything your customers are doing with their money, in fact, but you cannot use that information. You're not authorised to do it. And then, to take a risk, you have to put a lot of capital aside, but they don't. And they are not regulated, but you are. So, my point is not only to accept the competition and try to fight, but it is to fight back and to go to the regulators. If we keep doing this, it will lead to shadow banking type of activities, because there's a large amount of trade that could evade regulation. So, I think that the regulators should be put in front of their own contradictions. You cannot focus on one part of the industry and say it's safe because they were creating the danger, but now we have GAFA and they don't know what to do because they don't understand it. It is your job, in my view, as a bank to fight back and ring the alarm. The same rules should apply across the board.

Abhijit Prasad: Fully agree, there is that regulatory arbitrage that exists today.

Ian Kerr: The regulatory pendulum has swung too far. Apologies if you've heard this analogy before, but I liken it to broadcasting. Look at the BBC, a large organisation, and the new content providers like Netflix or Amazons. The latter are reaching into communities that the BBC never could. It's got to be about working together rather than fighting back. I don't believe the fintechs will fly under the regulatory radar for too much longer. Something will happen and that will change their approach.

Audience question: With the blockchain revolution, when you regulate something, shouldn't it be used by everybody in the industry? Surely it's only going to take off and work when you have every bank on the same page. The only blockchain deals at the moment are between partnerships. How do you actually see that progressing, because some are saying it's going to be five or 10 years, but is it actually going to be longer than that because you need to gain the trust of the banks?

Jacco de Jong: I get the calls from the blockchain companies within our company. We discuss how we can cooperate, because if we have blockchain transactions, which is a smart contract in a DLT environment, you need something to trigger that contract, which is proof of performance, which could be data from a bill of lading for example.

My problem with blockchain right now is that it's not proven technology, it's not adopted globally. We're talking about trade and commodity finance here. If you look into how blockchain is supposed to work, it is totally transparent. Trade, especially commodity finance, and transparency don't mix. If there's one thing commodity finance traders don't like, it's transparency. Because I know something you don't know, I can sell something to you for a higher price than I could have otherwise.

Also, it's just a concept. It's a ledger with a history, and that's it. I don't see it being used for the next five to 10 years in regular trade finance. Maybe certain components of blockchain will start to emerge, but the only sensible application for blockchain within trade finance I've heard so far is Islamic finance. There, you can use the transparency of blockchain to check if cryptocurrency has ever been used to finance tobacco, alcohol, etc. So you use the transparency element of blockchain to enable a certain type of business, which could be Islamic finance. So far, there is no real problem in trade finance that can only be fixed with blockchain.

It's not even a system, you just have all these technologies around a ledger. It's checked by nodes around the globe, and you need a workflow and procedure around how to use that, and there are so many initiatives out there right now that haven't gone beyond the proof of concept phase. It will take five to 10 years at least before it takes shape and then you need regulators to approve it. You don't need everyone on the same ledger, but trying to move from the paper world to the digital world is a slow thing. It won't happen overnight. It should make complete sense for it to reach this gradual adoption and the complete sense is not there right now.

Abhijit Prasad: It's like anything that requires use from multiple players in the loop, at some point it will reach critical mass and explode from there. So, it's a case of everyone saying, we're just going to use VHS, we're just going to be Beta Max, or, globally, the HD disc. So at some point it will happen, but which way will it go? At this point, we don't know.

André Casterman: Having discussed different platforms that are bringing trade-related innovations, I feel sceptical about the need for blockchain to innovate trade. You can digitise trade, as Bolero, essDOCS and many others are doing without blockchain. So it's not a question of when, but if it will happen with blockchain. Personally, as an independent consultant, I remain very sceptical about the impact.

We see a lot of buzz, but in reality, and case studies, I'm still waiting, and I'm challenging the bankers I know, having worked on many innovations over the last few years. I'm challenging those bankers who issue press releases to come up with real client testimonials. We do have those testimonials and real communities on the EBL, with those two providers, we see other platforms emerging in receivables finance and SME financing and they all progress without the need for blockchain. So, for me, for the moment, it's more of a bubble than anything else.

Jacco de Jong: But the good thing is, the buzz around blockchain helps us because people are engaging more with digitisation.

Abhijit Prasad: We believe that there is a use case for it. That's why we pursued it. We think there is a way that it can transform the way we do business. You're right, it doesn't have to be blockchain, but there is a need for digitisation in our business that this kind of technology helps to solve. It's still early days, it's very recent technology when compared with some of the other that have been around for 10 or 15 years. This has not been around for more than a few years. It's too early to give judgement on whether it gives value or not but we, as a bank, believe in it and we think there is a future in it.

Audience question: Don't you think blockchain is more of a technology that is used for payments that is streamlining the processes, streamlining the back offices, etc.? But when it comes to trade, especially when banks are involved, it is about taking risks. I struggle to find where blockchain can help a bank, or any player for that matter,
to take a risk.

Ian Kerr: There are some use cases where the technology can actually add some value. What the early PoCs are running up against now is the real issue, which is actually supporting a business process in a trusted and legally compliant way, and that's going to be the next hurdle to get over, and if we can add some value to that, then great. But, KYC is an ideal application for blockchain. If you can have a ledger that all trading banks have access to and add to in a non-competitive way, that could save a huge amount of time and money.

This technology panel discussion was held at the TFR Cross Border Trade Forum in London

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