Despite some recent protectionist headwinds, international trade had been chugging along and growing at a decent pace. However, this does not mean business as usual. Firstly, high-growth markets are continuously shifting, motivating companies to access emerging markets that they have not done business in before. Secondly, even in their local markets, companies face stiff competition, which drives them to build business and customer relationships in their regions (like in the EU, for example).
While such a shift in markets or trading partners provides ample business opportunities, it does introduce a transactional risk that has been present in international trade for centuries – that of not getting paid on time or at all. Banks have traditionally mitigated this risk through various documentary credit products and Letters of Credit.
Although these documentary credit products mitigate payment risk, they come at a financial cost, and banks charge fees for these services. The only other option is to trade on an open account or cash advance basis, which might not be acceptable to the exporter or importers.
The Digital Trade Chain initiative
The Digital Trade Chain, or DTC, is an innovative service that aims to make domestic and international trade easier for businesses in the European Union. At its core, the platform will provide a way to connect all the parties in a trade transaction (the importers, exporters, their banks, and transporters) and ensure seamless, authenticated, and verifiable transactions between them.
The Dutch company KBC pioneered the DTC, which provides integrated bank-insurance services. The company developed the prototype for DTC in partnership with IT company Cegeka and tested the solution with a small group of SMEs. The platform can be accessed on any device – like a laptop, mobile, or tablet and allows user-friendly tracking of trade transactions in a secure, blockchain-based environment.
In January 2017, seven European banks - Deutsche Bank, HSBC, UniCredit, Natixis, KBC, Rabobank, and Société Générale signed to develop DTC further and collaborate on enhancing its commercial potential and building critical mass in their local markets.
How it works
Open account transactions require a shipment to happen before their payment is secured. Once the goods are received, the buyer/ importer usually has a predefined period of credit extended to him. The importer then further liquidates his inventory and pays the original exporter for the proceeds. The problem with this mechanism is two-fold: Firstly, there is a credit risk that the exporter is taking on the importer, and secondly, the exporter is out of funds for the extended credit period, which directly impacts his working capital and profitability.
DTC aims to step in and greatly accelerate the order to settlement process by reducing the amount of paperwork involved. This has to be done to ensure security, authenticate all parties, and ensure non-repudiation.
In part 2 of the series on DTC, we will look at how authentication and digital signing takes place in business-to-business domestic/international trade.
References and Further Reading
- Selected articles on Authentication (2014-16), by Heather Walker, Luis Balbas, Guillaume Forget, Jan Kjaersgaard, Dawn M. Turner and more
HSBC and Barclays pilot banking without borders (2017) by Antony Pyton
- Selected articles on Electronic Signing and Digital Signatures (2014-16), by Ashiq JA, Guillaume Forget, Jan Kjaersgaard , Peter Landrock, Torben Pedersen, Dawn M. Turner, Tricia Wittig and more
- REGULATION (EU) No 910/2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC (2014) by the European Parliament and the European Commission
- Recommendations for the Security of Internet Payments (Final Version) (2013), by the European Central Bank
- Security Controls Related to Internet Banking Services (2016), Hong Kong Monetary Authority