In spite of 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 are facing stiff competition which is driving them to seek new business relationships in their regions (like in the EU for example).
While such a shift in markets or trading partners provides ample opportunities for business, it does introduce a transactional risk which has been present in international trade for centuries – that of not getting paid on time or at all. This risk has been traditionally mitigated by banks through various documentary credit products and Letters of Credit.
Although these documentary credit products do mitigate payment risk, they come at a financial cost – the fee that banks charge 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 or DTC is an innovative service which 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 DTC was pioneered by the Dutch company KBC 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 a tablet and allows for 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 a memorandum of understanding to further develop DTC and collaborate on enhancing its commercial potential and building critical mass in their local markets.
Open account transactions currently require shipment to happen before the payment for them 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 from 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 period of credit extended and this directly impacts his working capital and profitability.
What DTC aims to do is step in and greatly accelerate the order to settlement process by reducing the amount of paperwork involved. This has to be done in a manner which ensures security, authenticates all parties and ensures 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.
HSBC and Barclays pilot banking without borders (2017) by Antony Pyton