Last month BNY Mellon announced it had joined the Marco Polo Network, a consortium of more than 40 banks sharing an open, multilateral platform for trade, payments, and lending among each other and corporations.
Although the bank isn’t the pioneer in this blockchain-based network, a discussion with two of its senior executives reveal a lot about how financial institutions are adopting the technology. It sharpens the focus on use cases and suggests how the nature of corporate banking is changing, and fast.
Joon Kim and Zoran Kanlic are both based in New York, and they say enterprise-oriented distributed-ledger tech platforms such as Marco Polo have taken time to realize their value because they deliver market-level benefits.
In other words, they’re only useful if a lot of people use them: banks, multinational corporations, smaller companies in supply networks, and the various service providers in global trade.
Building that degree of buy-in takes time. But consortia or vendor platforms such as Marco Polo, WeTrade, IBM, and Contour, as well as government-backed schemes in Singapore and Hong Kong, are gathering steam.
This means participants are getting a better handle on their working capital.
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These platforms have their niches, such as geography, or a focus on letters of credit. Marco Polo, which runs on R3’s Corda blockchain, is among the broadest, as it addresses open-account settlement of trade finance, which is when goods are shipped before payment is made. This is the norm for 85 percent of world trade, says Joon Kim, global head of trade finance product and portfolio management at BNY Mellon Treasury Services.
The gaps between physical trade and payment create problems for smaller and middle-market companies, and DLT solutions are being applied to improve how they manage working capital.
DLT, or private, permissioned blockchain – that is, blockchain networks that run as members-only clubs – does two things to improve the situation. First, it is the platform upon which a myriad of paperwork is digitized. This isn’t just ordinary digitization, but putting the data into smart contracts that operate on a blockchain. Programmable transactions, automated reconciliations. Second, it is multilateral, which means anyone in the club, with the right permissions, sees the updates simultaneously.
Combining these two factors helps remove manual work – and costs, and risks – from deals that can involve dozens of participants. “Smart contracts will change the industry,” said Zoran Kanlic, head of financial supply chain products. “We won’t need the same checks and balances.”
These blockchain groups also give banks hope that they can eliminate a lot of fraud from global trade.
“These are still paper-based businesses,” Kim noted, citing the lack of transparency that has led to epic frauds such as oil trader Hin Leong hiding $800 million in losses from its bankers; the 2014 Tsingdao, China metal-warehousing scam (forging documents to hide using the same metals as collateral); or last year’s spectacular Greensil Capital bust.
“We want transparency and visibility,” Kim said. Placing invoices on Marco Polo makes them visible to other member banks. “They know not to refinance or double-finance that loan,” he said. “That’s a lot better than having 30 bilateral discussions to see who’s lent what.”
Opening the books
Because those benefits increase as more players join these platforms, Kim says BNY Mellon is now keen to add new members – which is probably why the bank is speaking with media such as DigFin about what they’re up to.
As more banks do jump on various blockchain wagons, it is having an impact on how they do business and what delivers value.
Kim said: “Five years ago, it was unheard of for a bank to call a competitor and offer to share a deal. They were worried that competitors would steal their customers. Today we show each other the assets. If I’m at full capacity, maybe you want to buy this one?”
Kanlic added: “Blockchain was just a marketing word, but it’s become real. Making it work is difficult because it is multilateral, but widespread adoption is inevitable. The cost savings, the ease of compliance, and the security are too obvious to ignore.”
The bankers acknowledge that this new norm is still being tested. There will be errors and some wrong turns. But the new business advantage, they say, is about finding the right technology to deliver the right product to the right members of the club.
A looming challenge will be “interoperability”. Companies don’t want to be tied to a particular bank simply because the bank operates on a given platform. Nor will every bank participate on every blockchain solution. So banks, or their tech vendors, will need to find ways to communicate across chains.
Kanlic says streamlining this will be difficult – but it will still be better than the old, bilateral, paper-based ways of legacy systems. That is because these connections now rely on APIs, code that connects software, and some of these can be standardized and repurposed. “The more standardized we become, the better,” he said. “APIs make integrations easier.”
Kim is optimistic that blockchain can ensure operations and back ends can modernize and keep pace with the glossy customer-facing apps. Digitization, mutualized information within the club, and automation can turbocharge lending and make it fast and cheap to operate.
This is less urgent for big, one-off trade loans, but can deliver tangible value to the big-volume, small-ticket world of payables and receivables up and down supply chains.
“What we’re seeing may be light at the end of the tunnel,” Kim said.