Banking & Payments
Contour aims to breathe new life into letters of credit
Why Citi has joined other banks behind this trade-finance blockchain network.
Citi has announced it is joining trade-finance network Contour, joining Standard Chartered, HSBC, ING and six other banks that have been behind the platform for a number of years. But Contour itself is a new creation, which also recently announced its “launch”.
Contour is the corporatized, commercialized incarnation of “Project Voltron”, run by that original group of banks, along with R3, Bain & Company and CryptoBLK to put letters of credit on a distributed ledger.
Its debut is in some respects a story of continuity. Carl Wegner, previously Asia Pacific head at R3, is now the CEO of Contour. CryptoBLK, the Hong Kong software developer that built the original Voltron app on top of R3’s Corda platform, is also building Contour’s apps.
Two things about Contour’s creation are newsworthy, however, beyond the addition of powerful banks like Citi.
First is that the owners behind Voltron decided to go all-in and make it into a company. That in turn reflects support among their clients, big corporations involved in global trade, such as Cargill, Thailand’s PTT, and Rio Tinto.
Trade finance via blockchain is here to stay.
The second thing notable about Contour is that banks are using this technology to affirm their relevance, not fade into a background of faceless ones and zeroes. They are doing so by betting DLT can revive demand for the role that banks want to play as the trusted intermediaries among distant trading partners. Traditionally banks have done so via instruments called letters of credit.
“The point of the platform now is to manage letters of credit more efficiently,” Wegner said.
Corporate banks: new lease on life?
Letters of credit, LCs, are bank-arranged contracts that guarantee to sellers that they will get paid, and that buyers will receive the goods they expect. They set out the rules and governance for all involved in cross-border financing.
LCs have been a staple of global trade where companies don’t trust one another, especially when relationships are new, legal systems aren’t understood, or when transactions are too big to leave to chance. Corporate banking departments step in to allow companies to trust the financing arrangements.
LCs therefore have involved lots of paperwork, usually incorporating many participants beyond the buyer, seller, and their respective banks. But banks are not well connected: the only platform they traditionally operate on is SWIFT for cross-border payments, but LCs require more inputs.
This has made them cumbersome, expensive, and slow. Corporations prefer to use open accounts (bilateral relationships) instead.
LCs now comprise only 15% of global trade financings, versus 85% three decades ago. And the decline of LCs has forced corporate banks to focus on riskier services like open-account financing, or just act as payments utilities.
“Distributed ledger technology provides the opportunity to breathe new life into LCs,” Wegner said. This is why the initial project behind Contour was started by banks, and why giants like Citi and Standard Chartered want to participate.
DLT or not DLT
Of course, a bank could achieve the same result with a centralized digital service. The decline of LCs hasn’t meant a reduction in paperwork. On the contrary: the International Chamber of Commerce estimates today global-trade documents involve more than 4 billion pages in circulation. The industry is in dire need of digitization.
The need for digitizing trade is also not just a story of eliminating manual paper. Many players in this industry, such as shippers and freight forwarders, do have digital processes. But these platforms struggle to talk to one another – they are not “interoperable”, in fintech jargon.
The point of the platform now is to manage L.C.s more efficientlyCarl Wegner, Contour
Moreover, corporations have also become more sensitive about data. Its rising importance means companies are reluctant to have sensitive information stored on a bank’s server. In addition, more governments are restricting the storage of data outside their borders.
“DLT lets you send only the data you need to send,” Wegner said. “No one holds it all on one server. It also provides data security, which creates a new opportunity for international trade.”
The question of compatibility among systems is a big part of what Contour hopes to do. It is creating a platform among banks and corporate buyers and sellers, but it is also doing so by onboarding a range of other industry players.
Among these are data aggregators, marketplaces, order confirmation platforms, and other entities. Data aggregators are often national groups collating shipping or trade data, but just for that country, only for one side of a transaction. Contour wants to integrate them, directly on Corda or via an API.
The problem of closed loops
Wegner didn’t respond directly to the question of how Contour might face competing DLT-based trade-fin platforms, such as we.trade, Komgo or Marco Polo (for open accounts). For now the focus is on winning new members, usually by getting one side of a trade (either a corporate or a bank) to encourage its counterparty to try it out.
If blockchain-based solutions are to triumph for trade, there will need to be a means by which various DLTs can interact. SWIFT’s creation in the 1970s to manage systematic risks from foreign-exchange shocks has done this for corss-border payments. It ended up creating what is still the only forum that connects banks electronically. The ostensible purpose of DLT for trade is it is open sourced and universal, so trade fintech could match SWIFT’s achievement – but it doesn’t seem to be headed that way. The rise of trade-fin “islands” is happening instead.
The answer may lie in creating networks that are big enough within their customer bases. Contour is concentrating on raw materials, commodities, and retail, particularly e-commerce. It is also focusing on China-related trade.
We started a company but we’re not a startupCarl Wegner, Contour
Such vertical strategies don’t answer some more fundamental questions around legal jurisdictions if a smart contract fails, or data ownership and liability for its accuracy. When a bank is involved simply as a “dump pipe” to move money, its responsibility for things like anti-money laundering checks on these platforms have yet to be tested. Most fundamentally, closed-loop islands will at some point be too confining for certain users, who will want a means to connect and use other DLT pools – they’ll want a trade-fin passport.
Wegner in the meantime has more prosaic work to do, namely build Contour into a company. “We started a company but we’re not a startup,” he said. Contour has a product and it has financial backing. It just needs the infrastructure, the production rule books and the people to execute. Currently Contour has only two employees: Wegner and Aaron Seabrook, R3’s project manager for Voltron and now Contour’s COO, both based in Singapore.
Hiring is ongoing, although the coronavirus outbreak has complicated matters by prohibiting some face-to-face contact. “This is not the greatest time to build a business,” Wegner said. “But there’s so much to build, so we’re quite busy.”