There continues to be massive speculation about how and what blockchain technology can possibly deliver in the realm of financial services. More and more we can see that with regard to corporate banking (or non-consumer banking services to be more broad), the neophyte pilots easing their way out of partnerships, consortiums, and innovation initiatives are related to some specific business areas. Back in January Mercator had written about three areas we thought would be aligned well with bloackchain, expecting possible pilot announcements during 2016, certainly with much longer term mass scale benefit implications. These were trade services, cross border payments and risk management. The subject of this piece is about one of those business areas, trade services, although one can easily make the case that all three are interrelated anyway.
Whilst it’s hardly widely-adopted, blockchain certainly found its feet in 2016, and we’re now seeing banks experimenting with a variety of POC use cases around international payments, e-identity and smart contracts. But now, blockchain has a big new target in its sights – digitising the financial supply chain. And it has the potential to save you millions.
This piece is about the financial supply chain, and the use of blockchain to eventually revamp the intensely manual process around letters of credit. The question is not really so much about whether the technology has real potential improve trade finance delivery, but how much can it be improved, at what cost and timeframe can industry scale be achieved?
…it could save you millions. That’s because all participants in a blockchain network have a complete copy of the shared ledger where all transactions are recorded. This includes details of where the money should be sent, and provides banks with an opportunity to increase the straight through processing rate, saving both time and money. One UK clearing bank I spoke with recently believes the cost of redressing instructions for the 2-3% that require exception handling equates to the same cost of processing the remaining 97-98%. In my view, it’s an area that’s screaming out to be digitised.
We will continue to closely track blockchain progress as it rolls through the early stages of these use cases.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
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