Despite the outlook on blockchain adoption for financial services starting to move from excitement to criticism, trade facilitation business processes represent a stronghold for blockchain-based programs, as long as basic change management principles hold true.
There is a mounting debate about the limits of blockchain in the world of financial services. Financial consortia R3 and Swift declare banks can do without blockchain because of its immaturity, while a survey across delegates at the DTCC Fintech event also shows that blockchain adoption optimism suffers setback.
The industry practice that—instead—seems to go against this pessimistic mood and puts hope in blockchain is trade facilitation, a mature discipline with business solutions that facilitate trade, exemplified by single-window programs that are deployed both in economically advanced countries and in developing economies. A single window system enables international (cross-border) traders to submit regulatory documents (e.g., customs declarations, applications for import/export permits, certificates of origin, and trading invoices) at a single location and/or single entity. These solutions are designed to help reduce or eliminate fraud and errors, minimize the time products spend in the transit and shipping process, improve inventory management, and ultimately reduce waste and cost.
Examples abound of financial institutions running trade facilitation-related proof-of-concept (POC) pilots with corporate clients. Transaction banking services running on blockchain benefit corporate users with the foundational characteristics of blockchain—traceability, authenticity, and trust. Because these are all values that inspire corporate executives’ decisions, banks could offer trade finance and treasury services on the back of transactions made visible and reliable on blockchain’s decentralized distributed ledger.
The latest example of such intense collaboration in the bank-to-corporation business scenario for trade facilitation is the announcement that Maersk and IBM are working on a proprietary solution for permissioned members based on the Hyperledger Fabric (an open-source blockchain framework) to manage and track the paper trail of shipping containers across the world, digitizing and storing on the blockchain the end-to-end supply chain processes to enhance transparency and secure the sharing of information among trading partners such as shippers, freight forwarders, ocean carriers, ports, and customs authorities.
We can expect that, as with any POC, several processes will be temporary and will be fixed up to test the application flow and resolve inevitable bugs along the way. With the experience gained from numerous conversations with banks and corporations that have undergone trade facilitation blockchain POCs, Aite Group suggests carefully focusing on a set of key areas that represent the litmus paper for the success of the initiative.
Collection devices: Supply chain events that trigger actions must be captured and stored on a blockchain. While for the POC some manual or semiautomatic data collection is acceptable, for a full-scale adoption the project must consider automatic detection devices such as barcode/QR-code scanners, RFID tags and readers, and mobile/handheld devices. Most importantly, data collection workflows must be established and standardized between all parties involved.
Data sharing: Unauthorized access and poor data segregation represent elements of badly designed blockchain POCs. Data workflow engineering must enable the access to data through ad hoc application programming interfaces that check the status of the data flow and execute specific tasks. Workflow applications must be developed as intelligent business workflow logic—a much better descriptive term than generic “smart contracts.”
Disputes management: An immutable, highly secure and trusted shared network, on which participants have visibility of data based on their levels of permission and on which no one party can modify, delete, or even append any record without the consensus from others on the network, may generate initial disorientation to corporate users who wonder how to manage disputes that inevitably arise in—especially cross-border—trade transactions. Maersk has taken care of this responsibility for the POC, but it is advisable to involve legal advisors before the pilot moves to wider adoption across multiple trade entities.
Onboarding: To scale up from initial POC, more participants are needed in the value chain, with a clear value proposition for each. Cost reduction seems to be the common thread for all parties, if it’s true that the costs associated with trade documentation processing and administration are estimated to be equal to the actual physical transportation costs, thereby almost doubling the cost of every shipment. However, the public authorities in the value chain (e.g., customs offices and port authorities) have a different scale of values. Proponents of the POC must convince these authorities with hard facts that the blockchain-based solution brings real-time visibility, improves the information available for risk analysis and targeting, and leads to increased safety and security as well as greater efficiency in border inspection clearance procedures.
At times in which caution on blockchain-based solutions starts to prevail over general curiosity and excitement, blockchain can prove its value and transformational possibilities for trade facilitation business scenarios. Although based on extremely sophisticated technical foundations, blockchain POCs can scale up to mass-market production once “soft” factors such as onboarding, workflow process management, and dispute management are agreed upon and—most importantly—have become a standard for all marketplace adopters.