Banks are exploring blockchain or distributed ledger technology as a way to prevent fraud risk in the $4 trillion trade financing industry.
Standard Chartered Plc, having lost nearly $200 million in fraud at Qingdao port two years ago, has partnered with DBS Group Holdings Ltd. to establish an electronic invoice ledger using a blockchain. HSBC Holdings Plc and America Corp. are also looking at blockchain for trade finance in addition to other applications.
Trade financing, a centuries-old mainstay of banking, could become the starting point for blockchain adoption since it can eliminate paper invoices, which foster fraud. For this to happen, banks have to support a joint platform.
Henry Balani, global head of strategic affairs at Accuity, a technology provider for monitoring trade-based money laundering, said invoices should be a top candidate for blockchain applications on account of fraud potential, according to a report Bloomberg.
Lenders normally don’t publish trade fraud losses. But according to an International Chamber of Commerce survey, nearly 20 percent of banks reported more fraud allegations in 2015.
Companies controlled by a Chinese-born Singapore businessman allegedly used invoices for the same metal stockpiles to cheat banks out of hundreds of millions of dollars in the Qingdao port case. In 2014, Standard Chartered wrote off $193 million in commodity assets from the incident.
A trans-Atlantic fraud conspiracy used fake purchase orders and invoices to secure loans for metal shipments that were estimated in 2008 to cost banks nearly $700 million.
Lum Yin Fong, a DBS executive who oversaw the bank’s ledger tie-up with Standard Chartered, said since there is no common platform to screen transactions financed by other banks on account of confidentiality issues, customers can capitalize on an information-sharing gap to gain financing from numerous banks using the same invoice.
Last year, banks conducted a trial code-named TradeSafe using a shared ledger for up to 60 mock invoices, said Gautam Jain, global head of digitization and client access of transaction banking at Standard Chartered. Details from an invoice generate a unique hash value stored on the ledger, which appears if another bank attempts to register the same details separately, according to Jain.
Bank of America and HSBC noted in separate emails they are working on various blockchain projects that include trade finance applications. Citigroup Inc., for its part, is in the early exploratory stages to determine how the technology can assist in trade and treasury.
Blockchain will only solve the fraud challenge if the banks can agree to establish a central registry, said Liew Nam Soon, Asean managing partner for financial services at Ernst & Young.
Liew said there has always been a competitive culture and challenges for banks to collaborate on large-scale projects. But this appears to be changing on account of the digital disruption that is pushing banks to work together.
The challenge is to get participants to agree on standards for a common invoicing platform. The different banks have to negotiate the number of data fields to generate the hash value for the blockchain, said Jain of Standard Chartered. Accuity’s Balani said banks also require common messaging standards.
Owen Jelf, the managing director of Accenture’s capital market practice, said challenges include agreeing on a common process and ensuring that a single operating system can be adopted. He said it is like putting seven people who each speaks a different language into one room to settle a problem.
DBS and Standard Chartered are working with the Infocomm Development Authority (IDA) of Singapore, a government agency working to advance telecommunications and technology, to promote the distributed ledger that was used in the TradeSafe trial. The authority seeks to commercialize the technology and is discussing it with other banks, according to a spokesperson.
The IDA noted it needs committed partners, pointing out that trade financing is borderless, and banks that adopt the technology will benefit regardless of the country of origin.
Featured image from Shutterstock.
Last modified (UTC): October 13, 2019 23:18