Going Beyond Pilots & POCs: Blockchain’s Catch 22 (Part 1)

May 20, 2018


At its peak, Microsoft Windows used to power 90% of the world’s computers. Today, that number is at 11%, yet Windows still powers 83% of the world’s desktops. How can that be? We have many more computers today – smartphones and tablets. The ubiquity of Microsoft on desktops highlights that even with a powerful product that’s deployed at scale; it’s still no match for a complete game changer.

Now the question is: will blockchain prove to be a disruptive technology (in the original meaning of the word) for today’s current financial institutions?

I don’t think so – assuming FIs continue to invest in blockchain pilots and experiments. Real world use-cases for blockchain are plentiful in the enterprise. How many times have we heard that IBM alone is working with 100s of enterprises on blockchain implementations? According to an estimate 1000s of pilots and POCs have been completed by corporations in the last two years alone.

But why blockchain?

Even though we have seen and heard many answers to this question, we are still not convinced whether it will become a reality. Many people I meet in tech and business appear unsure about how to handle the economics of business blockchains. I keep asking myself, Why blockchain for this use case? Why is it needed? Why not normal databases? Will it ever go beyond pilots?

There has been a lot of talk about industry-specific use cases (including our report on the topic in 2013): vertical-specific use-cases such as transaction settlement (finance & insurance), cross-border trades (finance), food provenance & authenticity (health/safety), biometrics monitoring (health), Personal Health Records (PHR: health), and virtual clinical trials (pharma/health), and so on.

Have we really made any progress?

In order to understand blockchain’s importance and potential, we must look at horizontal applications: supply chain management, product provenance & authenticity, process verification & audit, system interoperability & data sharing, and product life-cycle data storage. We see better success rates of startups and companies when they focus on horizontal, multi-industry problems – not vertical wise. But that’s not all. To answer my earlier question completely (or even partially), we will have to go deeper.

Supply chain management

Fred Smith, Chairman & CEO of FedEx pushed and convinced Robert Carter, FedEx’s CIO & Executive Vice President of information services to explore how blockchain could transform its business before someone else disrupts them. (What a great example of top-down commitment!)

Logistics and transportation are facing one prominent issue: massive amount of friction in cross-border logistics. The source of friction? Differences in standards, regulations, and terminologies. Per FedEx, For cross-border shipments, ‘trust’ is a legal requirement for every transaction. What blockchain has is a potential, for the first time ever, to make the information available for everybody.

Robert decided they will first explore opportunities in the freight industry since one single ship contains numerous transactions. Other large companies across verticals are also looking at other supply chain management use cases such as product traceability, anti-counterfeit protection, and solutions to streamline import/export controls and paperwork.

And in FinServ?

In fact, let’s look at some advanced use cases. Blockchain can potentially enable new peer-to-peer marketplaces, support automated payments, and give suppliers access to services including insurance and trade finance – which has a lot of momentum and a $9 trillion market. Trade finance, capital markets (exchanges), and remittances are the three FinServ areas that can help the global industry go past the pilots. These are the areas that will help the blockchain pilots scale.

Trade finance is ready

I recently met the CEO of a stealth-mode US startup. This is an A+ team which has built two generations of global trade finance platforms – systems that worked at scale, in banks and were great tech at the time. Now they’ve added top blockchain talent to round out a fantastic team. They are building a blockchain-based, decentralized trade finance platform. It’s a big hairy audacious goal, and if I may add, a platform whose time has finally come.

Trade finance has huge problems, which means it is ripe for innovation. To give you an idea of how complicated the process is, UBS said that a letter of credit itself can weigh 500 grams and comprise 36 documents. But there are more of such issues and even bigger ones:

  • Banks are only financing top-tier suppliers. Banks don’t finance tier 3 or 4 suppliers who need their services. With 30–60-day payment cycles, cash flow is a big headache. Other finance solutions (asset-based) for this long tail are not great either.

  • There is a huge amount of money locked in the treasuries of big companies. The Apples and PayPals and GEs of the world have tens of billions of dollars lying idle. This money can be used to finance the supply chain if used properly.

  • Current trade platforms like Citi and HSBC do offer help but aren’t good enough. It’s an inefficient process and not the best experience for a buyer like GE. They end up using 6–7 different bank trade finance platforms.

  • While supply chain finance itself is a huge opportunity, distribution finance is not even discussed much. Companies like Coca Cola, P&G, and Kimberly Clark have huge distribution chains and hundreds of entities involved who need financing options.

An upgrade won’t cut it

Early versions of blockchain-based trade finance solutions (especially pilots and POCs) believed that programming the processes into a smart contract on Hyperledger was enough. The bank (or 2–3 banks) could cut processing time down from seven days to hour(s). India’s ICICI Bank announced that it successfully onboarded more than 250 corporate customers onto a custom-developed blockchain platform for domestic and international trade finance – which may very well be possible. Unfortunately, it’s not enough for the suppliers who will have to deal with several trade finance platforms.

The problem is these pilots and POCs are merely automating what exists already rather than doing something transformational from the ground up. The value proposition is better than older systems, but the blockchain is not being used to its full potential. Furthermore, in a pilot or POC, business conditions are typically narrow, which doesn’t allow for a real-world problem to be addressed holistically. These programs are not focusing on the biggest pain point: access and onboarding for every tier of the supplier.

Better together?

Some banks are forming consortiums to achieve more scale (and theoretically, partnerships). The blockchain application used in the recent Cargill trade finance transaction is supported by 12 banks. HSBC stated that the transaction leveraged Corda, developed by R3, a New York-based blockchain consortium with over 100 members including banks, regulators, and trade associations. It’s certainly a good start, but a private, permissioned system isn’t tapping into the true power of blockchain’s capabilities.

This reminds me of the time when every company on earth wanted to be mobile first. As the mobile channel grew, companies simply converted the desktop website into a mobile website or app (MS Windows is probably the best example!). Then came the likes of iOS, Android, and Uber who created a mobile-first – built from the ground (glass?) up. This is what is needed with blockchain-based trade finance solutions. A Bitcoin or Ethereum-like solution that’s a truly open platform is the solution – a market should be owned by all the participants.

The good news is that there are great industry experts and technologists thinking big. They’re creating a value proposition as an open marketplace – a decentralized trade finance organization in which you tokenize the whole process, end-to-end, and provides incentives for the whole ecosystem. Innovation will be brought to the platform by specialists: eKYC, credit scoring, banks, insurance companies, and tech companies each playing their role – a decentralized trade organization where no one entity owns the platform.

The tell

What is interesting is that a bank like HSBC makes only $2.5 billion from their global trade finance business despite being in a $9-trillion market. That just doesn’t make sense. Can’t they do better? Can’t they grow that business? Absolutely. It requires a paradigm shift; not just new tools to tackle its complexity. And, thankfully, startups like the one I described above can help it grow quickly.

If you can match buyer, seller, and financier in a frictionless marketplace on the open public blockchain, you can have lift off!

Read and learn about topics you are interested in.