October 23, 2019
The financial sector has seen many innovations over the years. There’s no denying that trade finance has influenced economic conditions, public policy, living standards, and degree of financial inclusion of citizens for centuries. The Marco Polo Network, part of the Digital Standards Initiative (DSI), is the largest and fastest-growing trade and working capital finance network in the world. Launched by experienced trade finance and technology professionals, it is a joint undertaking between technology firms TradeIX and R3, the world’s leading financial institutions, and their corporate clients.
MEDICI spoke with Cyril Broutin, Account Delivery Executive at TradeIX, and Denis Dodon, the Head of CIB Innovations at Alfa-Bank to understand the Marco Polo Platform, trends in trade finance, how they’re providing access to a wide array of trade finance solutions via a distributed platform, and how blockchain has become a game-changer in the ecosystem.
MEDICI: How would you describe the current trade finance market? What are the key challenges still facing the trade and working capital finance industry?
Denis Dodon: The trade finance market is complicated. Each process of trade finance involves multiple parties that interact and exchange documents: purchase orders, invoices, transport documents, insurance policies, and apply for funding, payment undertakings, and payments to their financial facilities arrangers. All that requires new forms of service arrangements via platforms, flexible infrastructure, and underlying technology, which should play the most important role.
We see that customers are becoming more and more demanding about the way services are delivered – the level of understanding about customer journey will be determinative for success. We see that now there is a ‘quantum’ of technologies – Ethereum (Quorum), DAML, Hyperledger Fabric, Corda, etc. A lot of applications are being written on those technologies, and the main focus of the community is addressed to trade finance solutions and documentary ecosystem, which is historically disintegrated and mostly paper-based.
For the last couple of years, we have seen different networks like We.Trade, Komgo, Voltron, Marco Polo, and Finacle Trace Connect, and that’s not even the whole list. I believe that some of the projects will merge driven by technology, economies of scale, and elimination of duplication of efforts and resources. It is always a challenge deciding what technology to choose and what solution to follow. You should always consider your end-customers’ demand and where they trade – that will determine what technology to support. You might be with more than one platform, but it’s about the resources that you could allot only if you have the respective market size for the platform in order to support it. In case your customers’ trade flows are mostly focused on the EU, the platform chosen by the EU community will have more points; if your region is Asia, then you should consider the platforms there. But, no matter what you choose, you should adapt your back-end to be compatible and configured for an easy connection with any DLT-based solution.
Cyril Broutin: Trade and working capital finance operations still mostly rely on siloed and highly manual systems, causing a lack of visibility and challenging their reliability, not to mention the high overhead costs this incurs. These disconnected and aging systems place hard limits on the ability to create and scale new offerings easily, expand into more geographies, and take advantage of advanced technologies.
MEDICI: How important is trade finance for the global economy? What is the potential to expand further?
Dodon: Historically, people and companies that are producing something need instruments and infrastructure to deliver that to the end-customer. You might have the best product idea, but you could be short of funds; even if you have that, you should have the guarantee that your counterparty is reliable – that’s why trade risk and payment facilitators’ mission is crucial.
Across the border, trade is growing significantly, and it will grow even further – technologies will play the main game here. You see that a lot of new applications are being created: new marketplaces and technologies that are the key to further trade expansion, safe payment mechanisms, and forms of funding. If we talk about DLT, then we should recognize that current trends in uniting datasets and material actions digitized in ‘states’ will accelerate the trade as we could trade with less risk, optimized transaction costs, and time.
You see that almost all the markets are realizing real-time domestic payments (RTP) and apply this strategy for international payments. But payments have little value without integration into the trade and logistics flows. DLT allows to unite all these flows – and banking instruments are not an exception. All that is about to be completely assembled into uniform solutions and platforms, and this will significantly accelerate global and domestic trade.
MEDICI: What does the future of trade and working capital finance industry look like?
Broutin: I firmly believe that time is ripe for a substantial revamping of the trade and working capital finance industry. New technologies such as blockchain need to be leveraged massively to fully digitize a wide range of trade finance operations and processes. In that aspect, I think that early adopters have a significant role to play, not only to set ‘new’ benchmarks but also to help ‘evangelize’ and ease the necessary evolution of some ‘old’ regulations, which need to be dusted!
MEDICI: How many partners are part of the Marco Polo Network? How is it different from other blockchain-based consortia?
Broutin: Currently, there is strong momentum in Marco Polo, with new members being added on a weekly basis. As of today, over 25 banks have signed to the Marco Polo Network. We are expecting to grow substantially by the end of 2019. In addition, many member banks are presenting Marco Polo to their corporate clients. Today, over 15 major organizations are engaged in Marco Polo already, with some of them expressing that they will “go live” as soon as possible.
Beyond financial institutions and their corporate clients, we also have deep interactions with the major ERP providers as an important part of the Marco Polo value proposition: easing the end-to-end integration between commercial and financial parties. Last but not least, we are also very much engaged with other third parties like logistics providers and credit insurers, which are also meant to be playing a pivotal role in the coming months by providing additional transaction transparency and risk mitigation services to the Marco Polo ecosystem.
Having already experienced these kinds of “collective” initiatives in previous roles and positions, I can only say that this is the very first time where I see such a “common will” to move forward and really transform the existing ‘current state,’ especially between banks. In Marco Polo, I firmly believe that they have understood the importance of being part of that transformative initiative and are collaborating towards a common goal: making trade finance more transparent, smarter, and better connected.
MEDICI: Denis, why did you choose to join the Marco Polo Network?
Dodon: In early 2018, we did some research on trade and supply chain platforms; we were not focused only on DLT-based platforms – we had considered Tradeshift and Demica. We also met with TradeIX and started exploring. At that time, Marco Polo was in its early stages of development. Our active involvement started in February 2019 when we decided to move into the evaluation, linked to other banks, and got comprehensive feedback from our counterparties, such as Commerzbank and LBBW, which are very active and mostly lead all steering committees there.
Historically, Russia has a lot of trade flows with Europe and Germany in particular; not all of that trade is covered by letters of credit, but there is an unsatisfied demand for making safe payments, so we decided to obtain more information and participate in the co-creation of this platform. The biggest difference between Marco Polo and Voltron when compared to other consortiums is that they are both open for cooperation; even within the evaluation stage, there is a possibility of participating in steering committees – product, technology, and governance. Establishers and leading institutions share all relevant information, problems, as well as the next steps.
It is very important to deep-dive into the new product at its earliest stage of development. When you are involved in co-creation and discussion, the approach really helps to understand more about the network, the technology, and the product. We are actively involved in this kind of initiative and already applied the same approach in our market.
We also recently launched a successful pilot with one of our clients, Novolipetsk Steel Company (NLMK), in cooperation with Commerzbank, and Vesuvius GmbH, allowing trade participants to make payments, create irrevocable payment obligations and discount accounts receivable within a unified, transparent system of interaction with partners on the Marco Polo Platform.
MEDICI: In what stage is your organization with Marco Polo? What are the next steps?
Dodon: Currently, we are exploring additional business cases with our customers that we could pilot via the platform. We shall affect both export-related and import-related trade flows so that we could give comprehensive feedback to the exporters and importers community to see how our product should be designed. We also want to determine what infrastructure issues our customers should deal with, how processes should be changed, and the values they will receive.
The Russian market mostly looks very conservative with respect to new enterprise-grade FinTech solutions, and customers in most cases don’t move before they feel and understand the technology. But when we explain the value via these pilots and what values this platform might deliver, I believe that acceleration of deployment and usage will go up.
MEDICI: Why do you think this solution was critical for the industry?
Broutin: For quite some time now, we hear about the blockchain technology as a potential game-changer in a lot of very different areas such as real estate, logistics, manufacturing, healthcare as well as the public sector – there are plenty of uses cases. However, the area where it can provide the biggest benefits to all the parties is the digital transformation of trade finance processes.
Marco Polo is playing a major role in this transformation and has been carefully developed and designed to achieve what has been tried for years: making the physical, financial, and informational supply chains converge so that commercial transactions are fully streamlined and transparent for all involved parties in trade finance. Different than existing on-premise or “destination” platforms in trade finance, Marco Polo is a distributed platform.
This distributed trade platform and network allow users to connect-once-to-connect-many. Users require only a single interface and single integration to connect to and transact with all other participants across the Marco Polo Network, regardless of which software system, platform, or network they use. In addition, Marco Polo offers configurable modules and applications, a rich suite of APIs, and developer tools in addition to flexible integration gateways together with all the benefits of the Corda blockchain technology.
MEDICI: What are the key benefits and initiatives of blockchain technology for trade finance?
Dodon: Paperless, riskless, and everything ineffective will have ‘less’ at the end. As I said, a lot of processes are paper-based, disassembled, and disintegrated. DLT allows for a single point of truth where all your counterparties and their counterparties can deliver and can have access to the same data in real time. The key principle of Corda is ISWYS: ‘I see what you see,’ which could be applicable for all blockchains and DLTs with respect to trade finance. This means that buyers, suppliers, banks, and trade services facilitators (logistics, customs, insurance brokers, and others) will see the same information online – no paper, more control, and efficiency, resulting in cheaper funding as transaction costs are optimized, and banks will have full transparency on the underlying trade-related data. These, I would say, are the key benefits blockchain will achieve.
Now when you discuss a solution with customers, you should know the interests and opinions of all customers and stakeholders – treasurer, procurement department, logistics, IT, etc. A multifaceted solution involves multiple parties to whom you are arranging a platform – one solution should satisfy all stakeholders. Marco Polo’s principle, which is applicable to all network solutions, says: ‘connect once to connect to many.’ The approach to customers should be the same: ‘provide one platform or product application to satisfy all linked stakeholders.’ New trade finance applications are about that, and blockchain/DLT has it in its DNA.
Alfa-Bank is the only financial institution member of the R3 Consortium representing the Russian Federation, and as a result, we are actively involved in piloting business cases recommended f by R3 or chosen by ourselves. Cases which caught our attention covering trade finance are Voltron and Marco Polo. Having realized the pilot with Corda, we got to know about its functionality, how architecture should look like, and decided to consider these applications. Of course, we have looked through and tested other solutions based on Hyperledger Fabric and Quorum. We believe that the main benefits can be found in the area of distribution (both CorDapps Voltron and Marco Polo are intended for global coverage), the protocol, applications being created l by the community as well as individual developers, governance, and business models.
Currently, we are mostly focused on instruments covering open account trade. We see there is a great potential for our customers addressing their documents, finance, and payments, which could be integrated into one platform. We are in a deep-dive process and considering it mutually with our international banking partners as well as discussing it with our customers. Everything in that aspect is about the network effect and expectations that the value you receive is bigger than the investments you make.
MEDICI: How do you see the future of the trade finance market, especially with the implementation of blockchain-enabled solutions?
Dodon: In the services and applications market, there are more and more cloud solutions being created leveraging technologies that simplify data interchange in a secure manner. Trade finance is dealing with multiple international counterparties, which interact and exchange terabytes of data. I believe that some of the protocols will become standard. Key suppliers will adapt their solutions to enable DLT – one adaptation that will make it available for all of its customers and suppliers. All these market trends will significantly change the trade finance market, and those who support DLT will have more chances to win the game.
Like Marco Polo, the various consortia that banks have set up represent huge opportunities to grow trade finance volumes while increasing efficiency and decreasing operational costs – thereby improving margins in the trade business. Blockchain technology is bringing all parties together to enable them to re-invent trade finance processes. As we move forward with such consortia, the older models, marred by inefficiencies, will likely be replaced with a smarter, better connected, highly automated, and far more open and inclusive infrastructure, enabling private sector growth, healthier economies, and entirely new business models.