Trade Finance processes are old-fashioned, cumbersome, slow and costly

International Trade Finance is still a paper based and labour-intensive activity which has not evolved much for decades or even centuries, and where the role of banks has primarily been that of intermediaries to build trust between the seller and the buyer. The dilemma has been, since the dawn of history, to ensure that the seller would get paid and the buyer would receive the goods. For that purpose, a range of financial products have been created, like bank guarantees, collections, and letters of credit. All those financial products are based on the handling of documents and in many cases still in a paper format. In addition, old practices remain, like the need for a bank to review, in addition to the bill of lading, other documents like the sanitisation certificate, the packing list or the certificate of origin, which are not really needed to validate the transaction and make the payment.

Efforts to digitise trade documents are misguided.

Banks have for years tried to digitise the reviewing of documents in order to save costs, speed up the process and reduce mistakes. Many are now for instance introducing AI based solutions for document examination in order to accelerate and partly automate Trade Finance processes. However, this will likely remain a bridge solution since it is essentially applying AI on old fashioned workflows and does not improve the experience much from the customer’s perspective. Instead, there is a need to radically change how Trade Finance is done, for instance by exchanging the relevant data directly between participants in the Trade Finance value chain.

This is what we.trade set out to tackle.  

A promising initiative

we.trade was founded by twelve major European banks that could in principle cover all companies in Europe, both sellers and buyers in order to make their trade easier, faster, cheaper and more secure. It started operations in 2019 as a digital-native platform to connect sellers, buyers and their banks, hosting and executing their commercial (smart) contracts, settling the payment, and handling the counter-party risk. It also provided traders with access to financing and logistics, and the platform itself could be used as a search engine for new partners.  

Despite being based on the blockchain technology, the we.trade platform was not particularly sophisticated. In fact, the main achievement of the project was not technology related but was instead the writing of a comprehensive rulebook governing how to run trades on the platform, i.e., a common standard to which every single party being active on it would adhere to.

we.trade had a promising launch with regular customer onboarding and transactions done on the platform. It however started to face financial difficulties when shareholders refused to fund it further and stopped operations in June 2022.

So, what happened? Why did such a promising project fail?

Bad project implementation killed we.trade

we.trade was based on an excellent idea, the project management was successful and compliance and regulatory approval were achieved. However, when the roll-out was due to start, the implementation phase failed. Bank management within the consortium’s members was not engaged enough and their sales force lacked the motivation to spend efforts on it.

we.trade was disruptive since it changed the concept of Trade Finance to such an extent that the Trade Finance employees who had been doing it the old fashioned way for years or decades were not mentally prepared to adjust to the new platform’s concept.

This is a typical issue with business innovations. As Jean-Francois wrote in his blog post “Breaking the curse on Corporate Banking Innovation”:

“When the new product or service has to be introduced to customers, it needs a home in the organisation. Whilst finding an existing product unit to host the innovation is the easiest solution, it can also be a kiss of death if it differs markedly from the existing range of products & services of that unit and the income potential is farther in the future. The resulting lack of genuine interest to spend efforts on selling yet one more product means that it may soon fall into oblivion”.

And this is exactly what happened, there was a lack of determination at the management level within the member banks to implement an initiative lacking enough revenue generation in the short term. As a result, it was difficult to motivate the Trade Finance frontline to actively contact customers, even those who were the obvious candidates to use the we.trade platform.

One can argue that the problems of we.trade culminated in customer acceptance and onboarding. Too often, a company was on-boarded just to find out that their trade counterparty either couldn’t or wouldn’t get onboarded on the other side. In fact, this should have been the very task of the Trade Finance sales force since they were provided with plenty of leads based on data about historical payments identifying trade relations of particular interest. Quoting Ville Sointu, who was at the time Head of Emerging Technologies at Nordea:

“this further underlines the common issue in any network rollout: it’s never an issuing problem, it’s always an acquiring problem”.

Corporate customers lacked the understanding of which pain points we.trade was solving

Corporate customers are also partly to be blamed because most have not yet seen the real need for a solution like we.trade. It is probably not exaggerated to use Henry Ford’s famous quote referring to the development of the Ford Model T:

“If I had asked people what they wanted, they would have said faster horses.”

In a company, the trade finance operations are usually not integrated in the corporate treasury operations. There may be dotted lines in the organisation chart, but the de-facto distance means that the decision makers in the treasury unit have difficulties to grasp the relevance of the pain points in the purchase-to-pay process and how they could be solved. Unlike the Ford Model T, the solution provided by we.trade was not self-explanatory and efforts by banks to explain it to their corporate customers remained subdued.

Blockchain was initially seen as the ideal technology but had its own issues

The we.trade platform was built on the permission-based blockchain technology, as opposed to permission-less blockchain like bitcoin, meaning that it was a closed-loop network where only vetted members could be involved.

When the we.trade platform was designed, blockchain was somewhat hyped and the expectation levels of this new technology have come down since, at least temporarily, leading to the question of its suitability as the infrastructure for the platform.

The blockchain technology was seen as a solution for many problems related to Trade Finance, like identifying the participants, enforcing the transactions, and providing operational resiliency. However, the primary reason for its choice was a concern related to transaction data access, ownership, and protection. A substantial advantage of a decentralised ledger (like that enabled by the blockchain) in the context of Trade Finance is that only the corporates and banks involved in a particular transaction can have access to its data. In fact, this functionality allowed faster compliance with the banks’ approval processes related to handling of sensitive customer data.  

In addition, it acted as a catalyst to give the banks involved the perfect reason to start working together, something which would not have been possible with conventional technologies.

In this context, it should be noted that blockchain was never promoted to customers as being somehow critical to we.trade’s functionalities, and in fact you couldn’t even find the word in the banks’ we.trade related web pages. The whole point of we.trade was to benefit from new tech without complicating anything.  

The main stumbling block in using blockchain was, ironically, related to the vendor lock-in on this novel technology architecture as it caused high costs on maintaining the solution itself and the underlying infrastructure. This was not related to the technology vendor since the problem came from the banks which lacked proper vendor governance and risk management.  

Maybe the use of a still emerging technology, which remains a bit obscure in the eyes of many, also played against the initiative.

What next?

One could argue that we.trade came out ahead of its time and in fact other digital trade platforms have also failed. For instance, TradeLens, developed by Maersk and IBM with an ambitious agenda to digitise supply chain management, has recently closed down. Similar platforms, like MarcoPolo or Contour are still in operation, but none so far has made a real breakthrough and the Trade Finance revolution is still to come.

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