Swift has announced a proof-of-concept trial to link distributed ledger-based trade networks to its payments network. The industry reaction concentrates, not on the functionality or advantages, but the implied acknowledgement that DLT/blockchain is now mature enough for mainstream use.
That might be stretching it a bit: but the announcement is significant for a number of other reasons. Swift is working, initially with R3’s Corda, to create links between multiple trade networks and the latest version of its payments network, GPI.
Just two years since its introduction, GPI – Global Payment Initiative – now represents 55% of Swift’s cross border payment traffic with 50% of these payments being credited to the end beneficiary within 30 minutes. These phenomena are a developmental result of the global market demand for real time and transparent payments, both local and cross border. The growth of payments over Swift from 2017 to 2018 was 11.3%. With an average 31.3 million messages moving $200 billion per day.
The connection of trade networks – DLT or otherwise – to GPI takes us a step closer to a global corporate payment system operating along the lines of domestic immediate payment schemes.
This will have enormous benefits for Trade Finance and Working Capital Supply chain because:
- Before GPI, the majority of International payments took five business days to reach the recipient
- In Trade Finance simply exchanging a signed export document can take seven to 10 days and that’s before payment can be initiated
- 25% of Trade Finance is still physical (2018 World Trade Symposium in December London)
- Digitalization can significantly improve Trade Finance Working Capital by releasing money trapped in the supply chain
There is an estimated €1,300 billion tied up in the supply chain. This can be freed using technology and digitising procedures. At 1% interest rate that is €1.3 billion per year available for investment. Given many companies with strong credit history pay up to 10%, the investment figure is closer to €10 billion. For SMEs, the driver of most economies, their cost of capital is often far much higher.
International Payments and Trade Finance transactions need accurate information from many sources to complete the transfer of payments and documents transparently and compliant with in country regulations. Here AI and machine learning are being developed to reduce the risk of the transaction coming back for correction. Repairing the transaction adds time, often days, and new liabilities to the bank.
Yet there is work to be done in harmonising business practices, for which the trade finance world has BAFT. The leading forum for the financial community and its suppliers to collaborate on shaping global best practices with global advocacy. BAFT helps develop and adapt new and existing instruments, facilitating the settlements while contributing to the safety of the global financial system. In addition to BAFT, Swift has been partnering with Bolero for over 20 years on a Trade Finance standard rule-book. These standards follow common law, are multi-jurisdictional and valid with a digital signature.
The good news is banking is responding to the need to accelerate commerce. The dance to better serve corporates and extend trade services to SMEs at a reasonable price, often neglected in the rush to provide consumers with digital retail banking, has begun. Corporates are the biggest users of International Payments and Trade Finance and what more apt music for the dance than Ravel’s Bolero.