Why a New Small Business Blockchain is Actually a Big Deal

Efforts to apply blockchain in the supply chain took an interesting turn last week.

I'm speaking, of course, about a piece of news that at first seemed pretty ordinary: a group of European banks announced they would band together to develop a blockchain-based trade finance solution.

This one, though, is unusual.

Rather than tackle large-scale global transactions that cross oceans, the project focuses on intra-European trade, and, more importantly, between small- and medium-sized enterprises (SMEs).

Why is this interesting? It's not because SMEs make up the vast majority of the world's businesses (although that certainly does make for a compelling use case). Rather, it's because of what it says about the evolving nature of trade finance.

We have seen many blockchain projects take a run at the subject, and the application seems obvious. Transactions across borders generally involve significant documentation, a process that itself generates numerous errors and gross inefficiencies.

Reducing the burden associated with getting goods from one place to another has to be a good thing, right?

Let's take a look.

Starting smaller

Most of the projects to date have focused on large international corporations, which is understandable, given that over two-thirds of world trade originates with global enterprises.

Where both the pain and potential promise are most acutely felt, however, is not in conglomerates, but in SMEs. In part, it's because of their sheer number, but mainly, it's due to financial trends.

Approximately 80% of global trade is now conducted through open account transactions, not via traditional channels using letters of credit. This means that there is no bank guarantee of payment.

The buyer pays when it's time to pay – usually well after the product has been delivered.

For many large corporations, this shift reflects tighter restrictions many banks are facing on lending and guarantees, as well as a desire to improve working capital and reduce administration and financing costs.

For most SMEs, open account is their only option, since over half of SME trade finance applications are declined.

Win-win situation

In open account transactions, trust becomes a huge factor. This is an issue when initiating a new commercial relationship, especially for SMEs with patchy or non-existent credit histories.

Without going into the details of how the new platform will work, the ability to see, in real-time, the status of the transaction at each step should make trust more transparent. Accelerating the process from order to settlement will increase liquidity.

The incorporation of the management of the respective banking functions (payment, factoring, etc) aims to facilitate the procedure even further, and could increase margins for both the banks and their participating clients.

Seen from the exporting SME's point of view, the project could be a way to overcome obstacles created by the shifting sands of finance and politics. And from the banks’ point of view, not only will it help to retain and support SME customers, it is also an effective way for banks to re-intermediate themselves into the trade finance process.

Starting within the relatively "safe" confines of the European Union gives the project a chance to test the process of cross-border trade before venturing into more complicated territory.

What's next

If things go according to plan, we shouldn’t have to wait long to see how the project fares with target users. It is already a working proof-of-concept, developed last year by Belgian bank KBC.

Opening it up to six other European institutions is an obvious step toward scalability, presenting a way to test cross-border relationships within a manageable group before it's global.

The team will start to seek regulatory approval within the next few months, with a view to going "live" before the year's end.

Looking forward, the compelling advantage of lower transaction costs and stronger commercial relationships could help to partially offset the uncertainty and potential price of rising interest rates and shifting trade barriers.

It's not hard to see how projects like this could help to prepare businesses around the world for the changes ahead, and to adapt to not only current trends, but future ones as well.

Supply chain image via Shutterstock