HSBC says blockchain could ease small firms’ financing woes, with Greater Bay Area key to success
- Bank says it recently completed the world’s first yuan-denominated letter of credit blockchain transaction
- Quick exchange of information could make letters of credit more attractive, open more financing to smaller firms, HSBC’s head of trade for Asia says
A broader adoption of blockchain technology could open up more financing for small and medium-sized businesses seeking to export goods, particularly in the Greater Bay Area, according to HSBC’s head of global trade for Asia.
Ajay Sharma, regional head of global trade and receivables finance, HSBC Asia-Pacific, said obtaining letters of credit, in which banks guarantee payments in a transaction, has been difficult for small businesses in the past. A lot of paper had to be exchanged between parties and smaller companies, and if they missed something, they would often have to start the process all over again, which slowed transactions.
About 1.2 million letters of credit valued at US$750 billion were issued in and out of China last year, HSBC said, citing data from global financial messaging provider Society for Worldwide Interbank Financial Telecommunication (Swift). Blockchain, by making documents available electronically to the parties in a transaction and their lenders, has the potential of speeding up the process of issuing letters of credit and opening trade finance to an even larger audience.
“As it is more accepted over time, across the world, it will reduce the complexity and the bad name that letters of credit have gotten as a very difficult instrument to use,” Sharma said. “Letters of credit permitted small companies to go to the banks and say: ‘I’ve got a letter of credit. I’m going to get paid after 60 or 90 days. You know I’ll get the money after it is accepted, so could you finance me.’ Because people are not using letters of credit [as much] … it became more difficult for [small and medium enterprises] to get financing. If it becomes more easy to get letters of credit, you might actually see volumes go back up. It is an easier financing tool for some of the smaller companies we have.”
His comments came as HSBC said on Tuesday that it recently completed the world’s first yuan-denominated blockchain letter of credit transaction involving a shipment of raw materials between Hong Kong’s MTC Electronic Company and its Shenzhen-based parent firm, both in the Greater Bay Area region that links Hong Kong, Macau and nine Pearl River Delta cities.
The exchange of fully electronic documents was completed in 24 hours. A similar transaction between the companies conducted conventionally recently took eight days.
It is the ninth letter of credit blockchain transaction that HSBC has completed since May 2018, as the bank looks to commercialise the process. It is also an important milestone as China seeks to internationalise the yuan as a trade currency.
The transaction used Voltron, a blockchain trade finance platform developed by eight banks, including BNP Paribas, HSBC and Standard Chartered. Sharma said he hopes Voltron can be commercialised next year – meaning it will be more widely adopted and financially viable for users.
The movement to use blockchain to speed trade financing comes against the backdrop of the trade war that has raged between China and the United States for more than a year, which is forcing a shift in the global supply chain and is weighing on business sentiment and investment.
Obtaining financing for export remains a challenge for emerging economies and small businesses – one the banks hope to ease with greater adoption of blockchain to share documents securely.
The Asian Development Bank said in a report two years ago that there was a global trade finance gap of US$1.5 trillion, with the greatest shortfalls in emerging economies and in the Asia-Pacific region. About 40 per cent of trade financing rejections were in Asia-Pacific, according to the development bank.
In a report last year, blockchain software firm R3 said that 77 per cent of letters of credit each year originate from Asia alone, and a quarter of all rejections by banks were over concerns about meeting Know Your Customer and anti-money-laundering regulations.
IDC, the market intelligence company, said on Tuesday that banking, securities and investment services firms in Asia-Pacific, excluding Japan, are expected to spend US$296.3 million on blockchain investments this year. Across all industries, spending on blockchain technology in Asia-Pacific, excluding Japan, is expect to reach US$3 billion by 2023, according to IDC.
Sharma said HSBC was targeting the Greater Bay Area for more digitisation efforts, including using blockchain in finance.
“It’s a huge production hub. Given where it is and the kind of technology that exists in the Greater Bay Area, there will be more digitisation there than anywhere else,” he said. “I think we’d like to do a series of blockchains. We’d like to see how do you really make trade easier out of this aggregated [area] where there is so much production taking place and so many exports taking place … We think it’s a huge opportunity and you really need to find scale if you want this platform to be successful.”
