HSBC Exec Warns 'Digital Islands' Could Inhibit Blockchain Trade
When HSBC's Vinay Mendonca thinks about how distributed ledger technology (DLT) will reshape global trade, he sees two scenarios – one inspiring, the other dispiriting.
In the best case, blockchains and other digital platforms should do for the global value chain what shipping containers did for the physical transportation of goods. Just as the standardized dimensions of containers allowed them to move around the world easily from ship to rail to truck, DLT with data standards and interoperability ought to create seamless flows of value.
But without such standards, trade finance could end up on "digital islands," or silos disconnected from each other, said Mendonca, the global head of product and propositions for global trade and receivables finance at HSBC. And he believes that would do no one much good.
It's perhaps not surprising HSBC is thinking about interoperability; the bank has a finger in just about every trade platform of note.
HSBC was the first bank to partner with and invest in Tradeshift, the digital trade platform which boasts 1.5 million suppliers in 190 countries (Goldman Sachs led a further $250 million funding round earlier this week).
HSBC has also gone well past the proof-of-concept stage, completing the world's first blockchain-based trade finance transaction with food giant Cargill and R3's Corda platform. Further, it's a key member of the We.Trade consortium which uses Hyperledger Fabric – and that's not including a number of Asia-specific consortiums and projects of which it's part.
To Mendonca, it's important to bring the interoperability discussion to the table as early as possible.
He told CoinDesk:
"A fundamental challenge for all of us is to make all this fit together. So, how do we make sure the Cargill solution on Corda has interoperability with the national trade platform in Singapore, as an example?"
Hence, an "international set of standards that everybody complies with" is needed, Mendonca said.
Stepping back, the HSBC executive's concern for how to connect various platforms grows out of a realization that trade finance cannot be digitized in isolation.
It has to be about the total digitization of trade: issuing purchase orders, accepting invoices, shipping goods. Within that merging of physical and financial supply chains, clients can have a discrete step for a financing option, said Mendonca, "so not a completely different process, but really have that embedded within the existing process."
Would that it were so simple.
One problem is that construction of much of this architecture is at the R&D stage and so different initiatives and splinter groups are inevitable.
Mendonca said it is difficult to call how things will progress, but he guessed there could be some consolidation happening before too long.
"Some working groups may merge with others that are more advanced," he said, adding that he now only gets excited by projects that can scale for real, as opposed to PoCs done in a lab or a sandboxed environment.
Returning to the question of standards, Mendonca touched on some practicalities whereby the industry needs to decide, "are these the standards we will all accept on an invoice, on a purchase order?"
Then, if that can be achieved, "what technology you use to make it happen is probably slightly less of a problem."
Agreeing on the standards is likely the bigger challenge, he said:
"We will have to pull together as an industry to make that happen and it's not going to be easy. But to be fair, I think this time around, every working group realizes that it has to be a building block; interoperability shouldn't be an afterthought."
Collaboration or competition?
This all sounds great, but it's well known that big banks are touchy about sharing anything that could give their competitors an edge.
As well as being careful about data sharing, using platforms like Tradeshift that are essentially "bank-agnostic" means valued customers engage with multiple banks.
However, Mendonca pointed out that HSBC has actually been doing this type of thing for years with the SWIFT for Corporates channel, a service provided by the international financial messaging network for treasurers of multinationals.
"Its big benefit is being bank-agnostic, " he said. "For instance, you don't have to connect to five different banks; you connect once and you can give an instruction to all those five banks. So stuff that was put in place a while ago for cash is now available for trade."
The intuitive play in a more distributed world, then, is to define which factors banks need to collaborate on, and those they compete on. They can agree there's a need to collaborate on the exchange of purchase order and invoice data, for instance, because this will make customers' transactions more efficient.
On the other hand, HSBC would compete with others on the reach of its network to support transactions across the globe, Mendonca said, or the advisory capability of its trade experts and the service levels it offers.
As such, HSBC is not intimidated in any way by other big banks joining it on any particular platform, said Mendonca, concluding:
"We have been offering supply chain finance solutions to clients for years. When they tell us they are looking at a bigger picture, we understand these end goals."
HSBC bank image via Shutterstock