How banks are building those blockchains

THE REAL BENEFITS of Artificial Intelligence will come when as much of the trade environment as possible is digitised, says HSBC’s Andrew Speers...

FROM a physical perspective, supply chains are being squeezed to the point of critical mass in terms of efficiency, says Andrew Speers, HSBC’s Senior Regional Product Manager, Asia Pacific, Global Trade and Receivables Finance.
Treasurers are now looking to financially engineer their balance sheets to bring cash forward or decelerate cash flows, he says, using techniques such as Supply Chain Finance and Receivables Finance.
 But HSBC believes there is a third way to efficiency – through digitisation of the supply chain.
 The challenge is to inter-connect separate supply chains to work more efficiently with intelligent solutions which provide instant access to data points, Speers told ATI.
“This enables you to understand your business better and to be more efficient.
“So some businesses have now become virtual procurement networks, using the cloud. Each of these network businesses has a unique identity to allow customers to interact in a completely different envtronment.
 “Suppliers send an e-invoice, which matches automatically against the original e-purchase order, triggering and enabling shipping documents.
“The shipper is enabled into the network, a bill of lading may no longer be required, and the flow-through from that point is to what happens from a financial product perspective.”
Says Speers: “This is where we move away from the Letter of Credit and traditional debt and overdrafts to something that is closer to the supply chain.”
Speers gives the example of an importer buying widgets from China.
Having searched for a suitable manufacturer, the Chinese supplier will request a proposal for works to be completed. This will be followed by a procurement note from the buyer to the supplier, who effectively will then make the decision on how the widgets are to be manufactured, shipped, stored and used in the end-manufacturing process.
In the digital world, the order for widgets is uploaded into the cloud, either into an existing supply chain or, if new providers are involved, into an alternative supply chain where the various elements of the order are matched through an AI programme.
The widgets can then be manufactured by the lowest cost and fastest manufacturer to deliver the specs required, and the financial side of the transaction linked to the physical side without waiting for the goods to be shipped or the buyer to send data to the bank.
Says Speers: “As the financier, we know the supplier through our KYC (Know Your Customer) process in the supply chain, because, effectively, the data-rich environment of the blockchain allows us to do so.
“Much of the paper-chase — which has always been part of the regulatory overview in cross-border trade — goes away. That means a reduction in time, processing and therefore in costs.”
Speers told ATI that the real benefits of AI come when as much of the trade environment as possible is digitised.
“At the moment, the AI benefits are limited to the data set,” he says. “The quantitative analytics that drive AI are really based on the value of the data set, so the bigger the data set and the more reliable the pre-programmed parameters available to set the AI, the better and more accurate the results will be.”
This also applies to the security of the data set.
Of any potential data leakage, Speers says the best approach is to ensure that supply chain partners store data using perceived best practice.
HSBC, he says, carefully checks out all suppliers, customers and directors to make sure that the network is safe – the KYC model.
“The customer has to be at the centre of everything,” he says. “We have a central role in getting our customer educated in terms of the security issues.
“In both offshore and local banking we have a dedicated trade specialist, who manages the account in conjunction with the relationship team. The relationship team works with the global bank, and product managers like myself handle the solutions. We educate the customer and we do that with the compliance teams — it is a full bank relationship play.
“This allows us to have a valuable conversation with the customer in how to manage risk — for example, if there is a currency risk at some point in the transaction, it is a risk that may exist for both the buyer and the seller.
“As a global bank we have the luxury of being able to stand in the middle and provide a solution — we don’t see that as a risk, we see it as an opportunity to work with that supply chain.”
For cross-border traders, Speers sees potentially outstanding future benefits emerging from blockchain.
“When it comes to blockchain or distributed ledger technology — DLT as we call it —  we are working with a consortium including six other banks in Europe on what we call a Digital Trade Chain,” he says.
“Things like this take some time to crystallise into commercial benefits, but we can see the benefits of technology in intelligent automated systems to increase efficiencies.
“Our view is that, while we have some very strong proprietary systems, we will also continue to work with third-party fintech firms to co-develop solutions for customers.”
Speers says fintechs initially tried to pave the way for a brave new world as disruptors, but then become part-collaborators and are now fast coming into full collaboration and even integration with the banks.
“Because fintechs by their very nature are forward-thinking, they cannot work alone in a heavily-regulated environment,” he explains. “Financial services is by nature heavily regulated.”
The same situation applies to those shippers and logistics providers who have seemed to want to move forward in terms of being financiers as well.
“Regulation is a factor they will need to face into the future,” he says. “Look at the approach that APRA (the Australian Prudential Regulatory Authority) has taken recently in respect of shadow banking regulations.”
Speers told ATI:  “A bank is an intermediary by nature. What we can do is provide what flows through the pipes. We don’t have to own the pipes.
“We need to continue focussing both on being an intermediary and focussing on the networks that we do have, providing intelligent benefits between the parties. There is less focus on owning and more on still being able to provide a good technical solution.”
In blockchain, he says, cybersecurity solutions will continue to be co-developed because the fintechs need the banks’ understanding of what is needed and how to manage it.
“They can build a software programme that does wonderful things,” he says.  “But they need the commercial intelligence that a trade bank like HSBC brings to the party to understand how to actually market and develop it.”
“With DLT, we are giving regulators an insight into what DLT means for business. We are working with other banks to share technology through open source, and we have put equity into consortiums like R3, a co-operative of banks.
“Infrastructure needs to be set up, and we need to be involved in establishment of that setup.
Says Speers: “We are large participants in global trade and we have a social responsibility, not just to ourselves but to our shareholders and our stakeholders – regulators, shippers, importers, exporters, customs, Government agencies – to ensure that the products we are building in this digital world will provide future value.
“We are sharing our expertise and our IP, and we will continue to do that into the future to make sure that the infrastructure is safe and stable in the proper environment. “Some data suggests as much as 80% of global trade could now be on open account, so it has really moved away from the documentary trade space.”
Speers also offers his personal view of what the trade future might look like.
“Supply Chain 4.0 is now starting to emerge, where you have good intelligent technology – it comes to a matter of your input costs and where you actually have taken efficiencies from the supply chain,” he says.
“Your input costs are the energy and the materials you use to make the product.”
“You look at an environment like Australia.”
“We have a sunny day outside today, no clouds in the sky. We stand in an extremely competitive position in Asia to be a major manufacturing hub, based on intelligent automated manufacturing machine with solar energy and distribution through the digital supply chain.
“We can feed the world and make goods for the world into the future if it does turn out in a utopian way.”