Blockchain is not the panacea in business and banking

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Trust is hard to develop and can be lost in the blink of an eye. Without it, many business and finance relationships become prohibitively costly. Now blockchain and other new distributed ledger technologies (DLT) are proposing to reduce or even eliminate the need for trust. We argue in this short article series that to be valuable to customers, such projects cannot ignore the tremendous efficiency gained from trust in many situations.

In follow-up articles, we discuss the findings of the Imperial College London MSc consulting team 1. Their study revealed a very much nascent sector with projects of wildly differing levels of maturity. In another article, we look at LakeBanker, a project we are delighted to be advising. Their team is engaged in an ambitious approach to make better use of trust and data in finance with their flavour of Crowd Banking.

Containers Blocks in a Chain

In this introductory article, we draw out two themes we consider the most relevant in the context of blockchain.

Information overload

All parties in global trade have a common challenge of getting accurate information that they can act on. This applies to large or small companies, in tight supply chains or loose markets. It is also a growing problem, as the flow of information keeps accelerating with better transparency, more complex rules, increased focus on compliance, etc. There are two angles to this:

  • First, information technology aims to eliminate administrative overheads e.g. integrate different information systems to reduce re-keying of data. Yet it remains a challenge even after decades of progress. Banks and SMEs still struggle to keep up with the growing pace of business. Notably, the biggest gains have only been made with the adoption of communication standards (see SWIFT messaging, TCP/IP, the growth of software APIs, and the current drive for Open Banking). These have enabled different systems to inter-operate, and promoted more accessible cloud-based and Software-as-a-Service offerings.
  • Second, increasingly complex rules and interconnected trade and finance processes create challenges. Laypeople find it difficult to assess and interpret ‘raw data’ of the rules. This leads to increasing layers and specialisation so that currently, businesses must too often patch together advice from different experts in narrow fields, all the while remaining liable for any gaps or mistakes in interpretation.

We have talked previously about the problems facing international traders here and tips for first-time success here. Blockchain seems to propose very little new in this space. Shared databases, rules engines, and some newer machine learning tools can achieve a lot already.

Trust versus competition

Business leaders talk less publicly about lack of trust and lack of familiarity. But they are no less prominent in their minds: it is difficult to engage in unfamiliar processes and business practices, or demonstrate capabilities to new counter-parties.

For example, a new company wanting to join tightly integrated international supply chains needs to pass pre-qualification and other hurdles. These are mostly commercial requirements, not regulatory impositions: savvy businesses simply find them to be valuable ways of getting to know their suppliers and partners, promote good communication, and reduce risk in the supply chain.

But even looser, transactional marketplaces have procedural hurdles on top of the competitive pressures of open markets.

Take for example the mutual recognition of business quality marks by different countries. Called Authorised Economic Operator designation in the EU, it is recognised by the USA, China, Japan and more – many markets that the EU has not signed free trade agreements with.

The mark indicates that “your role in the international supply chain is secure, and that your customs controls and procedures are efficient and compliant”. Even though it is voluntary, it is almost becoming a necessity. Without it, businesses face cost and time disadvantages. The UK’s HMRC estimates that companies with AEO status carry out 60-74% of international trade2. Nevertheless, applying for AEO status is a significant project that is often not worth-while for smaller businesses.

Such hurdles give larger businesses an advantage purely by spreading fixed costs over a larger number of trades. One response would be to task public bodies to provide more subsidised support to smaller businesses. Another would be to provide more scalable technology solutions that level the playing field while also delivering information and services in a more efficient and accessible way to those who need it.

Business models vs. technology

A typical business owner is not interested in the details of technology and regulations that govern trade. For them it boils down to the time and cost implications. Making efficient trade accessible to SMEs needs common tooling and software. It also needs mature business models that can take into account complex trade arrangements and the possibility of legal disputes and interpretation.

See our next article for discussions of these, and how we are looking to solve these problems with a combination of technological and business innovations.

 

  1. See our blog post from July
  2. House of Lords report quoted on p.8 of the recent customs partnership paper.

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