How can blockchain unblock Thai banks' trade finance slump?

Banks are pooling resources to break growth ceilings with the planned development of a blockchain-powered trade finance platform.

Thailand’s ambitious plan to roll out a shared trade finance platform powered by blockchain technology is expected to significantly accelerate trade processes in a move that brings the Southeast Asian country at par with the developed trade hubs of Hong Kong and Singapore.

Fourteen Thai banks have teamed up to develop a shared trade finance blockchain platform, with the country’s big four, Bangkok Bank, Krung Thai Bank, Siam Commercial Bank and Kasikornbank, planning to launch electronic letters of guarantee that will be tested in a regulatory sandbox in a few months to improve product commercialisation.

The partnership, which runs parallels with the European Digital Trade Chain consortium, is a welcome development to boost trade finance in the country especially as most funding rounds have been focused on the e-commerce and market space than fintech, said Natixis chief economist Alicia Garcia Herrero.

“As for the next stage of development for Thai banks would be to incorporate the most successful fintech and regtech players with the banking platforms so as to avoid the fragmentation of banks’ value chain,” she added.

The Thailand Blockchain Community Initiative enhances interoperability in the financial services sector, suggested Jason Ekberg, partner, Corporate and Institutional Banking Practice at Oliver Wyman.

“Overall I think it’s a net positive for the industry because it brings standards to how blockchain will be used to drive supply chain...versus allowing 14 banks to develop 14 different standards that are not interoperable,” he pointed out.

Whilst M&As would be hard to achieve in the short term, the shared platform demonstrates that banks are setting aside competitive pressures and pooling scarce resources in a bid to cut costs and maintain margins, said Maybank Kim Eng Research analyst Tanawat Ruenbanterng.

Growth prospects in trade finance
Thailand’s exporting sector accounts for over 70% of GDP which gives rise to a massive market and demand for trade finance. If the new platform can deliver on its promise to reduce costs like money transfer fees should be welcomed by exporters and banks alike, analysts say.

“Anything that can improve their margin (like this lower-fee money transfer services), there is no reason for failure,” added Ruenbanterng, adding that less fees would entail more profit for Thailand OEM exporters who largely profit based on margin.

Digital alternatives could also solve sluggish toplines that continue to plague Thai banks as they face limited room for growth, Ruenbanterng noted, with major lender Siam Commercial Bank targeting a drastic cutting bank branches from 1100 to 400 and 27,000 employees to 15,000.

“Digital banking is one field that can help improve the margin. Domestic banks like SCB/KBANK have already started embracing digital banking technology,” he stressed. “Winners in the next era should be one that can adopt with fast-changing technology. That one should have efficient cost control (in order to change/adapt faster).”

The effect of blockchain could allow for greater inclusion because lower costs could bring trade financing more effectively to a broader set of audience like SME clients or micro merchants that want to do trade but are hampered by expensive costs of documentary trade, added Ekberg.

“A relatively advanced fin tech development in Thailand should clearly help financial inclusion and financial sophistication with better financial services for the already banked population,” echoed Garcia Herrero.

The technology would provide the necessary digital boost for Thai banks who have long been trailing their regional peers in trade financing. Research from East and Partners Asia shows that digital channel engagement for trade solutions such as letters of guarantee remain less than 5% compared with the regional average of 6.3%.

“Notably, none of the Thai banks stand out in their e-trade offerings, falling behind other international and regional providers on most measures whether these be market share, wallet share, mind share or customers satisfaction,” said East & Partners analyst Sangiita Yoong. 

“If the Thailand Blockchain Community Initiative succeeds in harmonising with other trade platforms in the region, similar to plans by MAS and that HKMA is looking to achieve with the Hong Kong Trade Finance Platform (HKTFP), the initiative will bring us a further step closer to achieving a regional digital ecosystem for trade finance,” concluded Yoong.