Processing letters of credit digitally in trade finance
Sector: Tertiary sector · Industry: Banking and financial services · Organisation: HSBC, ING, Cargill · Maturity level: Pilot
In May 2018, banks HSBC and ING conducted a pilot transaction on the Voltron blockchain platform for agricultural conglomerate Cargill. During this trial, a letter of credit was issued and processed completely digitally on a distributed ledger. The procedure drastically reduced the traditional multi-day, paper-based exchange of trade finance documents to just a few hours.
Documentation status
- Project status: Pilot (as of 01 May 2018) — Successful completion of a live letter of credit pilot transaction between HSBC, ING and Cargill using Corda technology.
- Evidence: Evidence medium
- Editorial review: pending
Description
The major banks HSBC and ING, together with the agricultural trading group Cargill, tested a procedure to fully digitalise letters of credit. In traditional foreign trade, a letter of credit requires the laborious sending of numerous paper documents by post or courier, which often takes several days. By using a shared distributed ledger, all parties can view and approve the same document status without any time delay.
In May 2018, HSBC and ING conducted a pilot transaction via the Corda-based platform Voltron to secure a real trade transaction for Cargill. HSBC acted as the issuing bank for the letter of credit, while ING took on the role of the advising bank. The companies involved exchanged the data required for the letter of credit directly and digitally instead of sending physical documents across borders. This reduced the typical processing time from five to ten days to just a few hours. The pilot demonstrated that distributed ledger technologies are practical in the regulated banking environment and can minimise the risk of document loss or delays.
Perspectives
B2B — organisations perspective
Companies and cooperating credit institutions benefit from drastically reduced settlement times in international commodity trade. Digital synchronisation of transaction data significantly lowers process costs and capital commitment durations.
Employees perspective
Clerks in document handling no longer need to manually reconcile trade documents or wait for postal arrivals. Instead, working hours can be used for more demanding checks and direct customer advice.
Benefits
General
- Acceleration of document verification from several days to a few hours
- Complete transparency of the current approval status for all transaction parties
- Significant reduction of transmission errors and fraud risks
B2B — organisations
- Faster release of goods deliveries at destination ports
- Lower capital commitment costs in foreign trade transactions
- Direct paperless communication between issuing and advising banks
Employees
- Elimination of manual document checks and physical archiving
- Real-time insight into status changes without manual enquiries
Challenges
General
- Legal uncertainties regarding digital bills of lading in some jurisdictions
- Need for uniform technical connectivity of all participating financial institutions
B2B — organisations
- High coordination requirements for consortium and network standards among competing banks
- Integration effort into existing core banking and ERP systems
Employees
- Adjustment requirements for established verification routines in document handling
Technology foundation
The Voltron platform is based on the distributed ledger technology Corda from R3. Corda was specifically designed for financial institutions and enables point-to-point encryption, making sensitive trade data accessible only to authorised transaction parties.
Implementation examples
Voltron letter of credit pilot
Traditional letter of credit processing is extremely paper-intensive, slow, and ties up unnecessary capital due to days-long document handling times.
HSBC, together with ING and Cargill, processed a cross-border letter of credit transaction via the blockchain platform Voltron. The digital process completely replaced paper-based document handling.
As part of the project, HSBC issued a digital letter of credit for the agricultural group Cargill, while ING acted as the advising partner bank. The processing was carried out via the Corda framework developed by R3 on the Voltron platform. The entire document exchange was encrypted and synchronised immutably, reducing the turnaround time from the usual five to ten days to just a few hours.
Reduction of processing time from 5–10 days to a few hours according to Euromoney.
Elimination of physical document transport and reduction of the risk of document forgery or delays.
Tags
Trade finance, Letter of Credit, Letter of credit, Distributed ledger, Corda