Digitalisation in the trade finance business

Securing payments for commercial transactions via the Marco Polo blockchain project – a joint development with clients

In May 2021 Commerzbank joined İşbank and Landesbank Baden-Württemberg (LBBW) to become one of the first banks worldwide to execute commercial transactions with German and Turkish corporate clients via the Marco Polo trade finance network in a live environment. This marked a key milestone in the run-up to the market launch of Marco Polo Payment Commitments.

Vera Voerckel

In the Insights interview, Vera Voerckel from the Trade Finance & Cash Management team at Commerzbank Dusseldorf talks about this with Kay Maybach, Head of Customer Service Interregio, Middle East Africa, Turkey & CIS at Covestro AG in Leverkusen. Angela Koll, Senior Business Expert Supply Chain Finance & Innovation, and Matthias Walter, Head of Trade Finance for the Rhineland region, attended on behalf of Commerzbank.

Vera Voerckel: Ms Koll, what is the Marco Polo Payment Commitment about?

Angela Koll

Angela Koll: A Marco Polo Payment Commitment is an irrevocable, abstract undertaking by the buyer’s bank to the supplier to make payment on the due date. The payment commitment is based on the exchange and successful automatic matching of digital trade data in the Marco Polo Digital Ledger Technology DLT/blockchain network. The Marco Polo Payment Commitment serves both financing as well as to secure payments and optimise working capital in national and international trade.

Mr Maybach, you have followed the process closely from the pilot transactions right through to the live transactions. Why do you take such an interest in this?

Kay Maybach

Kay Maybach: As one of the world’s leading manufacturers of high-tech polymer materials, Covestro operates a comprehensive network of locations in Europe, Asia and North America. Increasing digitalisation is tangible in all our international markets – but payment settlement in trade finance is still lagging behind, even though the requirements for future transaction flows are clear: faster, more transparent and more efficient.

What could be the solution?

Kay Maybach: Above all, the timely exchange and automatic matching of trade data between trading parties is crucial for the buyer’s bank to generate an irrevocable payment commitment to the supplier – to secure the payment, but also for financing. In the closed network, the buyer, the supplier and the banks involved have access to the relevant data at the same time. This is the kind of solution we have been looking for, which is why we are very keen to push this issue forward together with Commerzbank.

Let’s briefly look back on the history of the Marco Polo Payment Commitment. The foundation was laid back in 2017, when Commerzbank initiated the Marco Polo blockchain trade finance project together with the R3 blockchain consortium and other banks. How did this come about, and what was the background, Ms Koll?

Angela Koll: I was a member of a Euro Banking Association (EBA) working group when I became aware of the potential that the Distributed Ledger Technology (DLT) offered for trade finance. I recognised the possibility to effectively connect several participants of a supply chain in a network, and to exchange data in a transparent, fast and safe manner. Commerzbank was already a member of the R3 blockchain consortium, which was developing early initiatives for the trade finance business. In 2017, we founded Marco Polo together with Commerzbank’s DLT Lab, R3 and other interested banks. First solutions were discussed and developed in the same year. In 2018, we tested the first prototype for the Marco Polo Payment Commitment, and in March 2019, we conducted the first pilot transaction together with LBBW and the clients KSB and Voith, as a simulation of a historical transaction. This was followed by further pilot transactions with other clients and banks. It was important for us to receive feedback from our clients after the transactions were concluded, and to incorporate client-specific requirements. End of May 2021 we went live with the first transactions and have been able to continuously bring additional clients into the Marco Polo network and settle transactions on a regular basis since then.

Together with clients and banks, we want to actively expand the Marco Polo Payment Commitment business line in 2022.

Kay Maybach: I would like to briefly add and confirm that it is very important for us to be able to weigh in with the specific requirements of our company as early as possible.

For Commerzbank, however, this means that you not only need ideas and know-how in DLT, but also companies that will pursue this development path together with you. How do you find these companies?

Matthias Walter

Matthias Walter: There are three ways. Naturally, companies approach us time and again regarding new issues or products. But the starting point may well be our Product Management wishing to test new solutions with interested companies under practical conditions. In this case, we analyse our client base and check who might particularly benefit from the respective project. This is also how we proceed in the third way, when our correspondent banks abroad ask for pilot clients in Germany – through our local representatives – for cooperation.

How did the contact to Covestro come about?

Angela Koll: Through the third way just described by Matthias Walter: Banco Bradesco in Brazil approached us through our local representative office. Looking for a company which would benefit from a new trade axis with South America, we identified Covestro and contacted our regional specialists. This is how Mr Maybach and Mr Walter came into contact.

Matthias Walter: In the search for interested companies it is vital to have an overview and the right feel for one’s own client portfolio. Which clients have an interest in digital solutions? Who would be happy to enter unknown territory with us? This was the case with Covestro.

What are the requirements that a company must fulfil for a pilot transaction with the Marco Polo Payment Commitment? This does sound quite complicated.

Angela Koll: Participating in a pilot transaction is not complicated for our clients. A user access to the Marco Polo network – a so called “node” – is set up for the client. To prepare the pilot transaction, we need a historical commercial transaction with the trading partner, from which we extract the data required for the pilot transaction. We then prepare the data and make it available to the client. We explain the settlement process to the client on the Marco Polo platform and the steps that require action from the client. To sum it up: little effort for the client and no technical implementation.

After a successful pilot transaction, we are happy to take the next step. Together with the client, we identify an appropriate transaction and use the experience and knowledge to go live: the concert performance after the dress rehearsal, so to speak.

What is next for the Marco Polo trade finance network?

Angela Koll: We will bring further pilot transactions into live business, gain new clients, gradually expand our offering, win further banks for the network, and connect with other trade finance networks. There is still a lot left in the pipeline: going forward, shipping data can be uploaded directly by a logistics company, and further data by insurance companies and other participants of the supply chain.

What do such developments mean to Commerzbank?

Matthias Walter: New, modern and innovative developments are vitally important to us as a bank in order to continuously provide companies with the best possible range of solutions. Of course, the most effective way to develop these is jointly with the clients, so that the products are adjusted to their needs right from the start. Judging by experience, this is how we achieve a broad market acceptance. And this doesn’t apply only to Marco Polo: we are simultaneously working on solutions in the area of electronic documents, and we are researching and testing future technologies together with the Fraunhofer Institute in Dortmund. One example for this is sensor technology. But there are various digital solutions along the supply chain, or at least ideas about what these solutions could look like.

One last question for you, Mr Maybach: What does Covestro expect from digitalisation in the trade finance business?

Kay Maybach: With regard to the Marco Polo project, we expect DLT to materially simplify and accelerate our international business. We also expect the project to improve and standardise the automation of international trade.

Ms Koll, gentlemen, thank you very much for talking to us.

As of June 2022