Supporting Small Business with Blockchain and IBM Cloud

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A small kitchen supplies manufacturer in France is delighted when it receives a large order from a mid-sized Italian retailer. The manufacturer is eager to respond, but first it needs a bank loan for working capital to fill and ship the order. Without a short-term loan, the manufacturer might not make payroll; without this order, it loses an opportunity to grow.

Sound atypical? This is daily life for millions of small to medium enterprises (SMEs) operating around the world. Such businesses are the lifeblood of the economy in Europe: SMEs with fewer than 250 employees account for 99 percent of all businesses. Those 20 million businesses provide up to 85 percent of growth in European jobs, while in emerging markets, SMEs account for up to 60 percent of employment and 40 percent of GDP. And yet up to 50 percent of all SMEs worldwide lack access to formal types of credit, i.e., bank loans.

Without access to public debt and equity capital markets, these smaller organizations depend on banks to fund their growth. But small businesses are often seen as a risky investment for banks. With less rigorous requirements for reporting and compliance than their larger counterparts, it can be difficult for SMEs to convince lenders that their investment will be repaid. When lenders decide the risk is too high, SMEs are left turning to friends, family, and personal debt to fund their operations and growth.

In a bold move, a consortium of seven leading banks in Europe has committed to helping solve this problem using blockchain. These banks see the potential to accelerate economic growth and through it their trade finance business by making it less risky to fund SMEs and facilitating SME international and domestic trade. The consortium, called the Digital Trade Chain, includes Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and Unicredit.

IBM is advancing blockchain by applying it to real-world problems big and small. As IT moves to the cloud, transactions must be trusted by all parties in every industry. That is why we are building a complete blockchain platform. Blockchain brings together shared ledgers with smart contracts to allow the secure transfer of any asset – whether a physical asset like a shipping container, a financial asset like a bond or a digital asset like music – across any business network. Blockchain is doing for trusted transactions what the Internet did for information.

Through a competitive bidding process, the banking consortium selected IBM Blockchain powered by Hyperledger Fabric over R3 Corda, Microsoft, and Cognizant to build a blockchain solution to make it easier for SMEs to access the financing they need to trade across borders. IBM will provide implementation of the Hyperledger Fabric, GBS will lead systems integration, and the solution will run on the IBM cloud.

This new platform will allow authorized participants in a transaction network to have access to a single, shared record of events, which is updated in real time and cannot be edited without consensus by all parties. Banks will be able to see the terms of contracts, as well as track fulfillment of those terms as they occur. As more users and banks come on board, the network effect will be amplified.

Consider again the small kitchen supplies manufacturer. With blockchain, when the proposal is received, the manufacturer’s bank grants them access to the Digital Trade Chain platform. The result is a smart contract which cannot be altered by either party. As status updates are put in place in real time, all parties are notified and can see the changes on the shared platform. This transparency throughout the process makes it easier for banks to lend money for they see with total trust how they will be repaid.

Think of this example multiplied by the thousands of small businesses looking to trade in the European and global markets. The potential momentum based on transparency and trust is enormous. IBM Blockchain has imagined that scenario – simpler, speedier, cross-border trades by SMEs in Europe – and now it’s going to become reality.