Efforts and initiatives relating to the digitisation of international trade finance

By Stephen Ptohopoulos ACIB CDCSAdv CITF CSDG CSCF QTFS*

Disclaimer: Views and opinions expressed are those of the author and are not necessarily those of his employer.

The aim of this article is to give an overview of developments relating to the digitisation of international trade finance.  While the focus of this article will be traditional trade finance (TTF) which involves bank intermediation roles and/or the issuance of bank irrevocable undertakings, it is impossible to ignore and not mention the open account ‘space’, including supply chain finance (SCF).  Technical details of the underlying technologies will not be covered in this article.

While COVID-19 may have focused minds in terms of ‘going digital’ the forces driving the digitisation of trade finance pre-date the pandemic.

It is not only about technological change, since without other prerequisites, such as common standards, fit for purpose legal frameworks  and of course ensuring the participation (connecting) of all the parties  (buyers/sellers, customs, chambers of commerce, inspection agencies, freight forwarders, insurers, carriers, banks and other financiers) – the digitisation of trade finance will not be possible.

The International Chamber of Commerce (ICC) has been proactive and at the forefront of efforts and initiatives with respect to the digitisation of trade finance.

The ICC has published a Digital Trade Roadmap which essentially describes how it is proposed that we move from the present state to the future vision in terms of the digitisation of trade finance.  The roadmap outlines a number of steps that must complement technological change, such as rules, standards and changes in legal frameworks, which are the ‘means’ of meeting the ‘ends’.

As far back as 2002 the ICC published the first supplement to the Uniform Customs and Practice for Documentary Credits (UCP) with the aim of catering for electronic presentations – eUCP (Version 1.0).  Since then the eUCP has undergone two revisions, reflecting changes as technology and practices have evolved.  In 2019 the latest revision (Version 2.0) was published.   In parallel, the ICC published the first supplement for electronic presentation of the Uniform Rules for Collections (URC) – eURC Version 1.0 – thus ensuring that this set of contractual Rules is also ‘fit for purpose’ for the digital age.

An interesting development in the corporate (as opposed to bank-to-bank) trade finance ‘space’ is the emergence of online, internet-based payment instruments, using existing banking industry data formats, namely those of the SWIFT Category 4 and 7 series messages and which are governed by the above ICC eRules.  The Documentary Trade Credit (DTC) is governed by eUCP and is an open account space equivalent to the traditional documentary credit.   The Documentary Trade Payment (DTP) is governed by eURC and is an open account space equivalent to a traditional documentary collection.

With respect to the ICC contractual Rules dedicated to demand guarantees, namely the Uniform Rules for Demand Guarantees (URDG), it should be noted that the 2010 revision (publication № 758) incorporated provisions that made the Rules fully compatible with electronic presentations.  Furthermore, automation and electronic presentations are set to be further supported with the proposed, forthcoming SWIFT standards release of the Category 7 message series (Part 2: Guarantees/Standby Letters of Credit).

The year 2012 saw the launch of the Bank Payment Obligation (BPO), a digital solution, which aimed at creating intermediation / financing roles for banks with respect to their customers’ open account transactions.   A BPO is created when the purchase order (PO) data is matched to the commercial and transport data.  The data processing is done by a Transaction Matching Application (TMA).   At the time of its launch the most widely used TMA was the SWIFT TSU (Trade Services Utility).  In order to codify the roles and responsibilities of the involved banks and thus encourage take-up the following year the ICC published a dedicated set of contractual Rules, namely the Uniform Rules for Bank Payment Obligations (URBPO).   To date the market uptake of the BPO has been very limited; a reason cited for this being that while it is to be used for financing transactions in the open account ‘space’, it is essentially a ‘bank to bank’ rules framework that excludes roles for the contracting parties (buyers and sellers).   Building on this experience, remaining committed to its mission, ICC is in the process of drafting new Rules to facilitate trade finance in the digital age, namely the Uniform Rules for Digital Trade Transactions (URDTT).

The ICC also makes a substantial contribution to the digitisation of trade finance through its collaborations with SWIFT, BAFT, ITFA, FCI, etc., as well as with multilateral organisations such as the World Trade Organisation (WTO).

In recent years, a number of firms, including fintechs, have been developing new products / solutions using cutting-edge technology.  Firms from traditional industries that participate in international trade and finance such as logistics, freight forwarders, insurance, as well as finance providers (FPs) are now partnering with fintechs.   The ICC is in the process of drafting a guidance paper on this subject matter (‘FinTech Collaboration Guidelines’).

Businesses of all sizes – major corporates, mid-market companies (MMCs) and small and medium size enterprises (SMEs) – typically have Enterprise Resource Planning (ERP) IT portals which enable them to automate and digitise the accounting documents such as POs and invoices.  This development has enabled the growth of SCF (invoice-based techniques such as factoring, receivables discounting and payables finance) as well as innovation in the form of new digital services – often resulting from partnerships forged between traditional FPs and fintechs.

Digitally recording a payment obligation raised by a buyer in a supply chain opens the way to the creation of a new, digital financial asset.  This is likely to be attractive to FPs, especially if the digitised payment obligation can be securitised and thus be traded in the secondary markets.  The ICC’s Legal Committee has issued a Position Paper on Irrevocable Payment Undertakings (IPUs).

Expert commentators argue that to date the full potential of SCF has not been realised, not least because it is mainly confined to receivables (invoice-based) financing, which is triggered by an event at the later stages of the ‘financial’ supply chain i.e. after an invoice has been approved by the buyer.

5G will enable internet connectivity of physical objects, in what is termed the Internet of Things (IoT).  Such objects could include shipping containers, but also individual components, assembled/finished goods, etc., in a supply chain.  The IoT could allow greater visibility of the supply chain to FPs, enabling events in the ‘physical’ supply chain (e.g. pre-shipment inspection and shipment/dispatch) to be digitally captured.   This is set to have a transformative effect, opening new financing possibilities with SCF being driven by events in the ‘physical’ supply chain.

One of the biggest impediments to the digitisation of trade finance is how to create the electronic equivalent to the quasi-negotiable document of title that is the bill of lading (B/L).  A number of solutions, in the form of an electronic [transport] document of title (eBL) have been developed.   BOLERO – which is an abbreviation of Bill of Lading Electronic Registry Organisation – was one the pioneers in this field.  Today Bolero International is one of the leading providers of digital trade solutions, connecting corporates (buyers/sellers) with their logistics and banking/financing partners.  Another well-known and widely used provider of digital trade solutions – which also began with an eBL product – is essDOCS.  Within their closed, proprietary ‘ecosystems’  (‘Club systems’) eBLs are today used and can often fulfil the functions of the traditional, paper-based B/L.   Going forward, national legal systems will need to be updated so that the eBL is recognised from a legal viewpoint as the equivalent (and thus able to fulfil all the functions) of the traditional B/L.

More than a decade ago IATA – the global trade association of the air transport industry –removed the requirement of evidencing the contract of carriage through the issue of the paper based air transport document i.e. the air waybill (AWB).  It was replaced by an electronic equivalent – the eAWB.  The eAWB has now become the default contract of carriage for air cargo shipments on enabled trade lanes¹.

¹ the country of the airport of departure and the country of the airport of destination have signed the relevant treaty

Efforts and initiatives are also underway by trade and industry associations and multilateral organisations to update national legislative frameworks on negotiable instruments in order to allow for the development of the digital equivalent of bills of exchange and promissory notes.  This will be important to the future development particularly for one SCF technique – forfaiting – which in recent decades has recorded increases in the number deals/transactions due to new business cases and expansion into new geographies.

Industry/expert commentators, including the ICC have written about the impact new technologies are beginning to make in the trade finance industry.  A good example is intelligent optical character recognition (OCR).  OCR can deliver improved efficiency (and faster turnaround) with respect to the processing of hard copy/paper export-import documents handled in TTF, replacing many of the labour intensive and time consuming processes.  The ICC is in the process of drafting a guidance paper on this subject matter (‘Automation of Document Examination under Documentary Credits’).

A lot of innovation is happening in the space of Distributed Ledger Technology (DLT).  Many people refer to Blockchains and while this is a matter of on-going debate, many commentators consider the Blockchain to be a type/sub-category of DLT (for this reason the author will refer hereafter to DLT).  In partnership with FPs, technology firms have developed digital trade finance ‘ecosystems’ (platforms) powered by DLT, which have on-boarded corporates (i.e. buyers/sellers) and banks.  The business model of these platforms is essentially monetisation through intermediation, by connecting corporates to FPs.   One of the largest and best known such platforms (in Europe) is we.trade.

However, these digital platforms are not likely to gain traction if a transaction between participants in different DLTs / platforms is not possible. In other words, if there is to be greater take-up of digital trade finance through innovation in the DLT space, such interoperability issues will need to be overcome.   This is what the initiative of BAFT, called the Distributed Ledger Payment Commitment (DLPC) aims to address.  The DLPC is the digitisation of the payment commitment² – common data sets found in all digital trade finance transactions.  It is intended that the DLPC will be a digital financial asset in its own right, which can be used across digital platforms – thus helping to enhance interoperability between different DLTs.

² examples include drawee’s acceptance of a bill of exchange or promissory note;  the irrevocable undertaking of the issuing bank in the context of the issuance of a documentary credit; a deferred payment obligation (DPO) incurred by the nominated bank with respect to a deferred payment documentary credit

Given the rapid pace and geographic dispersal of innovation, this article cannot provide a comprehensive and complete coverage of all the developments currently underway.

It has been stated by many expert commentators that trade finance is set to experience considerable disruption. Traditional trade finance (TTF), underpinned by practices and legal frameworks that changed relatively little in over a century or more, is now undergoing considerable change, with new technologies at different stages in the innovation life-cycle and with the emergence of new entrants.  Yet at the same time it is not anticipated that the traditional paper-based negotiable instruments, documents of title and TTF will disappear altogether any time soon.

*Stephen is an Associate member of the London Institute of Banking & Finance (LIBF); holder of the following LIBF International Trade Finance professional qualifications: Certificate for Documentary Credit Specialists (with ‘Advocate’ designation) (CDCSAdv), Certificate in International Trade Finance (CITF), Certificate for Specialists in Demand Guarantees (CSDG), Certificate in Supply Chain Finance (CSCF); holder of the Incoterms 2020® Certificate – awarded by the ICC Academy.

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