Innovation in Trade Finance

By Ben Poole, Editorial Team, TMI

With the fallout from the global pandemic, geopolitical tensions, and soaring inflation and interest rates, the international trade and SCF ecosystem has faced a torrid few years. The good news is that certain new technologies and innovations from fintechs and banks, combined with legal progress, promise more efficient and cost-effective trade finance for corporates and their suppliers.

The Covid-19 pandemic caused enormous disruption to global supply chains as lockdowns and port closures rolled around the globe. Since then, there has also been an increasing impact on specific industries, particularly those that are technology-related, of nearshoring and ‘friendshoring’, with companies reformatting their supply chains to reflect macroeconomic pressures.

Dominic Broom, Senior Vice President, Working Capital Technology, Arqit, comments: “The mantra of 10 years ago for corporates to go and seek their goods from across as broad a supply chain as possible at the lowest possible cost has well and truly come to an end. The twin effect of political instability across certain trade corridors coupled with Covid has brought about a rethinking of supply chains, focusing on ensuring they are resilient.”

Dominic Broom
Senior Vice President, Working Capital Technology, Arqit

That resiliency extends into corporates making sure that they are working with trusted counterparties, instead of those providing materials at the lowest cost.

A change of location

There is also an economic shift, which has been underway for some years, significantly impacting where certain goods and materials come from.

“The transition of China to a more medium-wage economy has seen a growth in the shift of supply chain production activities into lower-wage neighbouring countries such as Vietnam,” adds Broom. “There is an increasing amount of technology goods, in particular, coming out of Vietnam.”

Alongside these challenges and changes, higher inflation and rising rates have also impacted global supply chains. The challenge facing the ultimate prime producer to keep the inflationary costs passed onto the consumer as low as possible is broadly in their interests. However, that has been almost impossible in industries such as food distribution. This impact on corporate liquidity and working capital has driven up demand for trade finance.

Enno-Burghard Weitzel, Senior Vice President, Strategy, Business Development and Digitisation, Surecomp, explains: “Today, there is a clear interest for companies to receive their money sooner rather than later. Whether a supplier negotiates a 90-day or a 120-day payment period on the invoice makes a real difference. Suppose it does not have the bargaining power to negotiate a shorter period. In that case, it may agree to 120 days but then turn to its bank or a financier, to demonstrate it has an invoice that can be financed.”

Enno-Burghard Weitzel
Senior Vice President, Strategy, Business Development and Digitisation, Surecomp

This impacts the demand for professional trade finance solutions because the more instruments corporates use, the stronger the demand for professional solutions that help corporates create transparency, obtain an overview, and more efficiently manage their trade finance. In recent years, several core trade instruments have spawned digital versions. Still, paper instruments continued to dominate the space as the legal basis for digital trade documents has been lacking. This September, however, that all changed.

Establishing a legal footing

On 20 September 2023, the UK’s Electronic Trade Documents Act (ETDA) came into force, enshrining in law that electronic versions of trade instruments including guarantees, promissory notes, bills of exchange can be used. While this is a law passed in just one country, it will have a global influence.

Broom notes: “Depending on who you speak to, between 60 and 80% of global trade is undertaken under an English law contract, so the impact of this legislation is very far-reaching. It’s part of a body of legislative work that G20 nations have agreed to, based on the UN Model Law on Electronic Transferable Records [MLETR]. And it was restated at the G20’s summit [in September] in New Delhi, whereby recognition of digital trade instruments is going to be undertaken by all major jurisdictions during the next couple of years.”

For corporate treasurers, the legal recognition of digital trade instruments should mean that they can streamline how they finance their supply chains while also delivering significant security to trade relationships.

Michael Vrontamitis, Founding Partner, T3i Partner Network, elaborates: “Having the ETDA enshrined in law and giving a legal basis to digital trade makes it much easier for a treasurer to take decisions around the risks of conducting their business. That will provide treasurers with two opportunities – first, access to additional capital and additional investors, and second, potentially create more liquidity in the marketplace for their short-term debt.”

Michael Vrontamitis
Founding Partner, T3i Partner Network

Daniel Cotti, Founding Partner, T3i Partner Network, agrees that additional liquidity is the key. “Of the many issues that concentrate the minds of corporate treasurers, there are two that specifically interest them – where can they obtain funds from and where can they obtain those funds at a cheaper rate?” Cotti notes. “Digitising the right trade instruments provides an opportunity to achieve both questions. It will bring more players together in digital marketplaces, and that will then create cheaper funding.”

Daniel Cotti
Founding Partner, T3i Partner Network

Corporates could take advantage of the ETDA as soon as it came into law. Indeed, a transaction happened on the very first day. Lloyds Bank completed a deal for Matalan Retail via Enigio’s trace: original solution. Matalan issued a digital promissory note to accept liability when settling a documentary collection for the purchase of garments from one of its suppliers. Through the technology, the key documents arrived two days earlier than they would have if they had concluded the promissory note on paper.

Rogier van Lammeren, Head of Trade and Working Capital Products, Lloyds Bank, enthuses: “We’ve had frequent conversations with the Matalan team around the Electronic Trade Documents Act and the benefits it can bring to Matalan and Matalan’s suppliers. Feedback from clients has also been incredibly useful, which we’ve fed back into the government, the ICC [International Chamber of Commerce] and other trade bodies.”

Rogier van Lammeren
Head of Trade and Working Capital Products, Lloyds Bank

Outside of the UK, the main push towards the legal recognition of digital trade instruments is coming from the United Nations Commission on International Trade Law (UNCITRAL) and its Model Law on Electronic Transferable Records (MLETR). This has been developed in partnership with many different international trade bodies and acts as a model framework that jurisdictions and countries globally can implement to enable digital trade finance.

“At the most recent summit of trade ministers from the Commonwealth nations [held in Kigali, Rwanda, in June 2022], international trade was in focus there,” adds van Lammeren. “The digitisation of trade was on the agenda, and they’ve all agreed to adopt the MLETR framework, so there’s plenty of drive globally around the subject.”

With the legal acceptance for digital trade tools falling into place, attention turns back to banks and fintechs to see how technology might be put to best use to make the most of the new environment.

Connectivity is essential

As the trade world becomes increasingly digital, interoperability between all participants in the trade ecosystem is essential. This includes the banks, shipping companies, freight forwarders, governments in every jurisdiction, exporters, suppliers, and buyers.

“The buy-in from corporate treasurers is crucial for that interoperability,” urges van Lammeren. “We need them to shout loudly about the need for a common set of standards to exist to let them gain the benefits available to them from a digital trade perspective.”

International bodies such as SWIFT and the ICC will be crucial in establishing such standards. Indeed, the pair announced the first API industry standards for bank guarantees and standby LCs in August.[1] This highlights the crucial role of APIs in the overall interoperability of the digital trade world.

Broom affirms: “The digitisation that the corporate world and the institutional world require is going to be driven by collaboration across systems between different specialist participants and providers of services. API connectivity is absolutely essential.”

The benefit of the API is that it’s simple to work with. It enables an open and inclusive environment because, suddenly, corporates can make their data flow, removing the silo effect of having data in one solution and finding it almost impossible to move it into the next solution.

Weitzel reflects: “I recently spoke with one of the top three global commodity traders and they have an ERP system, a TMS, and an office system to manage their letters of credit. These three systems are not integrated. For their reporting, which they do on a monthly basis and a very detailed quarterly basis, it’s a huge amount of work to get the data in sync and consistent.”

If a treasurer uses a trade finance system that has an open API, however, they can connect to the ERP system and the TMS, enabling the limits, exposure and liquidity profile of the LCs to be known. “While an API is a tiny, technical thing, it has a huge and directly measurable impact on the life of the corporate treasurer,” adds Weitzel.

As the digital infrastructure starts to come together, the digitisation of trade finance instruments is also coming into focus. One of the solutions that can have an impact today is the digital guarantee. If a corporate holds a paper guarantee and loses it, it cannot claim on it. But if it is a digital guarantee, the corporate will always have the original available.

“The whole process flow around guarantees can be simplified, and it can be treated like a central depository,” explains Vrontamitis. “This doesn’t require blockchain – it has all the capabilities, such as non-repudiation, and it can’t be tampered with. It’s what CSDs [central securities depositories] have been doing for years, and treasurers have been using them, so why not use the same solution for a guarantees system and then digitise the entire process instead of just the issuance?”

The promissory note is another trade instrument seeing a new lease of life today in a digital format. In its paper-based form, a promissory note would have to be physically managed and signed in wet ink by all parties in the transaction, and it would have been physically delivered by mail or courier. Suppose a transaction has 30-day payment terms, for example. That does not leave much time for a company to present that document to the bank or third-party financier, meaning there may be only around a week’s worth of working capital benefit for the company. The time saved by going digital can extend this benefit.

Van Lammeren elaborates: “Transactions can be turned around within 24 hours. That includes the financing elements, so the discounting of that transaction and the provision of the working capital to the supplier or the exporter. The fact that we’re moving from a paper-based document to a digital document has to be a benefit to growing trade – and also to providing financing for trade.”

As the usage of digital trade instruments picks up, the requirement for interoperability between all parties becomes more urgent. For example, the EBL still only represents 2% of all bills used today, but industry initiatives aim to boost the usage of digital trade instruments. For example, in March, the international shipping association the Baltic and International Maritime Council (BIMCO) launched the ‘25 by 25’ pledge,[2] with the target of 25% of all bills globally being electronic by 2025. This is an ambitious goal, but even if only 10% are electronic by then, that will be five times more than today. The data this would provide to corporates could be invaluable, but only if it can be correctly captured and processed.

Weitzel explains that increasing the use of EBLs would mean “a new era of data would be available, but data that currently can’t be processed in a TMS or ERP”. Overcoming that interoperability issue would lead to more insights available to treasury based on this new data.

“Think of new types of reports within the treasury department – if this risk indicator or liquidity indicator reveals a certain position, that could trigger treasury to be more active in the money markets, for example,” Weitzel adds. “Or maybe the department wants to have more automation. There could be all types of new services treasurers could set up based on the availability of more data. We need to make the data available at low cost and seamlessly. There is much work ahead.”

The great DLT unravelling

While the advances in digital trade finance open up new possibilities for corporates, there are still issues that are hampering efficiency.

Cotti explains: “One element that hasn’t changed is the technology mess. Corporates that want help with solutions are still swamped by fintech providers and often the solutions are vertical and don’t have a broad enough value proposition.”

In September, a group of industry experts in trade, treasury, and technology formed the T3i Partner Network, whose ambition is to help all organisations in the trade finance ecosystem navigate this complicated landscape.

“One of our goals is to help corporates decide who to engage with, but also assist fintechs in expanding their value proposition – it is increasingly becoming a matchmaking scenario for us,” adds Cotti. “Because when fintechs think this through and create one overarching solution into which perhaps two, three or four fintechs have all added their specialities, then we have a compelling value proposition for a treasurer.”

The classic ‘solution looking for a problem’ issue has also plagued the trade finance space in the past. Perhaps the most prominent example of this in recent times has been DLT.

Weitzel comments: “We had the hype five to eight years ago, where everyone was shouting, ‘DLT, DLT!’ In the trade finance space especially, no DLT proposition is solving a real day-to-day problem.”

This has become evident in the past 18 months, as a number of blockchain-based trade platforms – including, the Marco Polo Network, and TradeLens – have fallen by the wayside.

Vrontamitis reflects: “As well as the reduction in the number of blockchain consortia in the market, many companies that were on blockchain solutions have moved to other technologies such as the cloud, which points to a few factors. It shows there were many technologies looking for problems, but there were also many problems that were being solved with the wrong technology.”

The response to these issues has been a readjustment in the marketplace where participants have identified an obstacle but require a different technology or solution to clear it.

“There were those with the wrong technology, and the wrong problem that they were trying to solve, that are now out of business,” Vrontamitis adds. “Many have disappeared off the radar. That’s been really interesting. It’s reduced the complexity slightly, but not too much.”

The ‘queen bee’ effect

Ensuring that trade finance can deliver a triple win – for the supplier, corporate, and trade finance provider – is vital to a successful ecosystem. However, there can often be an imbalance between the benefits and the burdens of change, according to Surecomp’s Weitzel.

“I recently had a conversation with someone in a senior position at Singapore Customs who said that we need to look into that equation and make sure that the burden of change corresponds with the benefits of change for each party,” he states. “So, for example, imagine a scenario where there is an imbalance between a government authority, a corporate, and a bank. If the authority were the only party benefitting from the digital solution, and the bank and the corporate are also required to implement it, the authority may have the power to impose it but it [the benefit] would be imbalanced.”

In this example, the customs authority would try to ensure that the corporate and the bank, which are both compelled to use the digital solution, would also benefit from it.

Singapore, as a highly digitised and forward-thinking economy, is a good case study as to what the future of digital trade might look like for companies worldwide. In that market, there’s a focus on ‘queen bee’ corporates, the larger corporates at the centre of these supply chains that want to go digital.

Broom enthuses: “What those queen bees do is cascade digital process down through their supply chain or ‘hive’. This also creates a cross-pollination effect, where businesses that also support other supply chains recognise the benefits of going digital with these trade instruments and therefore agitate for change within another supply chain. That drives the overall adoption process.”

For corporates that are not yet at the hive level of sophistication, there is plenty they can do today to start digitising trade finance processes and capturing the associated efficiencies.

“Treasurers can look at the documents already available in a digital format and see what they can learn from that,” suggests van Lammeren. “Then, understand the company’s wider trade landscape and what the legalities around that are globally. Treasurers should also scrutinise their internal policies to understand whether their company enables or prevents them from using a digital version of a trade document.”

As well as understanding what could be done internally to prepare to use digital trade instruments, treasurers should also have one eye on what’s happening in the ever-evolving market, including keeping up to date with what their bank is doing around trade digitisation.

“Treasurers can start with the things that they know without having to worry about the things that they don’t know,” concludes van Lammeren. “For example, if a treasurer can digitise the issuance of a promissory note, that is a start, even if the bit before or after it in the process is still done in a paper-based format. In time, they will want to digitise all of it, but if they start doing what they can and focus on what they know, the rest will come.”