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Perspective
31 October 2016

Digital trade: Wish, vision or reality? The blockchain euphoria!

In:
Transport
Region:
Middle East & Africa, Americas, Asia-Pacific, Europe
Senior Commercial Manager at SWIFT
The latest studies and publications are now talking about the digital revolution in foreign trade. In an age where payment transactions, cash management and treasury are largely processed digitally, foreign trade processing is still paper-based – and yet foreign trade has dramatically changed since the 1990s at the latest.

The latest studies and publications are now talking about the digital revolution in foreign trade. In an age where payment transactions, cash management and treasury are largely processed digitally, foreign trade processing is still paper-based – and yet foreign trade has dramatically changed since the 1990s at the latest. Nowadays, exporters and importers are linked up to one another in complex value chains. Information about inventory and supplier needs is recorded and exchanged digitally. Although tracking & tracing functionalities allow merchandise shipments to be traced, accompanying documents are recorded and sent in paperbased form. The United Nations Conference on Trade and Development states that 60 to 70% of all data elements must be recorded several times. All of this leads to high inefficiency characterised by long processing times and high risk of error. The paper-based document-sending process, in particular, can take several days – if not weeks – under some circumstances.

Requirements for financial service providers

Naturally, financial service providers are especially important in foreign trade. They support their customers' value chains by assuming risks – whether they are counterparty or country risks – and the provision of liquidity in the form of financing, letters of credit, collections, and guarantees, which are financing and risk protection instruments that are hundreds of years old. In recent decades, hardly anything has changed in paper-based processing, apart from the technical recording in back office systems. The sending of documents under a letter of credit or collection is done by mail or courier service. Banks nowadays certainly offer some of their customers the presentation of their documents in electronic form as image files (e.g. PDF) for preliminary examination or even printing it out remotely on behalf of the customer. However, the actual border-crossing dispatch between banks takes place in paper-based form, as before.

The relatively high processing costs for the banks that are associated with this are reflected in the processing fees that must be billed to the customer. This is certainly one of the reasons why the demand for these traditional documentary payment instruments has been constantly diminishing relative to foreign trade development and has been replaced by the open account form of payment. Nonetheless, these instruments are still extremely important in sensitive business fields (such as commodity, project, and plant and equipment financing).

Existing digital foreign trade initiatives

The first paperless trade processing initiatives are now more than 30 years old. In this regard, international organisations like the WTO (World Trade Organisation), UN/CEFACT (United Nations Centre for Trade Facilitation and Electronic Business), UNECE (the United Nations Economic Committee of Europe), and others have implemented programmes and standards, and published specifications and guidelines.

It is not surprising that owing to their strong trade activity, Asian countries can be described above all as trendsetters for paperless trade. For example, as early as in the 1990s, South Korea initiated a project for automating the sector's overarching trade activities. In 2003, the National Paperless Trade Facilitation Committee was established, made up by both government representatives and private sector companies. Finally, u- TradeHub, a platform for paperless trade processing, was introduced in 2007.

The platform provides a system for Korean companies through which they can process all activities related to foreign trade – including marketing, customs clearance, foreign exchange trading, and payments transactions. The portal also facilitates the electronic drawing up and sending of trade documents like bill of lading, certificate of origin, and insurance certificate.

The corresponding trends can be seen in other Asian countries as in Taiwan (Trade- Van) or Hong Kong (Trade-Link), for example. Meanwhile, twelve APAC countries have joined together to create a supranational network, the Pan-Asian E-Commerce Network or PAA.net.

In customer-to-bank communication, the SWIFT standards (MT798) are worthy of a special mention because they at least allow the electronic exchange of letter of credit and guarantee data in a uniform multi-bank standard.

The initiatives described above and a number of others have certainly been successful in partial sectors. Thus, for example, customs clearance is now electronic in many countries, but so far there has not been a revolution in the digital foreign trade world. At best, one can talk about an evolution. The reasons lie in the complexity and the specific requirements.

Requirements for digital foreign trade

In principle, the following aspects and characteristics of foreign trade and its processing must be considered:

1. Tracking & tracing

Digital trade is basically about data exchange and thus about data telecommunication. Unlike conventional telecommunication, however, the receipt of data is not enough, as its traceability is also important. Data possession is frequently associated with rights such as the right to the goods, for example. In this respect, data senders and recipients as well as process participants, if applicable, must be able to trace the origin of the data, its current location right now and who possesses it.

2. Number of data sets

Studies have demonstrated that up to 27 different companies and participants are involved in the foreign trade process with more than 40 documents and 200 data elements. Unlike what happens in payment transactions where, for example, only one payment transaction file must be transmitted with a limited data amount, the foreign trade process is a lot more complex. The triggering and processing of the payment is only the final step. Before that, a lot of data (e.g. from invoices, transportation documents, certificates, etc.) must be exchanged, which is linked to one another as well. Discrepancies quickly lead to process inefficiencies and even to delayed merchandise deliveries.

3. Trust

Foreign trade has always been based on trust. If there is no full trust, one can fall back on risk protection instruments such as the letter of credit, for example. In the digital process the term trust must be expanded to data quality, data origins and security. Risk protection instruments should be set aside when data is submitted instead of documents.

4. Interoperability

Considering the number of process participants and the quantity of data, a uniform platform as well as formats and standards seem illusory. In this respect, interoperability must be achieved to secure an exchange through various platforms and applications.

5. Compliance

International trade is covered by a host of regulations, such as know-your customer and anti-money-laundering policies, and trade embargoes. Such regulation is becoming not only more comprehensive and changeable but also more strictly policed, exposing not only financial institutions but also corporates to the risk of reputational damage and fines. Effective compliance is thus a key driver of performance and a significant operational burden. Filtering technologies like the one from SWIFT should be embedded, respectively linked in or to any digital trade solution.

Furthermore, the different views on foreign trade processing must be taken into account, given that it is not possible to consider it as purely traditional transaction business. The significance lies in the value and complexity of the underlying transaction – that is, the goods. Therefore, the basic requirements for the creation of a business case are not the same for all participants. So, where does the euphoria for the subject of digital trade that is being observed come from? The answer lies mainly in blockchain technology.

Blockchain

Simply expressed, blockchain is a database subdivided into different transaction blocks. The blocks are important, as they contain a record of the latest transactions. The blocks are stored in various distributed ledgers (peer-to-peer), linked to one another, and encoded using highly complex cryptographic methods. The blockchain is only valid when all blocks lead back to the genesis block.

A very high potential is attributed to this distributed approach precisely in international business, because unlike today, no varied central networks have to be maintained and linked up. Through this distributed approach, the problem of tracing a foreign trade transaction described in this article is secured.

Many banks are currently conducting feasibility studies (e.g. HSBC together with the Bank of America Merrill Lynch and the Infocomm Development Authority of Singapore). Everybody agrees that blockchain technology is, in theory, an outstanding approach for changing foreign trade processes sustainably in the future.

Further initiatives employ a partially different approach but still pursue the same path. Thus, providers like essDOCS and Bolero have been on the market for a long time with an electronic bill of lading. The owner of the bill of lading is stored in the "title registry", which also secures the transfer of the right of ownership.

The Bank Payment Obligation (BPO) developed jointly by the ICC and SWIFT is an irrevocable undertaking to pay geared to the submission of consistent data. Since the BPO was introduced two years ago, banks such as the UniCredit Group and Commerzbank have already successfully executed initial transactions based on this new payment guarantee instrument.

Conclusion

Surely, total paperless trade processing is nowadays equally more vision and wish than reality. To what extent the new technologies will really lead to a revolution of foreign trade processing remains to be seen. Feasibility studies must first demonstrate their usefulness in practice. The complexity of foreign trade business that must be resolved is high. At any rate, however, the potential offered by Blockchain Technology & Co. is there and maybe the future lies in combining various approaches. There are many visions right now, and without a vision there is no reality – or as the Swiss writer Friedrich Dürrenmatt (1921 – 1990) already said: "You should never stop imagining the world that would have been the most reasonable one".

Urs Kern

Senior Manager, Corporate Business, EMEA - SWIFT

 

For more articles from the Berne Union Yearbook 2016, click here.

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