Digital Trade Chain: An incomplete solution to SME funding puzzle

Digital Trade Chain - a consortium of Europe’s seven largest banks - has chosen IBM to design a platform to simplify trade finance processes for SMEs. But will it be able to tackle the pre-trade financing contracting issues affecting SMEs?

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Comments (2)

  • William Laraque
    William Laraque, US-International Trade Services 11 July 2017

    1. Global Trade and Augmented Reality, A Hint The reason that many Fintechs have not reached profitability is what I term the "Jobs Dilemna." Deluded by their own knowledge and importance, sense of worth, the technologists have been principally concerned about solving the problems that they perceive and understand rather than solving problems that exist; like the global trade finance problem. Movement to Contact The nearest that any organization has come to replacing letters of credit and solving a process deluged by documentation, the global trade finance problem, is the use of XML and BPO (Bank Purchase Obligations). By using "Four Corner Operability," the buyer and seller, buyer's bank and seller's bank are able to comply with a set of rules established by ICC, and irrevocably agree to pay invoices that are presented by seller's bank via XML. I have a graphic presentation on the mechanics of all this that I will provide a software company, based in the U.S., interested in dominating this area, once I am satisfied with its competence, capacity and its respect for the U.S. Constitution. Interoperability within the protective SWIFT ecosystem is an important contribution to the digitization of global trade. An example dealing with the oil trade should suffice to explain all this. In an oil transaction, payment is arranged when the oil is loaded aboard a vessel. Typically, SGS (Societe' Generale de Surveillance) or other certification authority verifies that a specified quality and quantity of oil is loaded aboard a vessel. This satisfies the Incoterms, the ICC-designated, international commercial terms of the transaction. The problem is to determine without undue expense that the seller has the oil, has the means and capacity to load it aboard the vessel and that the buyer has the means (credit) and ability to pay for the shipment. This is typical of just one of the global trade problems, involving one commodity. It is a considerable problem that causes an incredible waste of time and money as buyer and seller circle one another (involving the sale of many commodities), in what I term a "great Mexican Standoff," trying to determine each others' credibility. One or two out of a hundred global trade transactions work out in this "dance." I will hint at the solution, but first my inspiration. Inspiration My inspiration is George Mitchell, the 82-year old goatherds son who solved the problem of fracking. The U.S. is becoming a global power in the export of oil and LNG as a result of Mitchell's innovation. This technological development and the creation of a more just and equitable society, as well as digital commerce, will drive the unprecedented economic growth of our country. The market and equitable distribution of wealth will achieve this in place of debt. This constant innovation cannot ensue where "persons of a certain age," women, the differently able, persons of differing race, color and creed are disregarded, disrespected and ill considered by the mostly young and utterly confused mavens of our Silicon Valleys and Silicon Alleys. Here is a hint as to how the conflation of Augmented Reality, SWIFT and digital commerce will drive this process: Hint Augmented Reality Markup Language (ARML) is a data standard developed within the Open Geospatial Consortium (OGC), which consists of XML grammar to describe the location and appearance of virtual objects in the scene, as well as ECMAScript bindings to allow dynamic access to properties of virtual objects. Enough said. 2. Global Trade and Augmented Reality -Part II Augmented Reality and ARML, Augmented Reality Markup Language, can be used to settle international trade transactions. How? I will explain. Trade settlement involves the presentation of the following documents: 1. Financial documents such as Pro-forma or commercial invoices, drafts or bills of exchange and on board ocean bills of lading, signed by the master of the vessel, airway bills, truck bills, multi-modal bills of lading. Bills of lading issued by an air or ocean carrier are controlled forms which are instantly recognized by the trained document checkers of commercial banks, in the same way that you and I can usually recognize by touch, feel, visualization whether the paper denominations of our own countries are fake or real. Bills of lading are of two types; negotiable and non-negotiable. In essence, the negotiability and possession of bills of lading, whether airway, truck, ocean or multi-modal, are used by shippers, carriers and banks to exercise control over goods. Airway bills are always negotiable. Ocean bills of lading are made negotiable only by endorsement or assignment. 2. Certifications: certificates of inspection, quality, quantity, phytosanitary inspection certificates, weigh bills or certifications of weight, are often conveyed as paper documents bearing the stamp of the certifying authority. 3. Non-automated legalizations, consularizationsare usually paper documents. Such special purpose documents as Carnets are also conveyed in paper form and with requisite stamps. A Carnet contains a copy of what is exported from a country that must conform precisely with paper descriptions or manifests of what is temporarily imported into a country. There are many other considerations regarding bills of lading, such as legal jurisdiction. Ocean Fright Bills of Lading by Michael Clain of Windels Marx, is a useful reference to these additional considerations. Paper Documents Paper documents and certificates and manual stamps are required by customs authorities, health authorities and inspection agencies of some countries and by banks that do not yet have the ability to go completely digital. Some trade transactions require that bills of lading be signed by the master of a vessel and to be presented with a specified number of originals and copies that conform to the specifications of a bank issued letter of credit. Some country accounting and financial standards do not yet allow electronic invoices and other electronic forms of documentation. Some countries' laws and regulations such as those of the Japanese Ministry of Industry and International Trade, or MITI (Now METI), specify that the "visible" method of settlement of a trade transaction must be demonstrated. This visibility has heretofore not included electronic documents. Rendering and presenting such documents in conformity to the ISO 20022 UML, XML and Metadata message standards adopted by SWIFT, is not a sufficient solution. Being able to "stitch" algorithms and parameters so as to render and present the actual documents through visualization, is a potential solution. That's where AXML comes into the picture (pardon the pun). Risks The principal risks to using AXML to render and present actual documents in digital and visual form are the usual suspects. They include cybercrime or hacking; the creation and presentation of fraudulent documents. Other risks are known in the trade as: • Dilution - due to contractual disputes • Fraud and fraudulent representation SWIFT has never been compromised although weak bank safeguards have led to compromise and theft as a result of criminals having access to bank SWIFT codes. 3. Global Trade and Augmented Reality - Part III The main preoccupation of U.S. Fintechs and banks is payments. Payments are part of the solution, not its entirety. Recently, in a global trade forum in Copenhagen, it was boldly declared that payments were at the heart of the conflation of banks and fintechs. This is yet another delusion. It is not a solution. Payments do not solve the underlying problems in global trade. Among these problems are trust and trade settlement. Approaches The approaches to solving the trade settlement and trust issues are regional: 1. TradeCard, which evolved into GTNexus and now Infor, solved the trade settlement problem through insurance. By insuring export receivables with Coface, an automated trade finance solution is provided and it is now used by an extraordinary array of industries. Not only has this solution gained traction because of its functionality and usefulness, it has attracted the investment interest of such notables as the Koch brothers. The Kochs own the largest privately owned enterprise in the U.S. Unlike fintechs, it is a profitable enterprise. 2. I have already described how SWIFT, a consortium of banks, insurance companies and other financial institutions use Metadata, a protective ecosystem and the rules-based structure of the ICC to provide a secure environment for the exchange of documents via XML. Unfortunately, this has not yet evolved to using Augmented RealityXML (ARML) and "stitching" to visually present actual documents securely, in real time (reality), so that trade settlement can ensue. SWIFT's process involves the BPO, the much celebrated Bank Payment Obligation, the Irrevocable obligation of banks to pay against the presentation of digitized documents. Unfortunately, traders, buyers and sellers across borders, do not wish to conform to what is perceived as a bank-centric and cumbersome process in order to conduct trade within their own organizations and to conduct trade with people and organizations they know and trust, with undue expense and complexity. In addition, when buyer and seller do not know and trust one another, not only is BPO perceived as being overly complicated but e-commerce platforms suggest that there are more convenient ways of engaging in global trade, even if you own a small business. I refer to the seminars held by ALibaba in Detroit, this just past June 20, 21, as prima facie evidence of this concept and trend. The U.S. Commerce Dept. is hurriedly trying to follow suit by arranging its own e-commerce seminars for small enterprises. 3. The third solution is barely known in the U.S. and Asia, where letters of credit are commonly used as the basis for "packing credits" or pre-shipment and pre-export financing. European banks in France and Spain (I visited them) have developed Forfaiting to an extent where it is used as the principal means of trade settlement by continental European exporters to the rapidly developing regions of North Africa, Sub-Saharan Africa and the Middle East. Forfaiting is the discounting of export drafts without recourse to the exporter. "A forfait" is French for without recourse. Forfaiting often requires avalization of drafts. This means that European banks work hand-in-hand with insurance companies which mitigate the commercial and political risks involving a transaction, permitting both the exporter and the lender to go "where angels fear to tread." Why are these methods not sufficient, you may well ask? Simply because they are not as easy and as convenient to use as e-commerce. The solution therefore involves the strategic alliance of multilateral agencies, economic development banks, export credit agencies, commercial banks, insurance companies and agencies (public and private) and e-commerce platforms as well as payment providers. In my opinion, augmented reality will make this alliance possible, will finally enable the conflation of disparate technologies and techniques and will lead to a broader, more inclusive and more equitable engagement in global trade. Global Trade and Augmented Reality -Part IV ARXML or Augmented Reality Markup Language is a potential solution to the global trade settlement problem. Why? Because the signature and authentication of processes common to trade can then be confirmed by the buyer, the seller and the enabling financial institution. It can also be confirmed by providing a 360 degree view of the actual signing, certification and authentication of virtual documents by parties to a trade transaction, that these actions took place in real time freely, without coercion or under duress. The documents can then be transmitted in real time. This can be done instantly and verifiably.

  • William Laraque
    William Laraque, US-International Trade Services 4 July 2017

    GTNexus now Infor, has successfully solved the problem of simplifying trade finance and trade settlement for SMEs. Better minds than those at IBM have been working on this problem since 1979. In this case, artificial reality is indeed artificial. The delusional will insist that blockchain or artificial intelligence can solve the problem of simplifying trade finance for SMEs. The problem is that this is an effort to solve the wrong problem. As Steve Jobs said, we must first look to the customer experience and then work back to the technology, not the other way around. What does IBM know about the customer experience in trade finance?

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