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Time to double down on trade digitisation? On counting virtual beans

TXF looks at distinctions between virtual and real in trade digitisation. How much is the current crisis helping drive change? The challenges are more than simply counting metaphorical beans.
3 min
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How many beans make five? A bean a bean, a bean and a half, half a bean and a bean. Forgive me, I have been growing runner beans for the first time, and this children’s game leads me to think about reality, digitisation and trade finance in the current crisis. Digitisation is an awfully big adventure, a very big beanstalk to climb, and at TXF we will be exploring branches of it more in articles and virtual discussions in the coming months.

Talking about digitisation of trade, both in terms of logistics and finance, has been something the industry has been good at, for years. Talking, that is. Covid-19 increases the financiers, borrowers, exporters/importers, insurers and lawyers and others desire to make sure documents are prepared, sent/received, verified and signed electronically. The pandemic appears to have gingered the pace up, and discussion of trade digitisation has been more animated of late. How much is talk really becoming action? There are great hopes for the ICC Digital Trade Standards Initiative (DSI), the rebadged UTN launched again in March under the ICC’s wing, supported by ADB funding, but things seem to have gone publicly quiet since then. 

Distinguishing the ‘virtual’ from ‘not real’

One of the elevator pitches for digitisation is that it provides, hopefully, a more transparent approach than paper, and traceability is there to highlight and eliminate human error and discrepancies. Distinguishing the virtual from the not real, the non-existent, the double invoiced, the fraudulent is a problem for paper, as recent expensive high profile frauds in trade and commodity finance have shown. A problem also of counting real beans versus virtual ones.

The continued use of paper-based transactions, cumbersome due diligence requirements for banks, and lack of adequate business information on borrower firms, especially SMEs, are key challenges in trade finance provision. Rapid developments in digitisation and automation should offer promise in addressing these challenges.

A trade distribution head at a major trade bank told TXF off the record, “I’m very optimistic on digital trade from a trade finance perspective. I think it’s accelerating, regulations are changing and there will be focus on the business and it will be driving the industry and there will be efficiency gains.” Nonetheless, he says while he is ‘gung ho’ about the prospects for trade, “The question is how do we accelerate digitisation, and not just in trade distribution but end to end. There are positive signs, especially with e-bills of lading (eBL), but there needs to be scale.”

Positive signs on cargo, piecemeal elsewhere?

E-bills of lading are certainly getting a lot more discussion amid the crisis – the Digital Container Shipping Association (DCSA) has been pushing for eBL standardisation for cargo, MLETR and UN/CEFACT are all pursuing initiatives. Most recently, EssDocs announced its partnership in India with Portall to deliver eBL in July and Bolero also notes a spike of interest in moving away from paper for trade. “The impact of Covid-19 on carriers, corporates and banks has shown that paper processes and business continuity planning scenarios can fail and Covid-19 is not going away soon. Thus meaning that traditional and contemporary trade is embracing the use of e-documents for anything from open account trade up to DLT Marco Polo transactions,” a spokesperson from Bolero tells TXF.

The need to step up actual digitisation as a way of facilitating and financing trade is pressing. Financing cross border trade and working capital via supply chain finance (SCF) is also underpinned by digitisation (specifically of invoices, and electronic developments in a/r and a/p and integration with ERP systems help facilitate working capital management digitally). Some lessons from this space can be applied in other areas of trade digitisation. 

Acceleration of digitisation on blockchain platforms is proceeding amid the crisis, but it is sectoral and a bit stop/start. Says one trade blockchain provider, off the record, “On blockchain we’ve not had many new projects into 2021 since the start of the crisis, and some, such as in aviation have been dead in the water, and auto has been tough. But we have had fulfilment on project commitments to year end. Another interesting trend has been in agriculture blockchain where a lot of companies that spent a lot digitising quickly and badly are now having to unpick what they did.”

Standards are stumbling blocks

Regulation, collaboration and scalability will continue to be important to underpin progress. But standardisation is key. As Joel Schrevens, global solutions director at China Systems asks: “Considering that trade is a business that is heavily driven by the exchange of documents is it realistic to expect that trade DLT platforms are able to get global cross-industry traction without fundamentally solving the requirement or having at least a clear roadmap to enable portability of  digital original documents between existing trade processing infrastructure and their own platform? While APIs can resolve specific integration challenges, considering the number of parties involved, a more fundamental approach is required to solve the challenge for trade documents.” 

The key to mass adoption, and not just some efficiency gains from ‘one by one partner integration’ is fundamental digitisation of standardised documentation, or at the least a clear plan to achieve that. Schrevens, for one, is excited that the technology for standardisation and secure exchange of digital original documents exists today, that there has been progress with the cargo industry and that lessons can be learned from the e-invoicing space. But, he cautions. “At this point, I do not see a coordinated cross-industry initiative to create standards for a core trade dataset with a customer-centric mindset, with the customer being the originator of trade transactions and managing their OTC/P2P processes mainly on the basis of purchase order (PO)/invoice related activities.” 

He argues that a holistic approach should be taken to standardise trade data (starting with the source data stored in POs and invoices, which subsequently flows into other documents, such as BL, CMR, AWB, CIM, CO, B/E, P/N, insurance documents etc. as a result of a logistical, insurance or financial service), bridging physical and financial supply chain services. That requires the involvement of financial institutions, the transport industry and representation from trade originators. It’s a big ask, but surely not insurmountable. Shouldn’t a body such as SWIFT be at the heart of the integration? 

“Today banks look at SWIFT for financial messaging, but the reality is that SWIFT Trade messaging, while definitely automating parts of the trade process, has been and today still is disconnected from standardisation activities in the logistical and trade origination world. The added value of moving current trade processes to a different technology platform, without achieving interoperability and portability of trade documents and data between systems used for trade origination, logistics and settlement, will be relatively low. Whether it is SWIFT or another organisation, without a holistic approach or at least a roadmap with clear milestones for this challenging journey, to convince those standing on the side lines, any progress is likely to be based on piecemeal developments, only serving the few, further increasing the digital divide and putting a block on adoption,” Schrevens says.

Are banks picking up the pace on paper?

What about the banks financing trade? In the ICC Global Survey on Trade Finance 2020 released at the end of July, 54% of the 346 bank respondents said emerging technology, digital trade and online trade platforms were an immediate priority over the next year. Some 70% also said traditional trade finance was a priority in the same period. The report went further into digitisation. Although there’s been progress, the results weren’t stellar and documentary transactions are rarely wholly digitised.

In the three areas looked at, issuance/advising, settlement/financing and document verification, the latter remained the most paper-dominated area. That’s discouraging.

It’s important to remember that, according to the ICC survey, 90% of trade finance is provided by just 13 banks. The estimated global value of trade finance transactions processed by respondents is $9 trillion. The top three to five trade finance banks likely account for a very high proportion of that figure.

Anecdotally speaking, it is players in those top trade finance banks (let’s call them HSBC, Citi, StanChart, DBS for starters) are the most positive about digitisation. Nonetheless, the survey says while 83% of global banks supposedly have a digital strategy, only 46% of local banks report having one. This highlights a growing gap between players of different scale and reach.

Compliance was seen as the biggest obstacle for banks’ growth in financing international trade (AML/ KYC requirements 63% and counter-terrorism and international sanctions regulation and compliance 61%). Compliance may be a major headache, but it is also stopping the bad hats. Nonetheless, for smaller players, compliance is an onerous burden.

One development last week that flew under the wire was encouraging, the ability to embed Legal Entity Identifiers (LEIs) in digital certificates under ISO standards. LEIs should help with identifying legitimate players digitally.

Digitising the horse: Back to the magic beans

Fundamental questions remain as to whether digitisation is changing the game, or just transposing Henry Ford’s proverbial faster horse onto outdated instruments – new ways of doing the same old thing. Should LCs become embedded into the logistics process, so the financing is included in the purchase and bundled into the transportation process?  That’s a discussion for another day. But in the meantime,  the transition to digital trade remains an imperative that is still in search of coherent and consistent standards. I’m optimistic there’s a way to get through – but complicated approaches are not helpful. Who knew a year ago that Zoom would ‘win’?

Economist John Maynard Keynes speculated in the commodities futures market. There is an old story he took delivery of actual real beans and had to store them in King’s College Cambridge. My undergraduate memory doesn’t serve well, as when I checked it was Argentinian wheat in 1936, which he didn’t actually store in the chapel crypt as it was too small, so he used the ruse to object to its quality so he didn’t actually receive it, but I’ll stick with the apocryphal beans as it suits my imaginings better. Arguably Keynes’s reflationary policies helped move the global economy out of the slump of the great depression (but not directly by buying wheat or beans), and yes, I know it’s a big argument that’s kept post war economists in business. Here’s hoping the ICC’s DSI can help with an answer to standards to support effective digitisation.

We’re going to be discussing some of the issues around digitising trade on platforms and how supply chain finance can be used to support corporates in emerging markets in in a virtual discussion supported by Finverity on 30 September [date change]. I hope you can join me then. 


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