A slow process of switching from physical to digital trade documentation appears to be speeding up.
Digitalization holds as much promise for corporates as it does for financial institutions and other parties involved in the flow of trade—promising greater efficiency, reliability, sustainability and inclusivity in international trade and supply chains.
So far, so good. But it’s complicated. Global trade consists of overlapping flows: the physical flow of goods, documentary flows that allow goods to move and pass various controls to arrive at their destination, and financial flows that underpin transactions between buyers and sellers and others involved in trade transactions, including carriers, insurers, logisticians and of course, banks. That puts the whole process at the mercy of delays and other risks, such as fraud.
Part of the problem is that retrieving goods still requires physically handing over paper documentation, which is both costly and time consuming. Today, a delay in the original paper bill of lading for goods can block a buyer from taking possession of its goods once the ship carrying them has docked.
Paper bills of lading came into common use in the 16th century and still account for almost 99% of commercial bills of lading issued today. For roughly 40% of all containerized trade transactions, as many as 20 documents can be interchanged for a single shipment between various stakeholders in the chain.
Considering the degree of digitalization achieved in retail banking, for example, it’s remarkable that electronic trade documents are used in fewer than 1% of international trade transactions. With the global trade finance gap calculated at a record $1.7 trillion as of 2020, according to the Asian Development Bank, creating a digital ecosystem is seen as an important step in unlocking future growth. Consultant McKinsey predicts an electronic bill of lading could save $6.5 billion in direct costs and enable an additional $40 billion in global trade while speeding up the exchange of trade-related data, documents and electronic authorizations between relevant parties in the supply chain.
A Model Law on Electronic Transferable Records (MLETR) was adopted in 2017 by the United Nation Commission on International Trade Law (UNCITRAL). It enables the legal use of electronic versions of documents such as bills of lading, bills of exchange, promissory notes, warehouse receipts, international guarantees and standby letters of credit, both domestically and internationally. So far, just six states—Bahrain, Belize, Kiribati, Papua New Guinea, Paraguay and Singapore, plus the financial center Abu Dhabi Global Market—have incorporated MLETR into their national laws.
Momentum may be building, however. An Electronic Trade Documents bill is currently making its way through Parliament in the UK and, if passed, will come into force next month, says Chris Southworth, secretary general of the International Chamber of Commerce (ICC) UK and co-chair of the Legal Reform Advisory Board of the ICC Digital Standards Initiative. The ICC expects 60% to 80% of world trade will be covered by similar legislation by 2026. The G7 + China and the Netherlands are all working on legislation, Thailand has a law drafted, and 86 countries are preparing to commit to legal reform and alignment in 2024 through the World Trade Organization, including the whole of the EU.
The UK bill is especially significant, says Southworth: “English law is used in international trade more than any other law; 80% of bills of lading operate on English law. In effect, from July, every company using English contract law can digitalize all trade documentation,” he notes. “It’s a game changer of enormous proportions. The bill will put rocket boosters into trade digitalization efforts and pile the pressure on other governments to follow suit. If they don’t, they may find companies shifting across to English law instead of using national laws in their own jurisdiction.”
Currently, the only alternative to paper documents for most parties is to use commercial systems like essDOCS, Bolero and WAVE, but requires a contract and comes with its own rulebook to overcome the lack of regulation. Should the UK bill pass, the task will become much simpler, according to Enno-Burghard Weitzel, senior vice president, Strategy and Business Development, at Surecomp, a trade finance solutions provider. “It means we can move beyond the rulebook, which today is the only way out,” he says. “If you want to go digital, you must agree to a rulebook or contract instead of bylaws, because you can’t place it on national law.” With the expected move by the UK, “digital documents will be legally equivalent. You won’t need contract law anymore. This is seriously major.”
Trade Connections
Another pivotal ingredient for accelerating trade digitalization, according to Weitzel, is electronic networks and alliances. “If we don’t collaborate with multiple networks, the alternative toward digitization is that everyone needs to be on the same network. While that works for interbank communication with the SWIFT network, SWIFT, over the past 20 years, has not been successful in bringing all corporates onto its network.”
Rivo, Surecomp’s digital hub, enables the management of any trade finance instrument to centralize and accelerate processing. “We see this as our challenge to connect the dots,” says Weitzel, “because a financial hub like Rivo is the only way a corporate that choses solution A can communicate with a corporate that is choosing solution B or C to simply say, ‘Hey, you’re doing a [bank] guarantee.’”
Surecomp recently partnered with Contour, a distributed ledger technology (DLT) trade finance network. “Together, we send a much stronger message to the market,” Weitzel says. “It doesn’t really matter which solution a corporate chooses. The most important thing is to choose a solution other than paper.”
Aside from governments’ slow catch-up, aversion to change is the biggest roadblock to digitalization of trade documentation, argues Joshua Kroeker, chief product officer at Contour. “There is consensus that digitization of the trade finance products and processes provide massive benefits,” he says, “but there is not consensus on how those benefits can be realized, and most importantly, who will be the winners and who will be the losers.”
Given that lack of consensus, “the status quo continues to win. But we are getting closer. Collaborative platforms, decentralized technology, and interoperable solutions all help to build consensus on how we are going to digitize.”
Since DLT is a network technology, its most important benefit will always come from the coalescence of a global decentralized network of banks, corporates and other partners in trade.
“This is the goal, and the hardest part of the whole process,” says Kroeker. “Any centralized technology can provide a nice digital trade finance application, but what it cannot do is provide that solution when the data is spread all over the world due to national data regulations, security concerns, or other blockers. A DLT network can.”
Once that network is established, “any and all types of trade processes and products could benefit from that network,” he adds. “A letter of credit was chosen as our launch product because it has the most to gain from the trust, traceability and transparency that a DLT network can provide. And because, much more than other simpler products, it needs a global network of banks, corporates and other partners.”
Looking forward, Kroeker sees trade finance as the next frontier for digital asset development, with the potential to make global trade more efficient and inclusive for small and midsize enterprises (SMEs).
“But to grow, we must increase the accessibility of these products for both borrowers and lenders,” he says. “The first step is to facilitate a more digital and efficient trade finance ecosystem for SMEs and local banks, which have traditionally been left out of the system due to the complex, paper-based structures of trade finance.”
That may be critical to the growth in trade that McKinsey anticipates from electronic trade documentation. Once a more efficient, decentralized network for originating trade finance is in place globally, “we can use digital trade assets to bring these transactions to ecosystems of investors that have previously not had exposure to these assets. This can lead to a virtuous cycle, where a demand for more yields will drive more trade finance lending, which will drive more inclusive economic activity around the world.”
