Sibos 2022: Is paperless trade within our grasp?

Digital trade finance has the potential to transform how we do business across borders. But it’s not currently the norm.

Why is this? Particularly in an industry that has already made such transformative leaps to digitise every other way that we pay and are paid.

What needs to change? And what are banks doing about it now?

Opportunity at hand

More than 28 billion physical trade documents are couriered around the world every year. Digitising these would unlock clear advantages.

Firstly, there’s the benefit of speed and efficiency.

Relying on paper documentation is time-consuming and more expensive than potential digital-led solutions.

Trade documents require checking by a dwindling number of operational experts, exposing banks and companies to risk, cost and time-consuming manual work. By way of example, a typical transaction involves at least 27 individual documents, some containing data points that may be duplicated up to 10 times. This complexity opens the door to processing delays due to discrepancies between documents.

There are also benefits in terms of security. Digitalisation allows banks greater certainty of authenticity and can help reduce opportunities for fraud such as ‘double financing’ – cases where someone secures multiple streams of financing against the same asset.

There’s the obvious environmental advantage in reducing paper volumes as well, from materials and printing to the potential reduction in travel and the associated carbon footprint generated by couriers ferrying documents from office to office.

And perhaps most importantly, there’s the contribution paperless trade finance could bring to reducing the barriers to entry for smaller companies to international trade. Digital processes could make trade more accessible and more affordable for more businesses.

Barriers to action

So why aren’t we already trade financing in bits and bytes?

The lack of a clear legal framework for digital trade finance is the first major barrier.

A new Electronic Trade Documents Bill is expected to be introduced in the UK soon, which would codify the legal framework for digital paperwork in England and Wales. This represents a significant step forward, but more must be done to harmonise this position across the world, beyond the UK.

Businesses and banks face the fundamental problem that they often can’t legally digitise documents required to complete a trade transaction, such as bills of lading, bills of exchange and promissory notes across all jurisdictions. This is simply because of limited legal precedent, opinion and case law on digital transactions, as well as a standard legal framework that covers all digital trade documentation.

Where there are global initiatives in operation, take-up is low.

Only a handful of jurisdictions have adopted the United Nations’ Model Law on Electronic Transferable Records (MLETR), while the International Chamber of Commerce’s (ICC) electronic rules for presentation under Letters of Credit – introduced more than 20 years ago – are currently only applicable to 0.1% of trade finance transactions issued by Swift.

And there’s the challenge of interoperability.

Where digital trade solutions are brought to market, the majority operate as closed systems. This can cause issues.

As just one example, there are currently seven major providers of electronic-bill of lading (e-B/L) – electronic versions of the documents that serve as a ‘receipt’ for goods being shipped, representing the contract of carriage between the person shipping goods and the carrier, and which allow the rights of the cargo to be passed between one party and another.

This last function – the transference of ownership of the goods – is currently difficult to achieve with an e-B/L unless both parties at each end of the transaction are using the same e-B/L platform. At this time, an e-B/L on one platform cannot be transferred to another platform – limiting their opportunities for use.

Path to progress

Collaboration will be essential to tackling these challenges.

Trade finance is delivered through a highly complex ecosystem, involving a diverse set of parties – from banks and businesses to customs authorities and inspection agencies.

Working towards greater standardisation and interoperability across this ecosystem is key.

Parties in the trade finance ecosystem understandably take comfort in conducting documentary trade finance against ICC rules that have been in place for decades. There is perhaps some concern that moving to new digital formats will mean more risk of transactions being challenged – and with it, a financial and reputational price to pay.

Developing tried and trusted global networks built on the same high levels of security that banks, Swift and international trade authorities already utilise will provide the bedrock we need for a confident, widespread rollout.

As these bridges are built, digital trade finance innovation must continue. We need to show exactly how paperless trade finance solutions can work, and the scale of the benefits they can bring.

At Lloyds Bank, we are working closely with bodies such as the ICC, Bankers Association for Finance and Trade (BAFT) and International Trade and Forfaiting Association (ITFA) on a number of digitalisation working groups to facilitate and expedite the trade finance ecosystem’s digital transition.

Paperless trade isn’t a fantasy. But it will require our sector’s ingenuity and cooperation.

We’ve all got a part to play.