Many commentators have said that trade isn’t about goods. Trade is about information. Goods sit in the warehouse until information moves them. Certainly, the business of trade finance has evolved over time. The exchanges of information that were once performed on the clay tablets of ancient Babylon now rely upon the electronic exchanges of vast volumes of big data.
Trade finance typically refers to the provision of risk mitigation and financing services, traditionally provided by banks but now extending to non-bank financial institutions and other third parties such as large logistics providers. In 1923, the International Chamber of Commerce (ICC) published its first international commercial trade terms. The most recent edition (Incoterms® 2010) remains in active use and work on a newly revised Incoterms 2020 has already begun.
Just as a common framework was needed to help standardise terms, so a common framework was eventually needed to standardise techniques. Several rulebooks are in common everyday use, including the ICC Uniform Customs and Practice for Documentary Credits (currently UCP 600) and Uniform Rules for Demand Guarantees (URDG). These rulebooks not only define the instruments but most importantly clarify what is expected from the different parties to comply with documentary presentation and payment.
More recently, the Standard Definitions for Techniques of Supply Chain Finance (SCF) was published in 2016 through the collaborative efforts of leading industry associations. These definitions provide much needed clarity within the SCF community globally, helping to align SCF products with market expectations.
Today, rapid evolutions in new technology are changing how we see trade and supply chain finance. Businesses are looking for solutions that will deliver greater control and visibility within their supply chain ecosystem. Financiers are looking for tools that will support regulatory compliance and optimise the use of capital. A variety of technologies are being proactively introduced from Optical Character Recognition (OCR) and Artificial Intelligence (AI) to Distributed Ledger (DLT) and smart contracts. Solutions can be configured to be fully automated end-to-end without requiring human interaction. For example, more and more corporates are implementing AI-based processes in which invoices can be auto-approved and posted to a financier when meeting pre-determined criteria.
At the same time, work has begun on adapting industry rules whilst maintaining the underlying principles for market participants. The ICC has supplemented its UCP 600 with an edition governing presentation of documents in electronic or part-electronic form (eUCP) and recognised a demand to explore a revision of the Uniform Rules for Bank Payment Obligations (URBPO).
The ICC Global Survey on Trade Finance 2018 concludes that an automated issuance of a Letter of Credit can reduce processing times by 60% and full-time employee headcount by 70%. It further suggests that banks with the largest values of trade finance reported the biggest rise in SCF activity (more than 30% year-on-year). Although SCF programmes require an initial setup, which will vary depending on complexity and level of integration, greater automation reduces the cost of support across the supply chain ecosystem. A number of common characteristics distinguish these programmes from traditional trade. For instance:
- Digitalisation of the execution processes
- A continuous data flow that can be split across many transactions
- A network effect created to capture the data flow.
Growth in SCF, coupled with a general market drive towards greater digitalisation, requires a new categorisation to distinguish solutions based on physical documents from those based on digital data flows. Whilst the role of traditional trade finance does not change, a new category of ‘digital data flows’ can usefully be adopted to describe solutions that are reliant on an exchange of data in line with the aforementioned qualities. eLetters of Credits and eGuarantees may eventually be included within this new category since it is unlikely that parties will implement an electronic solution if transactions are not recurring and there are economies of scale to be gained. While the complexity of each individual digital data flow solution will vary, all will share a set of common benefits including:
- Faster processing and improved operational efficiencies
- Greater control and visibility
- Reduced risk
- Working capital optimisation and
- Greater ability to manage access to liquidity.
Digital data flows can include multiple trade and supply chain finance techniques. For example, a corporate business can be interested in both receivables and payables financing to address both sides of the balance sheet, both managed through a centralised ERP (Enterprise Resource Planning) platform. Digital data flows also accommodate emerging technologies such as DLT. Recognition of this new classification will help to formalise emerging market convention, differentiating solutions that deal in data on a flow basis from traditional documentary and/or ad-hoc solutions.
*Disclaimer: The content of this interview does not reflect the official views of the International Chamber of Commerce. The opinions expressed are solely those of the authors and other contributors.