Much Ado About Something

Digitalisation’s Positive Impact on Trade

Rumours about the death of paper documentation in global trade are much exaggerated. But has the digital alternative really made as much headway as is sometimes suggested? Societe Generale’s Christian Cazenove, Group Head of Trade Oversight & Advocacy; Charline Profillet, Deputy Head, Structured Trade Finance; and Pierre Courquin, Director, Head of Forfaiting, provide TMI with essential insight. 

In 2017, the United Nations Commission on International Trade Law (UNCITRAL) introduced its Model Law on Electronic Transferable Records (MLETR). By giving digital trade documentation the same legal value as its paper counterpart, it surely would pave the way for much easier, cheaper, and quicker processes for all. Yet, seven years on, paper still rules. But with recent adoptions of MLETR in the UK and Singapore, and France on the verge of ratifying, is digitalisation finally now on the brink of something significant?

According to the International Chamber of Commerce (ICC), approximately four billion paper documents annually are shuffled around the global trade finance ecosystem. Each trade transaction accounts for an average of 30 original documents and more than 200 copies. There is no doubt that the trade edifice is still largely built upon paper. However, for it to function, it relies on complex processes that must be aligned, and paper shuffling makes that difficult, not least when it comes to finance.

One of trade finance’s key components is the documentary credit or letter of credit, known as the LC. Its primary purpose is to mitigate risk. And yet, somewhat ironically, LCs are commonly subject to the manual processing of multiple pieces of paper. What’s more, LCs are bound by several hundred rules, the treatment of which demands a huge amount of experience, not only in application but also in compliance checking, which takes an average of two hours per single transaction.

When the G7 forum met in London in early 2021, it was acknowledged by all that paper-based trade transactions were a source of cost, delay, inefficiency, fraud, error, and environmental impact. And with the often-drawn-out process of exchange frequently denying buyer delivery expectations, the whole paper-based set-up, despite good intention, is simply bad for business in almost every way.

And there is a new indirect threat emerging, notes Cazenove. It is becoming increasingly difficult to attract younger, digitally native talent into the outdated and arcane world of trade, he says. As those with experience and knowledge retire or move away from this industry, so it becomes more challenging to find the right people to handle the documentary process and ensure its efficacy and compliance. This situation can only deteriorate.

The range of issues in trade caused by the persistent use of paper documentation were underlined by the global pandemic. When offices and sites were required to operate minimally, and in many cases shut down, even accessing paper documents became near impossible. And where it was issued, handling it was a physical risk to recipients.

A bill of lading, for example, enables the buyer to collect their goods upon arrival at a port: without it, the goods cannot be released. It’s just one document among many, but it soon became clear that trade would suffer if paper persisted. In short, the process could only continue through digitalisation. And so it did.

The will to encourage the adoption of digital trade documentation, through initiatives such as MLETR, was suddenly held in sharp relief. Pre-pandemic, banks were able to execute forfaiting transactions using only the original paper-based drafts, not copies, says Courquin. “With limited staffing and homeworking during the pandemic, it became more difficult to address these transactions.” While alternative digital processes had already been formed at that point, they did not have legal equivalence. “It was a wake-up call,” he states.

Global ruleset

The purpose of MLETR is to create a framework for adoption by countries to confer upon trade documentation “functional equivalence and technology neutrality”, both domestically and across borders. It is, comments Cazenove, “sunlight in this dark, archaic world”.

Digitalisation in trade had previously been accommodated in the ICC’s Uniform Customs and Practice for Documentary Credits (UCP) 2002 supplementary ruleset, known as eUCP. UCP itself is used by LC practitioners worldwide. eUCP has been revised several times, v2.1 having entered into force in July 2023 with the accompanying Uniform Rules for Collections (eUCR v1.1). These align with the aims of MLETR.

“Since MLETR in 2017 there has been a huge momentum towards the adoption of digitalisation in trade,” comments Cazenove. However, he cites an influential ICC Banking Commission sponsored report in 2018 by Clyde & Co., a global shipping law firm, that considers the position of e-bills of lading (eBLs), the report declaring that, at that point, “the legal status of eBLs is still very unclear”.

Progress has been made. It was announced in February 2021 by Singapore’s financial authorities that following adoption of the MLETR framework, eBLs and other electronic trade instruments now had the same legal footing as their paper counterparts.

France, the world’s fifth-largest exporter and sixth-largest importer, used a 2022 government mandate to work on trade digitalisation to enable Paris Europlace (the French financial services lobby group) to establish a working group of representatives coming from the whole trade finance ecosystem, including banks, corporates, shippers, lawyers, and platform providers. It published nine recommendations in June 2023. The first called for transposition of MLETR provisions into French law.

In September 2023, the UK’s Electronic Trade Documents Act 2023 came into force, meeting the requirements of MLETR. And the US is also working to amend its legal framework, although broad alignment with MLETR is already in place.

Active participation

But there is more impetus behind adoption than the arrival of a practicable framework: it is wanted by active participants. The adoption in France of MLETR provisions leads to “a very large consensus across the trade finance ecosystem’’, notes Cazenove. He explains that the government’s position supporting digitalisation transition stems from Paris Europlace working group interviews (between November 2022 and March 2023) with more than 100 stakeholders, including corporates of all sizes and sectors, banks, carriers, and insurers.

“Not one stakeholder raised a concern about digitalisation. There was consensus in favour of reducing paperwork, enabling quicker and cheaper processing, increasing profitability, and improving controls,” comments Cazenove.

But even though the will to steer the global trade ecosystem towards more digitalisation is evident, with some jurisdictions taking the lead, the reality still comes up short. ICC Banking Commission, which is the voice of the industry globally, targets MLETR adoption by 100 countries by 2026. Currently only eight have implemented its provisions, but the effort is stepping up.

In France, the Paris Europlace working group (the 2023 recommendations of which are referred to above) has an MLETR advocacy stream underway. This sits alongside a stream considering how best to encourage legal adoption, and another seeking wider fintech involvement. Societe Generale is leading the advocacy stream. As in other mainstream large banks, its corporate clients are being encouraged to further explore digitalisation.

“Both in the short and longer term, the global trade finance ecosystem can benefit from digitalisation,” Cazenove says. Work is progressing alongside to establish fully digital trade corridors with France’s major commercial partners (number seven of the Paris Europlace recommendations) to “demonstrate the efficiency and usefulness of fully digitalised logistics chains”.

And MLETR, as it relates to forfaiting, will ensure digital drafts have the same legal standing and enforceability as their paper equivalents. “It will make easier and more convenient the use of drafts, for instance, making forfaiting more accessible to many more companies, notably SMEs that previously did not have easy access to trade finance products,” comments Courquin. There’s good reason for this.

Huge potential

With a digital forfaiting draft processable in a matter of hours, instead of the days or even weeks traditionally required, at the very least it reduces the cost of each transaction. But, Courquin continues, the benefits stack up.

“We are now living through a kind of revolution from a forfaiting point of view. If a negotiable instrument can circulate between all parties in such a short timescale, the financial institution can discount that draft shortly after issuance, enabling the supplier to be paid very quickly.” At an operational level, this unleashes the potential for a “drastic reduction in processing times”. It would particularly benefit SME exporters, where the accompanying acceleration of payment processing times gives commensurate improvements to their working capital position.

Of course, the fundamental purpose of trade finance is to mitigate risk; it enables companies to buy and sell across borders with confidence, based on their irrevocable commitments. But for Cazenove, shifting from paper to digital, with the latter’s relative simplicity and lower cost, not only generates easier accessibility for a wider spectrum of businesses but, with more financial risk mitigated (and easier compliance checking from the outset), it effectively creates a more robust global trade ecosystem.

Across the board, digitalisation lowers opportunities for fraud, he explains. And while it may open up other windows for criminals – and here it is worth remembering that most banks today are well-versed in cyber-defence – the ease with which paper documentation travelling across borders can be manipulated has long been an unresolved issue.

In the longer term, players in a trade finance industry that has weened itself off paper will find increased profitability, suggests Cazenove. The price tag alone for physically shifting the world’s annual feast of four billion paper documents is huge; add in the cost of duplications, delays and fraud, and the total cost spirals ever upwards.

Environmentally responsible

Given the industry’s intensive use of documentary paper, widespread adoption of digitalisation in trade will naturally reduce consumption – including resources for despatch and delivery – to a minimum. This will inevitably shrink every participant’s carbon footprint.

Less obvious, but nonetheless important from a sustainability perspective, is the way in which visibility across the ecosystem is heightened, says Profillet. “Digital solutions derived for different aspects of the market bring greater transparency for corporate clients. Data from these solutions enable companies to identify, focus and work on reducing GHG [greenhouse gas] emission hotspots in their value chain,” she explains.

Where previously it has been hard to collate information from a global paper-chase, digital systems reveal emissions with greater precision at every point, from supply to production to delivery. With that more detailed and readily available understanding, Profillet notes that it provides significant opportunities for businesses “to take affirmative action to concretely reduce their impact on the environment”.

But improved data streams facilitated by digitalisation also enable firms to begin reporting comprehensively and accurately on GHG emissions. There is an increasing burden of regulatory responsibility falling on corporates globally in this respect, notes Profillet. With more investors and other stakeholders similarly demanding greater transparency and clear statements of position – and perhaps independent assessments – data extracted from these systems is rapidly becoming a valuable differentiator.

Business boosts

The importance of digitalisation is increasingly obvious, states Cazenove. “Trade clients are making it clear that they expect banking partners to reduce delays. Today, the minimum end-to-end time to proceed with an LC is about 10 days. With digitalisation, we know from proof-of-concept exercises that this could be reduced to around two to three days only. Process automation will thus further reduce client wait times.”

There is yet another important driver for adoption, and that, says Courquin, is improvement of the client experience. “Digitalisation will offer more transparency throughout every transaction. In forfaiting, having client visibility over the draft, with a full audit trail, is a major benefit to all participants.” 

A rallying call

The prospect of opening up services such as forfaiting to smaller companies should have enormous appeal to the entire trade ecosystem; at the very least it creates increased optionality for buyers, new business opportunities, and greater security for suppliers.

This requires bank involvement. Societe Generale, says Cazenove, has committed to “going digital” to aid its clients. When Swift published its trade strategy centring on the MT 798 multi-bank messaging type (for international trade import, export and standby LCs), he says Societe Generale was one of the first banks to digitally integrate this message type with its back office.

Societe Generale’s roll-out of Swift GPI will further uplift trade digitalisation and its attendant benefits for stakeholders because it increases the capacity to continuously track every transaction, explains Cazenove. “We’re also working on the possibility of uploading and pre-validating full digital documentation. Because clients remain subject to complex trade processes and rules, this could become a valuable service for them.”

In every aspect of trade, the legal equivalence of digital and paper documents ensures financial products remain the same. But Courquin, aware that digitalisation enables banks to address a wider scope of clients, says Societe Generale is waiting on the French authorities to take the next step. “It’s a global call to our policy makers to bring about the necessary changes as soon as possible, so that we can all go digital. We’re preparing now and will be ready when the laws are amended and enacted.”

Connecting the dots

Interoperability between trade finance platforms is also key to Societe Generale’s “strong and ambitious objectives”, comments Courquin. Here, the single- and multi-platform universes need to align. Societe Generale has already connected EuroTrade and Komgo with its own Sogetrade in France, to support a portfolio of digital trade services including LCs, standby LCs, guarantees, documentary collections, and financing requests.

At a global level, now that there is a stronger likelihood of legal recognition of digital documentation through some form or other of MLETR, interoperability becomes the next grand challenge. Indeed, legal recognition has to have a practical outlet to be of use, so platforms from all participants must be able to connect across borders.

To initiate this major step, Cazenove says the ICC/Paris Europlace working group is seeking to bring together major worldwide carriers and the community of fintech and trade platform providers (such as ICE, essDOCS, Komgo, and Galileo). The aim is to engage them in discussion around the main criteria for platform interoperability.

To date, it’s still a process of discovery, “perhaps raising more questions than answers”, Cazenove admits. But it offers important topics to ponder, such as the relative sanction-screening capabilities of each platform. This, he notes, begs questions around protection and indemnity (P&I) insurance for shipping firms, where the risk of non-compliance with sanctions rules can be severe, not least because it can impact the scope of insurance cover.

Regarding digital forfaiting transactions, the lack of interoperability between platforms may negatively affect the progress of such operations. For Cazenove, with legal adoption underway in several jurisdictions, “failure to tackle this challenge is not an option”. Indeed, because interoperability holds the key to advancing the cause, Societe Generale is playing a leading role in facilitating these conversations, he says. The bank is working with platform providers, other banks and financial services firms, trade organisations, corporates, and carriers, with the aim of identifying key criteria for progress.

Maintaining momentum

Of course, businesses need to begin their own journey of discovery. With Societe Generale currently one of the few banks worldwide to execute digital trade transactions (cf. ICC’s eUCP Directory), “we’re a good place to start,” suggests Cazenove. But MLETR adoption must now gather pace everywhere, he adds. With France on the verge of approval, he says Singapore, an early adopter of MLETR, is now a focus for the bank’s trade team, “so we can start creating a 100% digital world”.

It will take time to build a useful MLETR ecosystem. The ICC’s target of 100 countries by 2026 seems ambitious in 2024, with only eight live. But, says Cazenove, there is country-specific movement in Europe, with Germany close to adoption, and Spain and Italy taking their first steps. The US is sending positive signals, too, and some African nations are now pushing for implementation, he notes. “But once Asia, and especially China, adopts MLETR, it will be a huge step forward for global trade digitalisation.” And that really will be something to talk about.