Treasury Today Country Profiles in association with Citi

Digital flows

Close up of electronic circuit board

The digitisation of trade has been a long time coming. It would seem however, that real momentum is beginning to build and that trade is truly beginning to enter the digital era. But what does a digital trading ecosystem mean for corporates and what may a fully digital trading ecosystem look like? Treasury Today explores.

Over the past century, technological advancements around trade have dramatically reshaped the way global business is conducted. Be it the developments made in transportation, that now see planes, trains, ships and automobiles weave a complex web of trade routes across our planet, keeping the global economy, and indeed our everyday lives, ticking over. Or the ever expanding digital ecosystem, where data flows invisibly and instantly around the world.

The result of these changes is a world that demands instant gratification. No longer do businesses and consumers want to wait more than a few days for goods – even if these are being shipped from the other side of the world.

At a consumer level, arguably this has been achieved. Businesses have been able to develop complex supply chains and distribution networks that enable instant gratification for their customers – Amazon, for instance, are now offering one-hour delivery on some goods in certain locations.

But at a commercial level, this isn’t often the case, and goods can only move as quickly as the paper documentation that supports them – just as was the case a century ago. This causes delays, risk and ultimately cost to businesses on both sides of the trade. But paper’s tenacious grip over the trade ecosystem may be beginning to abate and corporates may soon, if not already, be able to digitise at least some of their trade activity.

The last bastion of digitisation

It would be natural however for some treasurers to be sceptical of that comment, and not without good reason. After all, the promise of digitising trade documentation, and the trade ecosystem more broadly, has existed for some time. Indeed, it was Professor Paul Todd at Southampton University, who, in 1997, wrote that “it is possible, on the basis of existing technology and under the existing legal framework, to replace bills of lading by electronic documents, which can in principle afford to the parties security at least as great as existing paper documents.”

And nearly two decades on, whilst there has been some progress, it still remains a key topic for the industry. “I describe trade finance as the last bastion of paper and manual process in financial services,” says Ian Kerr, CEO at Bolero, a company that has been pushing for the digitisation of trade for nearly two decades. “If you look at other areas such as cash management, payments, investments and so forth, these have all moved onto digital channels.”

For Kerr, trade is an area gripped by inertia. “The processes in trade finance have been around for many centuries,” he says. “Bills of lading for instance were first launched in the 13th century and how these are used hasn’t changed much since then.”

Vivek Ramachandran, Global Head of Product and Proposition Management at HSBC, is another who agrees that trade has been slow to digitise when compared to other areas. And he offers two key reasons for this. “A trade transaction has many stakeholders involved in the process, and is typically cross-border,” he explains. “Even the most basic transaction will feature an importer, an exporter, a logistics company, customs, clearing houses and often multiple financial services companies. As a result, it is an incredibly complex ecosystem and one where it is difficult to drive change. Even if 99% of the process is digital, it all falls down as long as one party requires paper to be introduced into the transaction.”

Moreover, Ramachandran also believes that the lack of coordinated regulatory pressure on a global scale has further limited digitisation in the trade world. “A lot of digitisation in cash management has been driven by regulatory considerations – think SEPA,” he explains. “But, in the trade space there hasn’t been this coordinated regulatory response on a global or regional level.” This leaves both institutions and corporates with a lot of questions over how a fully digital trading ecosystem can be created and what standards this should adhere to.

Incremental steps

Trade is therefore digitising incrementally with small but meaningful enhancements being made to solutions by all parties in the ecosystem. And these in turn can have a big impact on how corporates can look to automate and streamline their trade processes, and ultimately be the building blocks that lead to a fully digital ecosystem.

Bolero has recognised this incremental change in the market. “It is a conservative industry and this has to be recognised,” explains Kerr. “What we are seeing however is the adoption of digitised trade solutions by some very high profile corporate names and consequently their financial partners and trading partners. There is a momentum shift in the market and these companies want to become fully digital in the next five years.”

And banks are recognising this as well, with many investing heavily in their own solutions to ensure that where possible trade and the management of trade documents can be done digitally. Bank of America Merrill Lynch (BoAML) for instance, earlier this year, announced an enhancement to their CashPro® Trade solution which enables electronic document identification and retrieval allowing the entire transaction history and associated documents to be viewed through a single window.

As Percy Batliwalla, Head of Global Trade and Supply Chain Finance at BoAML, explains: “Enhancements such as this ensure our clients have full visibility over the transaction and know what needs to be approved and by when. Whilst this may seem fairly basic and fundamental it hasn’t existed before in such a way that can really add benefit by streamlining the often tedious, manual process of document identification.

“In trade, corporates have relatively simple requirements: they want enhanced working capital, operating efficiency and cost reduction. And incremental improvements such as this that we and others have done can therefore add a lot of value to what our clients are doing today.”

The bank payment obligation

In fact, data matching sits at the heart of digitising trade and ultimately it will be this that enables corporates to achieve straight through processing. The question that remains is how exactly this will be achieved.

To date, the solution that has widely been seen as having the most potential is the bank payment obligation (BPO). Billed as the first end-to-end automated trade solution, the BPO is an irrevocable conditional obligation from one bank to pay another bank, subject to the presentation of compliant data in the SWIFT Trade Service Utility (TSU) – which matches data items such invoices and orders – and is based on ISO 20022 standards.

Despite the solution’s attributes, take up has been slow to say the least. Numerous explanations have been given for this, but one key reason it seems is the poor education and positioning of the product by the banks. “The positioning of the solution is very important,” explains Nadine Louis, Market Manager, Corporate and Supply Chain Markets at SWIFT. “Some simply see this as just a digital alternative for documentary trade. But it has more potential than that and can actually assist corporates with their open account transactions by enabling them to receive much faster financing than would typically be available.”

And SWIFT are seeing the solution grow in popularity, especially given its ratification by the ICC and also the BPO+ transaction that took place last year which utilised electronic documentation – provided by essDOCS – straight through, end-to-end for the first time in BPO transaction. This removed the need for data from documents to be manually entered into the SWIFT TSU, thus mitigating risk and eliminating inefficiency from the process.

Also rapidly gaining credence in the SWIFT portfolio is the relatively new MT798 trade envelope. “In fact MT798 is used by corporates to communicate with their banks instructions related to import LCs, standby LCs, guarantees, or export LCs, in a similar structure as used between banks with the MT7xx family messages,” says Louis. “That’s why MT798 is seen as an extension of those flows in the corporate-to-bank space.”

Growing the digital ecosystem

With developments like these, it would be fair to say that trade is truly beginning to be brought into the 21st century and that there will continue to be a concerted effort by industry moving forward. But as we have already explored, financial services alone cannot drive the digitisation of trade. There are numerous other parties that also need to be brought on board.

Regulators therefore will play a big role in driving the acceptance of digital trade globally. That being said, despite the talk, there remains no concerted effort to bring the world’s regulators together to agree on a single set of principles and standards that will define how a digital trading ecosystem will work.

A disparate landscape will continue to exist adding complication for corporates and those delivering digital solutions. And whilst it may still remain difficult to trade digitally in emerging markets, there are countries, such as Australia, Canada and Singapore, with its ‘smart nation’ concept that are looking to push ahead.

The increasing regulatory burden on financial services more broadly may however accelerate the digital agenda. “Reacting to regulation is a challenge and you can sometimes feel that you are always behind the curve,” says BoAML’s Batliwalla. “But they are a reality of doing business and it is more prudent to focus on the opportunities these create. Digitisation can help financial services meet the standards of the regulators around areas such as know your customer (KYC), anti-money laundering (AML) as well as more broadly reduce systemic risk.”

Away from regulators, corporates themselves have a vital role to play in driving the digitisation of trade. “A lot of what we are doing is still around education,” explains Bolero’s Kerr. “It is about growing an ecosystem and once one corporate adopts a digital solution and the benefits around increasing efficiency, removing cost and risk are made obvious to those companies in its ecosystem, they may then adopt and it will continue to spread.”

A brave new word

As we have explored, there are many things that corporates can use today that can help them digitise their flows. But, the promise of digitisation doesn’t stop at just making what we do today more efficient and effective. It actually provides the chance to go back to the drawing board and start thinking about not just how to make what is done today more efficient, but also how it can be done differently.

Distributed ledger, the internet of things (IoT) and big data are all areas that banks and other players are currently experimenting with. Distributed ledger, out of all of these, perhaps provides the most potential, in respect of creating a platform that can piece together all the disparate parts that make a trade transaction happen and in turn create a visible and secure chain of events that can go a long way to removing risk from the process. The recent Qingdao scandal for instance – where warehouse receipts were used to borrow loans from banks against a single deposit of metal – probably wouldn’t have occurred should the distributed ledger have held all the documentation and transaction flows.

Yet to corporates, the distributed ledger still largely remains a theory, rather than a reality. And despite banks working on solutions there is still little information around what these entail and how they plan to be commercialised.

The IoT is another, perhaps even more ambitious, area that the industry is beginning to explore. And it may be that in the future every item contains a chip with its own IP address that allows all parties involved in the transaction to track the movement of goods and thus automate the financial flow – perhaps utilising the distributed ledger – alongside this. “This will provide full visibility over the flow of goods and finance in a transaction,” says Kerr. “The risk can be reduced and so can pricing as a result.”

HSBC’s Ramachandran concurs. “There is an untapped opportunity to merge physical and financial supply chains and provide financing earlier into the system,” he says. “At present, traditional supply chain finance is dominated by post shipment financing. But, with this extra visibility there is a real chance to bring pre-shipment financing into the equation.”

Despite the promise of these areas, there are few that are brave enough to say exactly how this will all develop. And BoAML’s Batliwalla issues caution: “Whilst it is important to focus on these cutting edge technologies, we must not lose sight of the fact that there are corporates today with real challenges that banks can help to solve,” he says. “As an industry we must have two parallel areas of focus: namely how we can add value today, as well as how we can transform the industry in the future.”

The third dimension

And looking to the future there may be technology that will more broadly transform the world of trade and how it is conducted. As previously mentioned, no longer is trade defined by the physical movement of goods and services, it is also defined by the flow of data around the world. And according to a recent report by McKinsey, the value of data flows added $2.8trn to the global economy in 2014, slightly more than the $2.7trn traded in goods.

Few would argue that this trend will not continue, and it may even grow at a greater speed as the development of 3D printing accelerates making it a real possibility for companies to completely re-define their supply chains and how these operate. And for some market leading companies this is already happening. The Mckinsey report highlights that General Motors is using 3D printing to make fuel nozzles for jet engines and expects the aviation unit to be manufacturing 100,000 parts using the technology by 2020.

“This has the potential to fundamentally change what our clients do,” says HSBC’s Ramachandran. “It will be these trends that shape the digitisation of trade and trade finance in the future, rather than the streamlining of traditional trade flows. And it poses many new questions to corporate treasurers with regard to how they manage the financial flows that accompany this movement of data and the technology that will facilitate this.”

Moving ahead

Given all these developments, it would be fair to argue that after much delay, the digitisation of trade is truly upon us and that it will be the next five years that will shape how this space will play out.

Of course, there remain numerous hurdles that must be overcome, especially in regard to entire trade ecosystem coming together to decide on an agreed set of standards that will define how the digital era of trade will operate. But it is certainly an exciting time, and one that will pose numerous new opportunities, as well as challenges to treasurers, who must not only stay abreast of what they can do to help streamline their trade flows today, but also be prepared for the potential changes in global trade that may take place in the years to come.

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