Treasury Today Country Profiles in association with Citi

Digitisation of trade documents

Blurred motion photo of traffic in town

In a fast-paced global economy where companies and consumers work and shop 24/7, trade demands the rapid exchange of goods, money and services. But the sad truth is that – all too often – goods only move as quickly as the paper documentation that supports them. How is digitisation progressing in the trade space?

The notion that the paper-based office is on its way out has had currency for a very long time. Proponents of the digital alternative have tried to promote the cause via a number of angles including those of efficiency, security, cost and even ‘greenness’. Yet paper persists; in the world of trade finance its dominance in certain aspects has been something of a bugbear for those that seek to streamline processes. But in the age of digitisation, all this may be about to change, at long last.

Overseas trade has for many hundreds of years relied upon a full set of documentation to ensure the dispatch, shipping, offloading and receipt of goods by the paying customer. Such a requirement is unlikely to change dramatically, however, the form of that documentation certainly will. Currently the trade world is shifting from paper to electronic and in doing so is ushering in an era of vastly improved administrative efficiency, security and accessibility. However, paper’s grip on the industry seems more tenacious than anyone would have thought, given the availability of new digital ePresentation tools capable of answering the needs of most.

Can’t let go?

In theory, the preparation, dispatch and receipt and storage of electronic documents facilitates cost savings and process efficiencies whilst reducing the potential for fraud. Back in 1997, Professor Paul Todd from the Law School at Southampton University wrote a paper in which he asserted 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.” Todd accepted that changes may be required in some jurisdictions to the rules on personal data protection, admissibility of computer-generated documents in court, and the transmission of encrypted data across national boundaries.

But that was almost 20 years ago. Today, the legal issues with the digitisation of trade documentation have by and large been dealt with. However, there is a persistent perception that electronic documents are somehow less secure than paper and that they are open to abuse by cyber-criminals. Of course, there is an element of vulnerability with all electronic systems but few could surely believe that a fully-encrypted document is less secure than its paper equivalent.

Taking it forward

A chain is only as strong as its weakest link and in the trade documentation space the whole suite of ePresentation tools working in harmony can still grind to a halt if, as is often the case, local customs and excise officials demand to see paper documentation. Notwithstanding entrenched local practices, serious inroads into digitisation have been made in many countries. At the specific document level there has been progress with certificates of origin used in agri-business, veterinary or export health certificates used when shipping livestock, and the Shipper’s Export Declaration for export control of items over a certain value (the latter is now known as an Electronic Export Information Filing). But as progress is made there has been more activity in terms of thoughtful solutions offered by the key players, particularly infrastructure providers such as SWIFT, Bolero, essDOCS and GTC.

The advent of the electronic Uniform Customs and Practice for Documentary Credits (eUCP), issued by the International Chamber of Commerce (ICC), has been instrumental in gaining credibility for ePresentation. UCP is a set of a standardised processes for the issuance and use of letters of credit (LCs) used across the world. The ‘e’ version is a supplement brought into being as banks, corporates and the transport and insurance industries started to adopt electronic processes. The first issuance of a paperless LC subject to eUCP was in 2010, between an Australian mining company and a Chinese buyer, and facilitated on the Bolero platform. The documents in the ePresentation included the commercial invoice, packing list, certificate of weight, certificate of analysis, the bill of lading and the insurance certificate.

Main contenders

SWIFT TSU

SWIFT needs no introduction but in the trade space, its Trade Services Utility (TSU) may need explaining. This is an electronic data matching service for banks, developed by SWIFT in partnership with 12 banks known as the Trade Services Advisory Group. It was launched in April 2007 with the aim of improving the flow of information in the supply chain through the matching of data in items such as orders, invoices and transport documentation. This is intended to increase visibility and reduce risk. The TSU now carries XML messages (formerly called TSM ISO 20022 messages), including purchase order, invoice, transport, insurance and certificate data. It handles only data, not electronic versions of paper documents, but it does provide banks with accurate trade data, enabling them to broaden their range of associated trade products.

The TSU was developed as a direct response to firms moving away from safe but expensive LCs towards cheaper but riskier open account trading, where the supplier sends the goods before receiving payment. Today, estimates suggest open account transactions now account for over 80% of global trade.

Open account trading means there is no formal guarantee of payment, the buyer only pays upon receipt of the goods. Today it is easier for the seller to perform its own counterparty due diligence, except perhaps where these are in emerging territories. Although trading partners need to take on the task of processing documents, such as matching invoices to orders, this is perceived to be easier than LC preparation. With the banks effectively removed from part of the process they lose out on revenue stream. By allowing banks to automate the data matching process in a transaction, the TSU enables them to offer this as an additional service to their customers without the need for both trading parties to have a relationship with the same bank.

The TSU can be used for both open account and LC transactions but is only designed to interface with financial institutions and does not provide direct access for corporates. Participating banks may pass on the benefits to corporate clients, for example, where the automation of data matching results in faster processing throughout the financial supply chain, corporates may see lower costs.

SWIFT BPO

Potentially of most interest to corporates is the fact that the TSU supports the exchange of a SWIFT BPO as a data matching application. BPO is an irrevocable conditional obligation from one bank to pay another bank, subject to the presentation of compliant data in the TSU. The ‘Notice of Intent to Pay’ message is an additional information message indicating one corporate’s intent to pay another corporate. The combination of these two features enables banks to offer alternative forms of financing at various points in the deal, including pre-shipment, post-shipment and reverse factoring.

The BPO was first used back in 2012 by BP Chemicals, Oman-based OCTAL and Standard Chartered. However, it is worth noting that the BPO struggled to get any traction until its rules of engagement, held in the SWIFT domain, gained unanimous approval in April 2013 from the ICC Banking Commission. One reason why BPO uptake by banks has been slow thus far is the perceived threat it poses to the traditional LC. Although banks will inevitably see some business move from the LC to the BPO, the migration will only be partial and will certainly not eliminate demand for LCs entirely. What the banks might lose in LC business may be more than compensated for by the BPO gains made by re-intermediating themselves through finance offering in the open account space.

ICC’s approval should bring increased user confidence to the BPO in line with other trade finance products such as the LC, documentary collections and guarantees. What is essential to move ahead is greater collaboration between banks. The BPO’s design supports interoperability between participating banks through the use of a standard set of ISO 20022 messages. Whereas without BPO, a financing opportunity involving a supplier based in an unfamiliar market might see the obligor bank struggle to provide pre-shipment finance, using the BPO could help its client finance its supply chain by working with a local bank if that bank knows the obligor bank is irrevocably (but conditionally) guaranteeing the payment risk. The seller may also be able to obtain pre-shipment finance using the BPO as collateral.

To date adoption has mostly been by large commodity traders. OCTAL and BP Chemicals’ initial experience was positive. BP Chemicals’ Global Credit Manager, David Vermylen is a very public supporter of it, seeing it as “a way forward” out of the multiple banking platform issue. He talks up its capacity to add value to the trade risk mitigation process as its application can be delayed until the moment the bill of lading is secured from the freight forwarder; this gives an instant five to seven-day risk (and cost) advantage over an LC.

Because it is an entirely electronic document, a BPO can also be set up at the point the goods are discharged at the port of arrival, affording it the functionality of a traditional ‘documents against payment’ arrangement in which the presenting bank only hands over shipping and title documents to the customer when that customer has paid in full. Acknowledging its slow start in life, Gary Slawther, Corporate Treasurer at OCTAL, says communicating the ease of use of the BPO to corporates is key to its survival. “If it is just seen as a bank product then there is a strong possibility that it will just wither on the vine.”

Also rapidly gaining credence in the SWIFT portfolio is the relatively new MT798 trade envelope. This is aimed at de-risking open account trading. It is basically a means of carrying the range of MT7xx trade messages used to initiate import LCs, standby LCs and guarantees, or to receive export LCs. The MT798 transfers large documents from corporate to bank via FileAct, with FIN messages allowing corporates to communicate with the banks on both sides of a trade.

Bolero International

Bolero’s multi-bank trade finance and electronic trade documentation offering has also been a slow burner in terms of uptake. Since its launch in 1996, Bolero’s software-as-a-service (SaaS) delivery model provides trade solutions for large corporates in two key areas: multi-banking trade finance applications and the electronic presentation of trade documentation. The idea in the first instance is to provide a single platform multi-bank electronic trade finance management tool for traditional trade instruments. Bolero also aims to dematerialise trade documentation, enabling end-to-end flow for trade under LC, open account and the BPO.

In respect of the latter, all high value cross-border transactions, regardless of the settlement instrument, have a requirement to place in the hands of the buyer as soon as possible, the original trade documentation. Most notable of these is the bill of lading, which evidences receipt of goods for shipment, their delivery and legal title, and without which banks will not release payment. Whilst the bank data matching element of the BPO is a major advance, it too is driven by the speed at which paper-based shipping documentation physically moves along the chain.

The UK arm of the global shipping industry’s carrier insurance scheme, run through P&I (protection and indemnity) Clubs, acknowledges that “non-availability, or non-production, of a bill of lading is becoming more common”. Delays can be costly for all parties, not least the shipping company which has to decide what to do with the goods as it waits in port. Clearance of cargo without a bill of lading can be expedited with an Letter of Indemnity (LOI), however, these tend to be seen as problematic by the P&I Clubs, largely because there have been a number of fraudulent uses of these paper documents over the years. For high value cross-border LC, BPO or open account trade, the electronic bill of lading and the ability to notify and present on the LC electronically is what Bolero is aiming for with its solution.

essDOCS

essDOCS dates back to 1986 in its first incarnation as the Seadocs (Seaborne Trade Documentation System) project and was the first significant attempt to use electronic documentation for goods carried by sea. Having ironed out early legal issues, essDOCS today is one of the largest providers of electronic bills of lading globally (it claims adoption by more than 2,100 companies across 65 countries). essDOCS Exchange is its main multi-bank platform whilst its CargoDocs function enables banks and corporates to combine electronic bills of lading and supporting documents with eUCP Presentation, eDocumentary Collection and the BPO.

GTC

GTC offers a web-based multi-bank trade finance platform for corporates and banks. Its @GlobalTrade offering allows the transfer of all eUCP electronic trade documents including LCs, import and export documentary credits and collections. GTC also offers a solution for connectivity between applications within the ERP systems of corporates and the back office systems of banks and trade service providers.

eLCY

Another interesting provider of e-commerce solutions for the international trade finance community is eLCY. It is an independent vendor offering an auction site for the confirmation of LCs and direct corporate risk, and a multi-bank portal that enables the secure transmission of approved trade-related instructions and messages.

ePresentation and the law

As well as accelerating the speed at which documents are delivered, much of the value in electronic trade technologies lies in their ability to legally replace original paper documents with ‘original’ and universally-accepted electronic versions. The widespread adoption of e-presentation systems which conform to ICC’s eUCP standard has been important in giving the form credibility.

The fact that electronic documents in the trade context are legally acceptable by most parties (some local customs and excise offices excepted) means nothing if the law cannot be relied upon to secure the transfer of goods when using a digital replacement for a bill of lading. It seems provident that the document itself should offer its own means for the transfer of contractual rights and liabilities.

When Bolero was launched back in 1996, it had already widely tested its legal feasibility. The results of its test now form the basis for the Bolero Rulebook and governance of the title registry. Today, this legally underpins its entire technical operation and is binding on those parties who have agreed to be bound to it. The rulebook is administered by Bolero members but is also fully compliant with ICC’s eUCP. Elsewhere, SWIFT messages are issued in line with the appropriate central bank guidance and have a legally binding effect on the sender. As with Bolero, the provider of the essDOCS platform also has an internationally recognised legal framework based on a common user agreement.

Will full STP ever be possible?

In a perfect ePresentation scenario, the exporter would ship the goods and apply for an electronic bill of lading to be issued by the carrier, with which the exporter would transmit the necessary documents electronically to the presenting bank. The presenting bank would check the documents against the relevant LC and forward the documents electronically to the issuing bank, which would in turn check the documents to ensure compliance with the terms and conditions of the LC before making the payment. The issuing bank would then forward the documents electronically to the importer, who would use the documents for obtaining clearance of the goods. Throughout the transaction, the various parties would log into the same platform for access to the documents and for forwarding the documents to the next party.

The level of appetite among corporates to adopt full ePresentation depends on a number of variables such as whether the corporate is an exporter or an importer, the volume of transaction or the type of goods. BPO is largely confined to the huge commodities traders at the moment because the volumes and values (and risks) justify the costs of supporting the software and architecture. The users of multi-bank platforms such as those mentioned above (some of the world’s largest firms) are many in number and momentum is gaining but there will not be a paperless-trade world anytime soon.

Professor Todd stated in his work cited above that “doing half the job seems pointless once the reality is grasped that there is nothing that paper can do that computerised documentation cannot. If you are going to dematerialise, dematerialise totally.” But that was almost 20 years ago. Despite the massive technological advances in the interim period, paper-based trade is still common. For the use of ePresentation to be fully accepted in the export space, Ian Kerr, CEO of Bolero, is spot on when he says “alignment of all involved parties is necessary”. The conversation will continue for some time to come.

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