The Treasurer’s Guide to Digitisation 2016

Trade: moving into the digital age

Published: Sep 2016

In recent years, a number of steps have been taken to foster further digitisation across the trading ecosystem, all starting with the growing acceptance of electronic documentation. Here we take a look at the development of digital trade to date and what further changes may have a significant impact in the future.

In June this year, a vast Chinese freighter carrying nearly 10,000 cargo containers navigated its way through the Caribbean-facing Agua Clara locks of the Panama Canal. The vessel’s voyage is of note because it marked the opening of the canal’s latest $5.4bn expansion that will allow even bigger ships to pass through the legendary waterway.

In many respects, the history and expansion of the Panama Canal, since its inauguration in 1914, documents the progress made more broadly in the development of the global economy and how globalisation has fuelled the proliferation of trade to meet the needs of both advanced and third-world economies. Moreover, this demand continues to grow. The Panama Canal Authority, for instance, expects that the volume of cargo transiting the canal will grow by an average of 3% per year, doubling the 2005 tonnage by 2025.

Whilst the scale of world trade has changed substantially since the canal first opened, there are some areas of the trading ecosystem that would be familiar to those shipping goods over 100 years ago, namely the documentation. Cross-border 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. It is largely agreed that this method works and will be unlikely to change.

What will change, however, is the means by which this is delivered. Traditionally these documents have been paper-based which, as we know from other areas of business, is seen by many as being no longer fit for purpose. At present, the trade world is slowly shifting from paper to electronic (ePresentation) methods. In doing so, it is ushering in an era of vastly improved administrative efficiency, security and accessibility.

A conservative industry

Few in the industry would disagree that the trade space has been slow to digitise. Indeed, conversations were had in the 1990s about the digitisation of trade which, even back then, were seen as feasible. Yet, over two decades on, many of the conversations remain ongoing. There are numerous reasons for this.

Key to the slow pace of digitisation has been the complexity of trade transactions. Unlike a payment, for instance, which typically involves a limited number of parties, a trade deal contains many stakeholders. These could be, but are not limited to: the importer, exporter, logistics companies, customs, clearing houses and often multiple financial services companies. If just one of these companies is unable to accept digital documentation, then paper will have to re-enter the process, creating inefficiencies and risk.

Aligning all stakeholders, however, is no mean feat – digitising requires resources and a desire to change. Arguably in the trade space the latter has not been forthcoming. Payments, for instance, have come under regulatory scrutiny – think SEPA – which has helped facilitate digitisation. But in the trade space there has been a lack of concerted regulatory guidance which has left all parties with more questions than answers over how a fully digital trading ecosystem can be created and what standards this should adhere to.

Moreover, there are still question marks over the legality of digital documentation in certain jurisdictions. This is preventing progress. That being said, 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 much credibility for ePresentation. UCP is a set of 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: not a sheet of paper in sight!

In more recent years, further steps have been taken to remove the ambiguity around the legality of ePresentation. One such example of this is the early 2016 treaty drafted by working groups that brought together 27 member states of ESCAP, the UN’s regional development arm that counts 53 member states and nine associate members in Asia Pacific (APAC). The agreement, which is said to be the first of its kind to focus on advancing paperless trade across borders, is expected to contribute to regional economic cooperation and integration and also enhance economic competitiveness of the region as a whole.

The issues are not just legal, however. There is also a persistent perception that electronic documents are somehow less secure than paper and that they are open to abuse by hackers and other cyber-criminals.

But for those who still believe this, consider the following. In 2014, an investigation was launched at Qingdao port in China around a private metals trading firm suspected of duplicating paper warehouse certificates in order to use a metal cargo multiple times to fraudulently raise financing. And how about the statement issued in December 2014 by the International Federation of Freight Forwarders Associations (FIATA) that warned its members to be on the lookout for forged ‘master bills of lading’. A number of these paper documents had recently been presented to a consignee’s bank for payment, the documents “indistinguishable from the paper originals”.

Of course, there is an element of vulnerability with all electronic systems too. But few people, especially after the Qingdao scandal, could surely believe that a fully-encrypted document is less secure than its paper equivalent.

But there is perhaps another good reason why traditional methods are prevalent: they work and are broadly, aside from a few incidents, effective. The result of this has been a lack of coordinated customer demand for innovation in the trade space in comparison to other areas of treasury. Banks, therefore, with their own agendas and pressures, have been less inclined to invest in digital trading technology, especially given how ingrained this is across the supply chain.

As a result of all of these factors trade is referred to by Ian Kerr, CEO at Bolero as “the last bastion of digitisation”.

From paper to data

Despite these challenges, progress keeps knocking and in the last few years the rise of a truly digital trading ecosystem looks more likely. Significant product development has been made by forward-looking banks and infrastructure providers, such as Bolero, SWIFT and essDOCS, that can have a big impact on how corporates can automate and streamline their trade processes, and ultimately be the building blocks that lead to a fully digital environment.

This creates a fragmented and uneven landscape. Whilst all parties involved are making an impact in their own individual areas of strength (a number of banks, for instance, are enhancing their online portals to ensure that trade documents, even if these were paper-based originally, can be stored and managed electronically) the lack of market harmony, both in terms of regulation and law, again poses a challenge with regard to using electronic documentation across the board.

This hasn’t deterred progressive corporates from looking to use these products. A number of large corporate names are looking to spearhead the proliferation of ePresentation by using numerous products and, where possible, forcing their financing and trading partners to comply, further extending the digital ecosystem.

For these large corporate names, the benefits of going digital are clear. As most treasurers will attest, the paper-based nature of trade finance presents many challenges centred around lack of visibility. Going digital can solve this to some extent by transaction transparency and allowing all parties to see who did what and when. Visibility affords treasurers the opportunity to better manage their credit facilities, look for cost savings and also help the business facilitate greater trade volumes by matching the financial flow with the physical flow.

The rise of the BPO

One solution that has the promise to deliver is the bank payment obligation (BPO). The BPO is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date, following a successful electronic matching of specified data (such as goods delivery). It functions in a way which is similar to both the letter of credit (LC) and open account settlement, but there are a number of crucial differences for both buyer and seller.

For corporates, the BPO has a trio of benefits. The first is in improved risk mitigation. In terms of documentary risk, the BPO has significant advantages over traditional trade finance products which are often subject to discrepancies. For example, when using an LC, a participant in a trade may find the goods descriptions on their documents differ from that of their counterparty’s.

Next is the assurance the solution provides for sellers that they will be paid in full and on time. Unlike trade on open account, which offers no such assurance, the BPO functions rather like a confirmed LC. The third main benefit is the opportunity for the seller to use the BPO as possible collateral for pre- and post-shipment financing. Once the obligor bank has issued the BPO, the recipient bank knows that, providing their client ships the goods, repayment is covered.

Despite these advantages, since the solution was first used back in 2012 by BP Chemicals, Oman-based OCTAL and Standard Chartered (Treasury Today reported on both BP Chemical’s and OCTAL’s enthusiasm for the project), it has struggled to gain any real traction. The rule of engagement, ratified in April 2013 by the ICC Banking Commission has helped with credibility but still adoption remains slow and even then dominated by large commodity traders.


The BPO divides the corporate community to a degree. Whilst some are big supporters and believe the solution has the ability to add value to the trade risk mitigation process, there are others who simply see the product as a solution looking for a problem.

The solution may have won more fans however, following the completion of the first BPO+ transaction last year between BHP Billiton, Cargill, ANZ, Westpac and facilitated by electronic document provider essDOCS.

The BPO+ was billed as a ‘major milestone for global trade finance and cross-border payments’ because it was the first BPO transaction to utilise end-to-end electronic documentation. This was unique because, quite ironically, until this transaction occurred, paper still played a big part in any BPO transactions. This is because in the first transactions the data that drives the BPO solution was provided on paper by the corporate to the bank. The data therefore had to be manually inputted into the SWIFT Trade Services Utility (TSU) data matching software, forcing room for error and obvious inefficiencies.

In addition to avoiding data rekeying, digitisation – in particular the electronic bill of lading (eBL) – also solves another issue some corporates face when conducting BPO transactions regarding timing. In previous transactions, corporates had often been unsure of when to send the paper bill of lading. Should they do it after receipt of payment, risking the wrath of the buyer, or before and hope that there are no issues with the shipment?

To solve this problem essDOCS holds the eBL in escrow, visible to all parties but unable to be touched, or traded on, until the BPO transaction is complete. It is released when the TSU provides a positive match on the data – the fundamentals of a BPO. If there isn’t a match then the decision can go to the buyer who can override it and either release the document or send it back to the seller to make the necessary changes.

Nearly there?

According to SWIFT data, the number of banks registered to SWIFT TSU used to support the BPO is growing, with 19 banks live and a further 21 testing. Furthermore, 18 of the top 20 trade banks and 68% of the top 50 trade banks are now reachable on the TSU.

While acceptance of the BPO is growing, more is still needed for it to become established. Treasurers who see it as a good idea need to approach their banks now.

The way ahead

Whilst there is still lots of work to be done to create a digital trading ecosystem with the tools that exist today, there are some in the industry looking at what other tools and solutions can be developed to help companies digitise their flows.

Distributed ledger, the Internet of Things (IoT) and big data are all areas that banks and other players are currently experimenting with. Distributed ledger (often referred to as blockchain), out of all of these, perhaps provides the most potential. It has the capacity to digitally piece together all the disparate parts of a trade transaction and create a visible, secure and indelibly stamped chain of events that can go a long way to removing risk. The aforementioned Qingdao scandal, for instance, could not have occurred had a distributed ledger of transactions and documentation been used.

IoT is another, perhaps even more ambitious, area that the industry is beginning to explore. It may be that in the future every item contains a chip with its own IP address that allows all parties involved in a transaction to track the movement of goods from raw source to end-user, even automating the financial flow using blockchain.

None of this will be possible without the acceptance of digital documentation. With this final piece of the jigsaw, a corporate could theoretically marry the physical and financial flow and create a fully automated, end-to-end trade financial flow (including trade finance) that is triggered by pre-agreed events. This could give corporates not just certainty, control and visibility but reduce the overall cost of the deal because the majority of the risk is removed.

Trade outlook

Just as the Panama Canal is continuing to develop in line with advancements in technology, so is the broader trading landscape. That being said, full straight through processing in the trade space is far from a reality because despite massive technological advances, paper-based trade is still very much alive. For real progress to be made towards a digital world, an alignment of all parties in the trade world will be necessary.

It will not be easy but it surely is a matter of when it will happen, not if. As the ecosystem slowly transitions, it will pose numerous challenges and opportunities for treasurers. The trick is not only to stay abreast of what can be done to streamline trade flows today, but also be prepared for the potential changes in global trade which may happen in the years to come. After all, if the Panama Canal had not been updated it would have fast become a major trading problem.

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