Insight & Analysis

Will trade finance get the message?

Published: Nov 2023

Of the many potential solutions to improving the provision of trade finance, increased use of the ISO 20022 data standard for financial information is perhaps one of the most under-reported.

Trade charts and graph graphics overlapping stack coins increasing in size

According to the Asian Development Bank’s 2023 trade finance gaps, growth and jobs survey, the shortfall between available and required trade finance rose from $1.7trn in 2020 to $2.5trn last year.

It is unrealistic to expect adoption of ISO 20022 alone to close this gap when so many other factors are at play. However, the ability to transmit data with a higher degree of accuracy is crucial where errors or missing information in financial messages can lead to delayed or disputed payments.

The enhanced data standard will improve remittance data and invoice finance transactions suggests Oonagh McGrane, Director FI Commercialisation, Client Products at Lloyds Bank.

“The improvements in remittance data is predominately information on payment flow including – but not limited to – invoice number, purchase order and bills of lading,” she says. “These will all be available in the payment messages mandated in the current CBPR+ migration for initiation and in balance and transaction reporting.”

For invoice finance transactions, there are ISO 20022 standards developed for requests and cancellations.

ISO 20022 enables greater trade digitisation and automation in both the accounts payable and accounts receivable reconciliation process with the use of structured remittance information allowing corporates to batch several invoices into a single payment for the same supplier and still provide the required information for an automated reconciliation process at the supplier’s end.

It also enables trade finance solutions such as letters of credit and guarantee to be processed faster, while reducing the cost of compliance and the need to handle physical documents.

“ISO 20022 is just one of many developments that can improve the provision of supply chain finance,” says Tesy Mathew, Group Head of Cash Product Management, Global Transaction Services at DBS Bank. “For example, we collaborate with large anchor platform partners and leverage APIs to embed trade finance within their ecosystems and to tap into their supply chain data.”

This has enabled the bank to democratise financing programmes at scale with alternative trade lending approaches, where it provides corporates with one-click, same day disbursement of financing.

“In addition, we launched a digital portal that cut the time required to onboard a supplier under the supplier finance programme from two weeks to 30 minutes,” adds Mathew.

HSBC also sees standardisation of information adding value to invoice financing and payments initiation observes Mark Evans, the bank’s Head of Cross-Border and Cross Currency Payments.

Dedicated extended remittance fields mean more details can be provided on the multiple invoices being paid in a single transaction, while providing details on who the payment is being paid ‘on behalf of’ helps reconciliation at the receiver’s end as they are able to clearly identify and match it against the anticipated funds from different suppliers.

“With better structure it becomes easier for buyers to standardise supply chain finance programmes across multiple entities and different geographies,” says Evans. “This allows us to increase payment transparency by capturing richer information about sender, receiver and agent and ensure the downstream payment process at our end is straight through.”

Of course, the realisation of this is dependent on the adoption and maturity of the new standards by all parties in the chain.

“The real advantage of ISO 20022 will come with adoption and usage and in order for us to get there we need the payments industry to embrace the standard,” says Ciaran Byrne, Global Head of Clearing Transformation at J.P. Morgan Payments. “As an industry we are currently seeing around 15% of payments volume globally in the ISO 20022 format.”

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