Trade & Supply Chain

How ABB Group digitised its export trade finance function

Published: May 2024

An export trade finance solution that centralises an element of ABB Group’s trade finance operation by introducing a new wave of digitisation is proving transformative. Digitising trade finance is enduringly difficult, but Treasury Today interviewees say evolution not revolution will gradually end manual processes.

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Digitising trade finance is notoriously difficult because of the lack of harmonisation, and technology gaps. But Felix Meyer and Petra Hunjet-Moison at ABB Limited, the corporate treasury arm of Switzerland’s industrial conglomerate ABB Group, say they have made a leap forward in export trade digitisation at the company following a process-led technology implementation.

Meyer, who leads Treasury Technology and Hunjet Moison, Global Head, Export and Trade Finance, tell Treasury Today how a new export trade finance solution that centralises an element of ABB’s trade finance operation and introduces a new wave of digitisation in hitherto manual processes is proving transformative.

Export trade finance at ABB spans typical trade finance activities, concentrated mainly on guarantees and letters of credit alongside managing various accounts receivable and supply chain finance programmes.

“In addition, we arrange financing with our banks so that our customers can buy ABB products,” explains Hunjet-Moison. Overseeing thousands of performance guarantees, often with unique characteristics, is perhaps the most challenging aspect. Issued by banks and insurance companies (in markets like the US) these guarantees promise that ABB Group will fulfil its underlying contract to customers, acting like a traditional warranty on any purchase.

Meyer and Hunjet Moison’s treasury overhaul has focused in this corner of export and trade finance particularly. ABB has just finished rolling out new processes and architecture to support how it issues performance guarantees, digitising and standardising these trade instruments. The new processes digitise all requests for performance guarantees automatically via one system with full visibility at a central level.

To date, workflows and reports from some 80 countries have been onboarded and around 27,000 guarantees have been migrated in seven waves from more than 100 banks and insurance companies.

Under the new system, a central treasury team now requests that banks and insurance companies which issue guarantees on its behalf use either Swift or a web enabled interface. “Our main goal was to automate and use Swift to automatically process the guarantees as the standard,” explains Hunjet-Moison, who says that the process had to use two channels so it could cater to guarantee providers unable to tap into Swift.

“Insurance companies issuing performance guarantees and some of the banks in remote locations are not on Swift,” she explains. “We needed an alternative whereby this cohort could log onto our system and take care of all the correspondence without a paper trail. We wanted to get rid of manual, fragmented processes.”

Standardising Swift processes for trade finance with existing Swift standards was a particularly knotty process. “Swift and market participants have traditionally left discussions on trade finance message standardisation off to the side, favouring instead standardisation strides in the payment sphere through its ISO 20022 migration,” Meyer states. “As a result, every bank has quite a bit of leverage regarding how the contents of their message are organised. This has pushed the burden to the vendor and corporate to ensure proper message preparation and interpretation.”

The ABB team had to analyse these specifications per bank in a time-pressured process that also involved negotiating a raft of Swift agreements.

“We discovered that the negotiation process for SCORE agreements – even as addendums to existing payment agreements – was quite time and resource intensive. On the implementation side, although Swift MT 798 format and the larger MT 7xx message family provide a multi-bank message structure for import/export guarantees and standby letters of credit, the format leaves ample room for flexibility and bank-specific specifications,” says Meyer who chairs Swift Corporate Group Switzerland (SCG-CH), which lobbies the payments giant on behalf of treasury teams for the country’s largest corporates.

The next challenge came in moving the data from the legacy solution, including transformation and data cleansing elements. The documentation-heavy nature of trade finance contracts also required that attachments were correctly linked to the underlying guarantee or surety.

“We had 27,000 guarantees which equates to tons of documents to move over. It’s difficult to get some messages imported into our system but we did well. We had under 4% of failed records!” said Hunjet-Moison. She attributes much of the success to clever IT colleagues running a BOT to ensure speed, precision and repeatability of the migration and extensive clean-up activities prior to migration.

The overhaul was completed in a tight timeline that included extensive testing for the trade instruments with all the banking counterparts. This involved organising the transfer of credit lines between legacy and new systems and enabling implementation of standardised approval levels across all markets, like India, where the team had multiple approval levels.

“Now, all ABB internal approval levels for guarantees, no matter what country, are the same,” she says. “Local guarantee and letters of credit systems used in some countries have been discontinued.” The transformation was carried out by around 15 staff with different business, technical and legal skills.

ABB’s overhaul began in 2021 when it issued an RFP to explore the best providers in the market. In the end, Meyer and the team decided to procure an off-the-shelf solution that enables small, minimal customisations.

“Moving to a software-as-a-service (SaaS) solution offered many advantages from a technology and hosting perspective. Despite pushing us to move to a more standardised solution with limited flexibility, the supplier agreed to make some customisations that benefitted the larger user base” he said. “We hope to see a return on investment in two years.”

ABB is already planning how to continue its digitisation journey, building on both its new processes and technology. One ongoing initiative targets more centralisation of operations to better support customers, ultimately boosting and facilitating sales. For example, technology driven initiatives include tighter integration with TMS and accounting systems for the purpose of payment automation for fees, still a highly manual process.

Evolution not revolution

Trade finance may oil the wheels of the modern economy, but as the world digitises, it remains stubbornly rooted in paper processes. Many of the business documents underscoring trade which create trust between a buyer and seller, ensuring payment or delivery of goods, are still written on paper.

Like the fact only an estimated 1% of the four trillion paper bills of lading – just one of many trade finance documents, that details goods in transit – exchanged every year are digitised. Meanwhile, the use of paper by stakeholders in the chain from banks, insurance companies to customs and buyers and sellers, requires huge resources and expense, complexity and processing time.

Still, real progress digitising payments and receivables is evident, and cast progress through the lens of evolution not revolution, and change is happening.

A lack of available technology is not the problem, explains Marie-Laure Gastellu, Global Head of Trade Finance at Société Générale (SocGen). “The availability of standards and legal frameworks must be accelerated,” she says. Broadly, standards refer to the ability of trading partners and other participants in the value chain to speak the same language and match information on their different platforms. And standardisation – the hot topics amongst trade bodies – is difficult to achieve at scale given trade finance involves so many different actors using a variety of platforms.

But standards are being developed. Like the International Chambers of Commerce (ICC), publishing rules that stakeholders must comply with if they want to exchange e-documents. Other signs of uniformity have come from Swift which has published a strategy in support for global trade that puts standards at the forefront. “The ecosystem is making significant progress. There are so many different players across the trade value chain and so many documents in a letter of credit, it will take time to achieve digitalisation at scale, but I am convinced that we are on an accelerated path,” she says.

Important milestones include the UK becoming the first G7 country to pass the Electronic Trade Documents Act (ETDA), which enables trade documents to be held and transacted in electronic format. “ETDA was an example of English law leading the way on the digitisation of trade,” says Geoffrey Wynne, Head of Sullivan and Worcester’s Trade & Export Finance Group. Similar iterations are now under review in France and will be transposed into French law. Germany is also looking at it.

Progress is also being made around electronic bills of lading. Shipping companies, which operate in a concentrated market where around ten companies control nearly all trade flows, have pledged to digitise bills of lading by 2030. Elsewhere, many of the fields in a typical Letter of Credit are now electronic in some shape or form. “We are quite a long way down the road,” observes Wynne.

Elsewhere, Letters of Credit are now underscored by “soft rules” drawn up by the ICC and commonly accepted by the entire trade finance industry and the same for everyone, continues Gastellu. “At the end of the day, if we can achieve a legal framework, technology adoption and capacity to develop shared standards, that’s how we will achieve digitisation at scale for the benefit of the entire ecosystem, starting with SMEs. We need to have the three bricks in place: a legal framework, standards and technology.”

One hurdle to progress is the cost of integrating digital processes. Large banks or trading companies can afford to invest in the technology, but smaller companies or sole proprietors can’t. “Entry costs are holding back digitisation,” says Wynne, mindful of the irony that investment in digitisation will lower the cost of trade and doing business from compliance checks to back office paper processes. Gastellu says new technology at SocGen is already cutting costs like automating flows between corporate clients and the bank. “Receiving the information digitally creates lots of efficiencies.”

Digitisation will continue, and the more it is talked about it, the more it will happen. But one key bottleneck remains. Buyers still want to physically check their goods – and nothing quite transfers ownership like a piece of paper.

“Ninety percent of the tasks being done by machines is fine, but when the machine says it looks good to me, I will still want to have one more look. I’m not saying we are not progressing. I’m just saying that full automation won’t happen. We are not going to part with the goods until we’ve had a final check,” concludes Wynne.

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