“Despite much talk of AI and blockchain, many people still argue that it is not possible to have paper-free trade documentation. Are they right?”
For hundreds of years, trade finance has been essential for both domestic and cross-border trade flows. Currently, these transactions are responsible for a significant portion of global trade – 80-90% of global trade relies on some type of trade finance. In essence, every time goods or services are exchanged and sold across the border, there is some form of trade finance involved.
One of the critical problems in trade finance is the sheer volume of paper-based documents on which the information flow is based on. Many forms of trade finance such as letters of credit have not gone paperless and still rely on semi-automated and antiquated processes that are based around the physicality of the written word. Besides, these paper-based documents are prone to fraud because of the number of parties involved and the complexity in trade finance transactions.
More recently, service providers, financial institutions and their corporate clients are seeking to streamline processes, reduce transaction time and cost, as well as mitigate fraud risk by replacing the flow of paper with digital data flows and leveraging various technologies. Digitisation is driving down the cost of trade finance transactions and increasing the transparency for all parties involved. This can result in reduced credit risk, enhanced cash flow forecasting, and better allocation of working capital. By providing a global electronic counterpart made up of many interconnecting and intelligent networks, the trade finance market can become digital. By doing so, digital trade finance has the potential to be offered by a larger funding pool and to a much broader market, including SMEs.
However, the shift to digital has been very slow. The reason for the limited adoption is evident: trade finance transactions involve multiple parties, trading parties, financial institutions, credit insurers, shipping companies, customs and other services providers, all located in various jurisdictions and all of whom must adopt digital trade finance solutions.
The good news is that with the introduction of new technology such as blockchain and APIs, we can now more easily link digital processes across the different parties involved in trade. Applying new technologies in trade finance is not new, however, the pace of innovation in this area during the last year is something which has never been seen before.
Technologies such as blockchain have the ability to streamline the trade finance process and increase the speed and adoption of digitising trade finance. With blockchain, trade participants can create a digital ledger of transactions that is distributed amongst a digital network. On the network, each permissioned member can securely amend the digital ledger. The blockchain embodies all the necessary information in one digital document, which is updated and viewable by all participants on the network almost instantly.
Today, blockchain is already being used to simplify trade practices and replace manual and paper-intensive processes in trade finance. One example is Marco Polo, one of the largest trade finance networks with over 30 financial institutions, and tested by over 20 leading corporates including Daimler and MAN. The global network focuses on open account financing offered through a distributed trade finance platform. By connecting a critical mass of numerous parties in the trade ecosystem, it gives the much needed digitisation of trade finance a real possibility. In the coming years, we will see how the journey towards machine-to-machine trade finance is evolving and how many corporates, banks and third-party service providers are catching up and moving to mass adoption in one of the largest global financial markets.
Many have blamed paper for the time-consuming and costly nature of trade. With such a bad reputation, it is no surprise that many hope new technologies will liberate us from the constraints of paper. Yet, the prospect of a fully paperless trade value chain within the next five years seems unrealistic.
Though there have been commendable initiatives designed to encourage standardisation – the International Chamber of Commerce and the Bankers Association for Finance and Trade are notable examples – we have a long way to go. Our industry involves many stakeholders who share few common standards, therefore paper is often unavoidable. Between the placing of an order and its delivery, manufacturers, shipping companies, port authorities and banks must reconcile the information they share in their own standards, sometimes varying from country to country. Despite its limitations, paper continues to help enable this.
One must also consider the problem of admissibility. The ambition to have paper-free trade can already be met with today’s – and even yesterday’s – technology. We could just stop printing the required forms and share them digitally, something for which AI and blockchain are not even necessary. But the lack of shared admissibility rules within our industry makes this impossible.
Reducing the use of paper should not be pursued as an end in itself. Limiting paper use, and, where necessary, making use of AI and blockchain, is only worth it if it makes trade and supply chain processes more time and cost efficient. Paper should be regarded as what it is: a vehicle for information. The ability to decipher and share this information quickly and to a high standard is what differentiates best in class service from time-consuming, inefficient processes. It allows payments to be made quickly and prevents ships being stuck at port.
Societe Generale ensures efficiency in this area through membership of joint initiatives like we.trade, the first blockchain-based trade finance platform live in production. We also continue to develop AI-based tools that use optical recognition and machine learning to automate compliance and documents checks. In these technologies, it is not required to make paper disappear. However, where paper is used, it is used more efficiently, and human intervention is devoted to added-value interactions.
Paper will still have a future in the trade industry for years to come, despite much talk of AI and blockchain. As a very first step, these technologies are used to improve our operational efficiency to the benefit of our clients, in terms of speed, cost efficiency and security. And they are also the basis for a paper free trade industry one day.
The concept of ‘going paperless’ goes back at least 30 years to early iterations of the internet and desktop computing. Given the enormous technological leaps we have made during that time, I find it incredible that we are still having this debate at all.
Technologies like blockchain and artificial intelligence have undoubted potential to revolutionise key aspects of the treasury function, from greater efficiencies, through to enhanced KYC and innovative new financing options. To begin any discussion at this point, however, is to ignore a fundamental step in the journey, without which any benefits of emerging technologies are entirely irrelevant. So let’s walk before we run.
The way businesses trade together has not really evolved much in the past 40 years. Digitisation within large enterprises is actually at a pretty advanced stage, and yet globally just 8% of trade transactions are digital.
The missing piece in the puzzle is digitisation between business partners across the broader supply chain ecosystem. You can have the greatest level of digitisation internally, but if the partners you are dealing with – banks, suppliers, buyers, logistics handlers – are not digital, then the whole process reverts to the lowest common denominator.
Take a step back and compare this to the way you live your life outside of work. How many of us still receive a paper copy of our bank statement every month? How much more convenient is it to download a mobile copy of our boarding pass when we arrive at an airport, as opposed to having to remember to print these documents off at home?
Why do our expectations shift as soon as we go to work?
Firstly, most business software is simply not up to the job. Rather than making it easy for businesses to connect with one another, most business software is designed in islands. True digitisation is just not possible within this framework. The best you can hope for is the equivalent of a telephone that only makes calls to people who use the same telco provider.
Secondly, your business might be committed to digitising its operations and eliminating paper-heavy processes, but if the external partners you deal with are not on board, the system begins to break down. Most supplier onboarding initiatives involve a lengthy to-do list with no real upside for the supplier. That feels like a pretty one-sided deal, and no great motivator.
So what’s the answer? The ubiquity of mobile, internet and social media mean that our personal lives are increasingly governed by a series of digital relationships. If businesses are to get rid of paper then the industry would do well to take inspiration from sites like LinkedIn, which foster a digitally connective ecosystem that makes it very easy to connect and share information.
Consumer technology also teaches us that if you want to influence behaviours, then carrots are far more effective than sticks. If your objective is to eliminate paper-heavy processes, you need to incentivise businesses to make the change as well.
To come back to the original question, technologies like blockchain and AI offer us a glimpse of an exciting future. They also open up the door for a range of innovations that will help suppliers see immediate benefits from going digital, from faster approvals through to enhanced supply chain financing options.
But before we can really say goodbye to the past, we need to get the basics right. The software exists to achieve full digitisation at scale, but the benefits this technology provides have always focused on the buyer. New technology is one thing, but if paperless is ever going to become the norm, then new perspectives and new business models will be required that offer benefits to the whole ecosystem of digitised business relationships.
Any outsider looking at the paper-intensive world of international trade must struggle to make sense of it. Despite the digital revolution in almost all other walks of life, paper documents continue to be physically signed, couriered across the globe and presented for payment or delivery of goods, much in the same way as they were centuries ago.
Yet these continuing practices belie the huge amounts of time and cost that have already been invested in seeking to update these ancient models for use in a 21st century digital environment.
In truth, paper-free trade must be possible and it must happen. The obvious benefits demand it: reductions in the time and cost of compliance checks and physically preparing and moving paper (not to mention the additional costs and delays that arise when the paper fails to travel quickly enough), the creation of visible and immutable records and the potential for increased protection against fraud and other crime.
The more relevant question is how quickly will it happen? And the answer depends in no small part on how many laws will have to change globally to make it work.
The fact that international trade is not already paperless is largely because, after centuries of successful and consistent practice:
The customary paper instruments that underpin trade (such as bills of lading, letters of credit and bills of exchange) have established a special legal status which is derived largely from laws requiring physical actions (such as physical (ink) signatures and physical possession of paper); and
The legal treatment of these instruments is to a significant extent almost universally aligned, resulting in broadly equal treatment (and resulting confidence) across different trading nations.
The problem for paperless trade is that these existing instruments and laws essentially pre-date the electronic world, and the established (paper-driven) rules do not always easily integrate with that world.
The challenge to going paper-free is twofold:
To ensure the beneficial effects of these paper instruments (such as ease to transfer and pledge) are not lost when presented electronically.
To create consistency between laws and systems across borders.
To date, efforts have brought some successes but not universal solutions. For example, various domestic lawmakers and online platforms have sought to afford electronic bills of lading the same legal status as paper bills, such as replicating contractually the requirements for a physical possessory pledge or transfer. Despite such progress, however, many remain legally untested and often successfully operate without paper only within the jurisdiction of the relevant laws or amongst the parties which have signed up to the conditions of the applicable platform(s).
Similarly, legal requirements for instruments like bills of exchange or promissory notes to be “in writing” and “signed” have led a number of legislators to recognise that electronic documents can meet these criteria. But again, for paperless versions to become the norm, the majority of major trading countries will need to share a mutual recognition and acceptance of e-documents and e-signatures (and, looking further ahead, smart contracts and other technological advancements). This will most likely happen eventually, but it is unlikely to be immediate.
Parties will only universally adopt paperless trade once it is tested in courts and has had its intended effect upheld. Until then, parties will live with the practices that have stood the tests of time and legal scrutiny. But as technology continues to advance, the hurdles to paperless trade appear increasingly smaller.
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