Trade digitalisation: The stage is set

The challenges facing the digitalisation of trade are well documented. But, with new legislation in place and a fundamental shift in the approach to technology, is the industry finally ready for widespread digital transformation? Duncan Lodge, global head of supply chain finance (SCF) at Bank of America, examines the latest developments and how the industry is gearing up for the new era of trade.

Trade finance has reached an inflection point. The various elements required to help facilitate digital trade are finally aligned: The relevant legislations are being passed, an increasing amount of market guidance from trade bodies is being published and there is a fresh approach to the technology in the works.

The COVID-19 crisis, persistent high interest rates, the continued push for better corporate sustainability and calls to improve data visibility have exposed a global trade environment that is ready for an all-new digital system; one that can function effectively in today’s — and tomorrow’s — world. Against this backdrop, Bank of America has positioned itself as one of the leading actors in the digital trade finance story, helping to shape the market as it adapts.

Within traditional trade, one of the key components required for trade digitalisation is new legislation. Governments have the ability to create the conditions to enable digitalisation and, in the UK, they have managed exactly that. The UK’s pioneering Electronic Trade Documents Act (ETDA) — live as of September 2023 — gives paperless versions of certain documents, such as bills of lading, equal legal standing to their physical counterparts.

Helping to enable the ETDA is the Model Law on Electronic Transferable Records (MLETR). The MLETR acts as a prototype for law reform at a national level and has already been adopted by countries such as Singapore, Bahrain and, most recently, France. It is the ETDA, however, that is the major breakthrough. With up to 80% of global trade governed by English law, the passing of the ETDA unlocks widespread opportunities for digitalisation.

In conjunction with the rule of law, it is important to have a rulebook that enables companies to transact with confidence electronically. For example, the ICC’s Uniform Rules for Digital Trade Transactions (URDTT) provides a framework to outline the obligations, rules and standards for the digitalisation of trade transactions between buyer and supplier. Rulebooks are playing a pivotal role in helping to drive the commercialisation and adoption of digitalisation even further forward.

These developments have come at an opportune time. For starters, the pandemic laid bare the challenges and risks of paper-heavy processes, thereby sparking increased impetus across the trade industry to implement more practical, efficient solutions. Adding fuel to the fire, the ongoing high interest rate environment is putting a strain on working capital and bringing businesses’ cost considerations even further to the fore. Automation can significantly reduce costs for companies, so going digital is becoming an ever-more attractive option.

All that being said, according to ICC estimates, some 80% of global merchandise trade occurs without the use of traditional trade instruments such as letters of credit and documentary collections — instead they happen under so-called ‘open account trade’. With open account trade, an exporter sends their goods and submits an invoice directly to the buyer, with logistics documents usually travelling via a logistics service provider or freight forwarder. Before buyers pay an invoice, they will invariably undertake some sort of approval process, be it simple purchase order to invoice match, or a more detailed match that may include logistics documents. These approval processes can be very manual — particularly when discrepancies arise.

Many companies either outsource this process or use simple matching software — but this only goes so far, and does not eradicate the paper and manual processes. In most cases, banks won’t be involved in open account trade until there is an invoice that needs financing (for example, through supply chain finance), but a significant opportunity exists to digitalise and automate processes for corporates even where traditional trade instruments are not being used.

At the same time, sustainability continues to be high on the corporate agenda, and companies are looking for ways to reduce the carbon emissions associated with moving billions of paper documents around the globe.

Another evolving client need is that of enhanced data transparency across their supply chains to help manage supply chain efficiency and resiliency, particularly in light of the myriad supply chain disruptions witnessed over the last four to five years. Digital trade undoubtedly provides far superior data availability, data visibility and richer insights than are possible through paper-based trade, where it is very challenging to extract real-time data and aggregate it.

By digitalising processes and connecting different information sources, a company can access and analyse standardised data at its fingertips. As such, identifying potential red flags and pinpointing sources of risk within a supply chain becomes far easier. For example, insights can be gleaned into overall supplier performance, as well as more specific trends, such as recurring late shipments.

Yet, while digitalisation certainly brings significant benefits in terms of data visibility, on the flip side, data security concerns persist for some businesses. Data breaches can present a threat to both customer privacy and company balance sheets — often with a devastating effect. And with high-profile hacks and security breaches covered in the news, it can perhaps be tempting to think that physical documents provide a safer alternative to digitalisation — after all, you can’t hack a piece of paper. But with paper documents able to be easily copied, forged, altered or lost, paper remains far more vulnerable to fraud than digital documents. 

With trade digitalisation edging closer to reality, having robust systems in place to support it is paramount. Over the past few years, various consortia have attempted to implement a single technology platform to enable digital trade. But these initiatives have seen little in the way of longevity. The lack of success indicates that creating an all-encompassing digital trade platform is an unrealistic and impractical aspiration. The sheer complexity of trade transactions (with all its myriad counterparties, document types, geographies and data elements) necessitates a different approach.

 Key to realising an optimised, streamlined digital trade landscape is bringing together the digital ecosystem via integration — in other words connecting different, specialised platforms to create an ecosystem that captures all the different elements that make up a global trade transaction.

 Many individual platforms already exist — be they proprietary bank systems or those created by leading technology companies. By working collaboratively, it is possible for banks and fintechs to stitch together these ready-built, core component platforms using APIs and cloud technology. This enables much faster time to market than creating comprehensive new systems from scratch.

Moreover, by enabling companies to access such ecosystems via their own platforms, such as their ERP, financial institutions can deliver an optimised, customised digital trade experience to clients that does not require them to log onto multiple new platforms. 

Comprehensive trade digitalisation can only happen once common approaches have been established to help connect technology platforms together and optimise secure data sharing between trusted parties. Providing the most effective digital trade experience to clients therefore requires banks to think about their platforms from more of an “industry-wide” perspective.

Bank of America is a key industry player leading the switch to digital, and is embracing this broader way of thinking. Its Open Account Automation solution, for example, speeds up invoice approvals and payments by bringing together existing data from the supply chain ecosystem for users of the bank’s CashPro digital banking platform. It is the streamlining of the data collection — facilitated through APIs that pull together the necessary information sitting within the platforms of our clients’ logistics providers and even their suppliers’ ERPs — that enables the acceleration and automation of invoice approval. In turn, this not only reduces costs for customers, but also means that invoices are available earlier for supply chain financing. Moreover, clients can integrate these rich interfaces into their own ERPs, and benefit from real-time visibility into their supply chain operations.

Bank of America has successfully stripped back a process that saw around four million pieces of paper a year arriving at its counters, by implementing a digital solution that reduces the time taken for approval and payment, from often days and weeks to a matter of minutes. In fact, it has seen clients being able to migrate from a 100%, paper-based process to 100% digital one as a result.

The benefits of digital are clear. And with the combination of new legislation, published industry guidance and growing client demand for efficiency, the pieces of the digitalisation jigsaw are coming together. It is up to banks to implement the infrastructure that can support the digital landscape for the benefit of clients.  

This article was recently published in Global Trade Review