Digitalization of trade finance

Digitalization can help address structural issues that increase the cost of trade and trade finance such as paper-based process inefficiency, costly regulatory compliance for anti-money laundering/ know-your-customer, and?high-risk premiums on small borrowers. The use of digital technology in trade and trade finance has been constrained by a lack of legal frameworks, limited technical interoperability, and?a digital divide.

Now Swift in collaboration with BNY Mellon, Deutsche bank and four electronic Bills of Lading platforms, successfully tested an interoperability solution capable of enabling the widespread use of electronic documents that are critical digitize trade. The digitizing global trade will reduce the cost and improving transparency to mitigate fraud. It will also reduce the delays and inefficiency in processing of paper-based Bills of lading.?

Compared to paper form of bills of lading, the electronic bills of lading reduces the risk of document loss, fraud and speed up the transfer of documents. McKinsey predicts that Digitalisation could save the industry USD 6.5 billion and enable USD 40 Billion in global trade by 2030.

the current lack of technical interoperability between existing eBL platforms presents a significant obstacle to wholesale adoption.??The nine eBL providers authorised by the International Group of Protection & Indemnity Clubs (IGP&I) each have their own rules and customer bases, meaning that customers of one eBL system can’t take part in transactions handled by another eBL system. Instead, financial institutions, corporates, and others involved in each trade transaction, need to connect to multiple systems – an approach which is both inefficient and costly.

Regulatory compliance requirements. Compliance with anti-money laundering and know-your-customer regulations is an intensive process for both banks and firms. A majority of banks identify these requirements as one of the largest challenges for the industry to grow, although they are necessary to ensure sound cross-border transactions. Also, the new Basel III standards require banks to have more regulatory capital and liquidity.

Three global initiatives are worth receiving support. First, the Digital Standards for Trade initiative aims to develop digital standards so different systems can be interoperable in the trade ecosystem. Next, the Global Legal Entity Identifier system can provide a global harmonized identity for all companies, large and small. It promotes transparency and security by enabling firms to have a unique identity. Thirdly, there has been little recognition or adoption of a legal framework nationally. E-title documents, e-promissory notes, and e-bills of lading are not yet recognized as legally equivalent to paper-based trade documents. Therefore, model laws created by the United Nations Commission on International Trade Law can help implement legislation toward paperless trade.

In parallel, national government and regional institutions should increase their support for trade finance, for example, through export credit agencies and trade finance programs. Knowledge gaps should be reduced since small and medium-sized enterprises often lack awareness of trade finance products and public assistance programs.

n 2022, Swift ?started working with their ?FIT Alliance partners and eBL platform providers to develop an API-based eBL interoperability model. Under this approach, firms could leverage a single connection to Swift in order to interact with trade transactions carried out using multiple different eBL platforms.?

Then, earlier in 2023, Swift ?ran a Proof of Concept (PoC) to test how an interoperability solution could work in practice. In its first phase, swift ?collaborated with eBL platforms edoxOnline and CargoX to test the use of a single ubiquitous API contract to open up a secure channel with Swift.??

Swift ?then expanded the PoC to include two additional eBL platform providers – TradeGo and WaveBL – as well as BNY Mellon and Deutsche Bank. Using the same API layer, participants were able to reproduce the end-to-end flow transfer process of an eBL in a simulated trade transaction.

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The PoC successfully demonstrated that financial institutions could exchange eBL across multiple trade platforms using their existing Swift connectivity – instead of having to connect to each platform individually. By reusing their connection to Swift, institutions wouldn’t need to develop custom point-to-point integrations with multiple, fragile, and complex dependencies.

Soon, we can expect revolution in trade fiancé front and the legacy letter of credit may vanish.? This give an opportunity for you to relearn trade finance again.

Source https://www.swift.com/news-events/news/swift-enables-global-trade-interoperability-successful-trials?utm_campaign=Innovation&utm_content=Oktopost-linkedin&utm_medium=organic_social&utm_source=linkedin

Source https://www.acuitykp.com/blog/the-digital-evolution-of-global-trade-finance/

https://blogs.adb.org/blog/more-just-money-digital-technologies-can-help-narrow-trade-finance-gap