Trade Finance Digitization Guide

Trade Finance Digital Transformation requires a new way of thinking and demands an urgent need of streamlining commercial supply chains and their inherent financial flows through digital processes which has been a constant over the past years.

I'm sure that many of trade finance professionals are feeling either lost or may be replaced with some robotic solution. That's why I have decided to write this article to help you understand the related Trade Finance Technologies, explain what's going on? where are we now? and how we can cope up with the change.

To help you acquire all the related knowledge and skills, below are the main sections in my view to keep you up to date:

Section A: Trade Finance Technologies

Trade finance involves various technologies to facilitate international trade transactions. Some of the technologies used or potentially applicable in trade finance include:

1. Optical Character Recognition (OCR): Optical character recognition or optical character reader is the electronic or mechanical conversion of images of typed, handwritten or printed text into machine-encoded text, whether from a scanned document, a photo of a document, a scene photo or from subtitle text superimposed on an image. As an example of best usage for this technology, a platform that enables users to scan trade finance documents in which all the data from the documents are being captured using OCR technology and mapped to their related data depositary or banking system. This technology has helped many organizations change the way they process documents.

1. Artificial Intelligence (AI): AI is the ability of machines to perform tasks that are typically associated with human intelligence, such as learning and problem-solving. The best example of this technology is ChatGPT by OpenAI . Specifically for trade finance this technology can be implemented to predict customers behaviours or trade transitions irregularities considering transactions history or set of available data. AI can analyse vast amounts of trade data to assess risk, predict market trends, and automate tasks like document verification, credit scoring, and fraud detection. It helped tech companies to develop Trade Finance platforms digitizing documents checking and compliance screening.

1. Machine Learning (ML): ML is a branch of artificial intelligence (AI) and computer science that focuses on the use of data and algorithms to imitate the way that humans learn, gradually improving its accuracy. Your mobile face recognition is best example to ML which is used by banks for digital onboarding. Machine learning algorithms can improve credit risk assessment by analysing historical data and providing more accurate risk profiles for businesses as well.

1. Distributed Ledger (DLT): DLT is a kind of distributed database that stores information in multiple locations. Instead of a single server hosting all the information, DLT uses geographically distributed servers known as nodes to store data in different places at the same time. Each node on the ledger processes and validates each piece of data, creating a record while establishing consensus on the validity of the dataset across all nodes. The main characteristics of distributed ledger technology also apply to blockchains. DLTs are?Immutable, Transparent, Append-only &?Decentralized. That said, while a blockchain network is fully decentralized, with no central authority, a DLT may have some central oversight. Both systems are popular in finance, owing to the need for the speed and transparency decentralized systems can provide.

1. Blockchain: a blockchain is a revolutionary form of distributed ledger technology (DLT), comprising a network of decentralized servers, or nodes. This network collectively records and verifies transactions, organizing them into blocks of data. The uniqueness of blockchain lies in its order linking of these blocks, creating a continuous chain. Each transaction and piece of data comes with a unique special cryptographic stamp, known as a hash, ensuring its integrity and security. The birth of blockchain dates back to January 2009 when the Bitcoin network pioneered this technology. Since then, the blockchain landscape has expanded, giving rise to numerous variations, each with its own capabilities and functions. These newer blockchains are not limited to cryptocurrency but encompass a broader spectrum of use cases, including supply chain management, healthcare records, and digital identity verification. It's worth noting that differentiating between DLT (Distributed Ledger Technology) and blockchain is important. DLT is broader in range of distributed ledger systems beyond blockchain, with unique features and applications. Understanding DLT vs. blockchain is key to understanding different types of crypto .In 2016, Barclays announced its cooperation with a fintech start-up named ‘Wave’ to initiate the supposed first global trade transaction with its blockchain-based letter of credit project using the Wave blockchain platform.In 2018, HSBC announced that it completed a trade finance transaction to issue an entirely digitalised letter of credit, using blockchain technology. On the same year Banco Bilbao Vizcaya Argentaria (BBVA), a Spanish bank, used blockchain technology as a substitute for traditional trade documents.In 2020, Standard Chartered and DBS Bank Ltd announced that they have kicked off a project to use a blockchain network to register trade finance transactions with the support of twelve other banks, including ABN Amro, ANZ, CIMB, Deutsche Bank, ICICI, Lloyds, Maybank, Natixis, OCBC, Rabobank, SMBC, and UOB.

1. Smart Contracts: smart contracts can be thought of as software programs on a blockchain. They automatically run when their conditions are met. They can be used by blockchain projects to automate tasks such as agreements and the transfer of assets without the need for a trusted third party allowing the execution and automation of contract terms. Smart contracts, built on blockchain or other platforms, can automate and enforce contract terms, including payment obligations, reducing the need for intermediaries.

1. Internet of Things (IoT): IoT is a network of interrelated devices that connect and exchange data with other IoT devices and the cloud. IoT devices can be used to monitor the condition and location of goods during shipment, reducing the risk of damage or theft. Some platforms use this technology in their Supply Chain Visibility solutions providing real-time visibility into the movement of goods in the supply chain, reducing delays and disruptions.

1. API Integration: API stands for Application Programming Interface, sharing data between applications, systems, and devices. This happens through a request and response cycle. A user initiates a request for data by interacting with an application. This technology enable secure and efficient data sharing and processing among trade finance participants.Integrating APIs from financial institutions and trade partners allows for seamless data sharing and transaction processing. One great example is ''API standards for guarantees and standby letters of credit '', a joint effort by ICC and swift Working Group to standardise the APIs and thus digitize trade finance.

1. Cybersecurity Solutions: Cybersecurity is the practice of defending computers, servers, mobile devices, electronic systems, networks, and data from malicious attacks. It's also known as information technology security or electronic information security. Robust cybersecurity measures are essential to protect sensitive trade finance data and prevent cyberattacks.

The adoption of these technologies can enhance the efficiency, security, and transparency of trade finance processes, benefiting businesses engaged in international trade. However, the extent of their use may vary depending on regulatory environments, industry practices, and business needs.

As an example of one stop solution, Cleareye.ai an advanced Artificial Intelligence & Machine Learning platform helped users with a platform "ClearTrade " that automatically capture date from scanned documents using OCR and automatically check documents, do compliance screening and analyse the data using ML & AI.

Section B: Rules, publications and Initiatives

Here you can go through all the related rules, publications or initiatives that has been issued to advance the digitalisation of trade finance practices.

1. Uniform Rules for Digital Trade Transactions (URDTT), The Uniform Rules for Digital Trade Transactions (URDTT) Version 1.0 are the result of the mandate given by the ICC Banking Commission to develop a high-level structure outlining rules, obligations, and standards for the digitalisation of trade transactions. Click here for free e-copy of URDTT.

1. ICC Uniform Customs and Practices for Documentary Credits for Electronic Presentation (eUCP VERSION 2.1), The eUCP is a supplement and digital companion to the UCP 600 in purely digital form, allowing a quicker and safer way for financing trade. Click here to get free e-copy of eUCP.

1. ICC Uniform Rules for Collections – Supplement for Electronic Presentation (eURC Version 1.1), The ICC Banking Commission provided a press release announcing the launch of a Working Group to anticipate and accompany the digitalisation of trade finance. One core activity was to evaluate existing ICC rules in order to assess e-compatibility and ensure they are ‘e-compliant. Click here to get free e-copy of eURC.

1. The ICC Digital Standards Initiative (DSI) aims to accelerate the development of a globally harmonized, digitized trade environment, as a key enabler of dynamic, sustainable, inclusive growth.?We engage the public sector to progress regulatory and institutional reform, and mobilize the private sector on adoption, implementation and capacity building. Click here to know more about DSI in brief or visit ICC Digital Standards Initiative website: https://www.dsi.iccwbo.org/

Seven Documents already have standards defining unique data points among the documents and same is published under DSI website.        

1. Standards Toolkit for Cross-border Paperless Trade provides an overview of existing standards to help drive adoption, identify potential gaps and promote interoperability. Its objective is to equip every supply chain participant, both public and private, with some of the most notable and widely used standards to help push trade digitalisation to the next level. Click here to get your free copy of the Standards Toolkit.

1. Electronic Trade Documents Act 2023, The Act gives effect to the recommendations made by the Law Commission of England and Wales in its report on Electronic Trade Documents, published on 16 March 2022.1 The Act is concerned with certain types of documents used in trade and trade finance whose functionality depends on their being capable of being (physically) possessed. The Act gives effect to the recommendation of the Law Commission for England and Wales to allow for the legal recognition of such documents in electronic form. Click here to read more about Electronic Trade Documents Act 2023.

1. Electronic Trade Documents Act 2023 - EXPLANATORY NOTES, These Explanatory Notes relate to the Electronic Trade Documents Act 2023 which received Royal Assent on 20 July 2023 (c. 38).These Explanatory Notes have been developed by the Department for Science, Innovation and Technology (DSIT) in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament. These Explanatory Notes explain what each part of the Act will mean in practice; provide background information on the development of policy; and provide additional information on how the Act will affect existing legislation in this area. These Explanatory Notes might best be read alongside the Act. They are not, and are not intended to be, a comprehensive description of the Act. Click here to get copy of the Explanatory Notes.
2. MLETR, The United Nations Commission on International Trade Law’s (UNCITRAL ) Model Law on Electronic Transferable Records (MLETR) creates an enabling legal environment for paperless trade. It provides an international framework to align national laws and enable the legal use of electronic documents of title (electronic transferable records or “ETRs”) both domestically and across borders.you can check the MLETR progress tracker here .

Section C: Certificate in Digital Trade Strategy (CDTS)

The objective of this course is to provide learners with a deep, macro level understanding of the various components required to digitise trade and supply chain processes at scale. The certificate is split into 5 modules, each with 4-6 lessons and a final exam. The entire certificate will take 7 hours to complete.

Its a great Initiative by ICC In partnership with DSI.

Type: Self-paced online course

Cost: $499/- (Discount is applicable for ICC Academy members).

Click here to know more and apply for the certificate.