There is a lot of movement in the Trade Finance space around moving the business into the digital era. This blog is an overview of the most significant moving parts.
We have the International Chamber of Commerce process, in which a very large number of banks are involved. The ICC Banking Commission most recently met in October in Tblisi in Georgia, to make progress on:
- updating eUCP, the supplement for Electronic Presentation to the ICC´s Uniform Customs and Practice for Documentary Credits (UCP 600). eUCP accommodates presentation of electronic documents and records alone, or in combination with paper documents;
- formulating eURC, the equivalent of eUCP but for electronic presentation Collections transactions, be they clean or documentary collections.
It looks like they will need one or two more meetings to get there, but at least then there will be a global protocol for the handling of Letters of Credit and Collections using electronic documents, as there has been for some time for paper documents in the form of UCP600.
The Bank Payment Obligation or “BPO” is included, and so are Bills of Exchange: Bills are not dead and it is explicitly mentioned that it is foreseen that Bills will continue to feature in Trade Finance transactions in either paper or electronic form.
Then we have projects whose aim is to apply blockchain technology (the technology behind Bitcoin and cryptocurrency generally) to Trade Finance. These projects are consortia amongst banks, and they seem mainly to be Western banks in whose heartlands the normal terms of trade are Open Account, and whose customers have a peripheral need for Letters of Credit and Collections. There seems to be a lack of banks from the countries – in Africa, Asia-Pacific and Latin America – where the normal terms of import and export trade are Letters of Credit and Collections.
Firstly we have the Voltron project, backed by eight major banks, created with the aim of “simplifying letters of credit” and then revolutionising “trade finance, delivering an open industry platform for letters or credit, enabling exchange documents and value across an open network”.
Voltron is based on a blockchain platform called Corda which has been developed by the R3 banking consortium, an organisation that has received considerable investment and which its backers are using as a major focus for their harnessing blockchain technology to bring about improvements in the delivery of existing banking services.
Then we have we.trade, whose solution is based on Hyperledger Fabric, an open source blockchain framework hosted by the Linux Foundation. Three new banks recently joined – CaixaBank of Portfugal, Erste Group from Austria and Union Bank of Switzerland – alongside the platform’s existing banks: Deutsche, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Societe Generale and UniCredit, bringing the number of shareholders to 12.
The new additions boost we.trade’s geographical reach to the following European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland and the UK, but not yet, as indicated earlier, to the countries where letters of credit and collections form the normal terms of trade.
The new joiners appear to be defectors from a rival consortium called Batavia that has fallen by the wayside. Ingo Bleier, head of group corporates at Erste Group, says this deal allows it to “put together our knowledge of blockchain-based trade services, which we have built up within Batavia, and to make we.trade’s uniquely convincing offering available to our corporate clients”.
Both consortia seem to have set as their aims to:
- Cut the total elapsed time involved in putting in place a letter of credit and transacting the stages of it;
- Enable all participants in the transaction to see the same version of the status.
Electronic documents are required to underpin the first objective, and these can be created using any one of a number of systems like Bolero, essDOCS and GTC. eUCP at least, if not eURC as well, will then be required to form the underlying rulebook: it is not credible that these consortia would create their own rival rulebook to the ICC, when the ICC’s rulebooks for the paper-based world are universally acknowledged.
Another trend is for banks to set up dedicated websites to support their exporting customers – curiously the emphasis is heavily on exporters from the US and European banks’ point of view, rather than on sourcing and imports.
Banks do not necessarily club together directly with one another in this activity, but can find themselves as joint users of the same platform.
Lloyds Bank has established its ‘International Trade Portal’ as part of its Brexit-related undertaking to the Department of International Trade, to “support 25,000 new exporters by 2020, within the Government’s efforts to help 100,000 businesses export for the first time”.
The platform supposedly has a database of 100,000 buyers around the word, and “over 25,000 sector-specific reports and analyses help you gauge the latest international trends”.
Behind the scenes this is a Lloyds-badged version of one of two or three such platforms built and maintained by IT companies, which draw on the databases of their members and make those databases available to other members.
Another of these is called “Trade Club”, it offers “180 country profiles, and 20,000 market reports” and is the basis for the Nordea Bank Trade Portal. Export Enterprise’s “International Trade Portal” product is the basis of the portals offered by Societe Generale and Deutsche Bank, and so on.
These portals perform a similar function to the Dun&Bradstreet guides in the paper-based era: access to a first cut of possible trading partners that one can then research in greater detail, and decide how to connect. The idea that one could establish a working business relationship from a standing start through such a portal seems unlikely but we will see.
At any rate, the agglomeration of ICC rulebooks for electronic documents and trade portals or document exchange systems do promise the possibility of contracting Trade Finance in fully electronic mode within the next five years.
(First published on Accountingcpd.net)