Clarissa Dann: Welcome to Trade Finance TV.
The new Electronic Trade Documents Act, or ETDA, has come into force now. And this is accelerating trade finance going digital. We’ll be discussing whether end-to-end trade finance is ever likely to be adopted and how far along the process are we.
Michael, Dave, Andre and Stuart, welcome to the show.
Stewart Pace: Good morning, everyone. Pleasure to be here.
Andre Casterman: Thanks for inviting us. Great to be here.
David Meynell: It’s great to be here.
Michael Vrontamitits: Thank you for having me here and looking forward to that discussion.
Clarissa Dann: Thanks, gentlemen. Moving on to our first question, where does the ETDA actually get us? It’s a big thing, isn’t it? So it’s a line in the sand. David, do you want to take it away?
David Meynell: Yeah, sure. I mean, up till now, we’ve seen lots of updates in technology, the availability of provider platforms evolving ICC trade rules, the market practices, we can look at developing standards, basically a general willingness in the trade finance world to move forward to a digital environment.
What we’ve not seen is a catalyst that will allow us to move away from what Michael has often called ‘digital islands’. And this must be overcome or we’re never going to achieve what’s possible. Basically, if parties wished to possess or transfer electronic transferable records in the past, such as bills of lading or those of exchange, the only real option has been to join some kind of private club where a contractual agreement could be put in place in order to enable such actions.
Where the ETDA and the model for electronic transfer records before it has taken us, is into a world where it’s now possible under law, to possess and transfer electronic transferable records. And with this act now in effect in the UK, we’ve reached an important connection between technology, practice, law and rules. And very importantly, the EDTA actually aligns MLETR. What needs to happen now is the commercialization of this opportunity. Fx the UK work with a MLETR-compliant jurisdictions to establish use cases.
Whilst these private club solutions have taken us into a very good place, they played an essential role, the barriers to involvement in these initiatives has actually deterred, I think, many SMEs and not just for cost reasons. The technology is now in place, so taking it to an interoperable environment is now entirely feasible with the EDTA and many similar initiatives around the world.
Clarissa Dann: Thanks Dave, Mike?
Michael Vrontamitits: So when I sort of think about the EDTA, it’s an important part of the overall jigsaw (puzzle). So when we looked at the digital trade roadmap back in 2017, we put that out at the FACC, we saw sort of three core elements to it. One was legal. The second was standards, and the third was adoption. And Dave has pretty much covered that. And what the EDTA does is it allows for parties to start looking at different use cases and potentially use cases that haven’t been thought of before, that allow for new innovators, whether they’re existing financial institutions or new fintechs to to to to use the law as a basis to put new product out into the marketplace as long as there’s customer demand for it.
Clarissa Dann: Andre, you’ve got some thoughts on FinTechs, haven’t you?
Andre Casterman: Yeah, definitely, and I think over the years we’ve all been in this business for a few decades. Many trade processes have been digitized. So we really have to take stock of what the work that has been done by technology players, banks, of course, and the adoption that corporates have been able to to enjoy. Take supply chain finance who has been digitized from the start. It’s a critical open account. It’s probably the most successful use case when it comes to adopting a new way of of funding corporates and SMEs. Take compliance, AML compliance, very digitized as well within banks and also doc checking processes.
Now where we faced issues is when we started to create new instruments in the most complex use cases. We’ve all been working on various initiatives to digitize the letter of credit. Ten years ago at sidebars, corporates were saying the letter of credit is dead. And here we are 2023 and we see that the letter of credit is thriving and more and more being processed in a digital way.
I think the key challenges we face is that we were trying to create new instruments rather than taking the existing instruments and improving them incrementally. So creating new instruments, even in the right way through ICC standards and rules, that’s the right way to do it. But creating new instruments is quite hard for banks to take on and for the corporates also to take on and adopt. And also we were focusing on the most complex ones, like conditional payment undertakings, whereas with the EDTA act here, we we’re focusing on unconditional payment obligations, which are very close to what the market has done with supply chain finance. So delivering irrevocable payment undertakings to the funders on the back of an approved invoice on the buyer side.
So I think there is much room to be positive here on the adoption of the EDTA Act and the electronic notes, bills of exchange and also on the logistics side with the bill of lading.
Clarissa Dann: Thanks Andre. Stewart, you do loads of documentary credits and you’ve been doing it for a very long time. What do you think of all this?
Stewart Pace: I sort of echo what Dave said at the start. There’s been a huge stride in making everything digital, but the challenge still remains there for corporates in that, especially in the doc trade space. A letter of credit offers it a lot of protection.
Risk management, payment, country risk, it covers a lot of bases from a payment perspective. And at the moment, they’re given quite a clear and concise instruction that they produce credit compliant documents. They will get paid, they can use them documents to receive financing. So I think there’s a great opportunity, but also probably a reluctance from the corporate side in making sure they’ve got that confirmation of payment when they produce documents. I think there’s a bigger challenge in the sourcing of these documents as well. Multiple providers, multiple different partners. So that’s obviously something they’re going to have to overcome.
Clarissa Dann: Yeah. We were talking earlier a new set of suggestions that we perhaps are chasing a solution that was looking for a problem. Is that fair?
Stewart Pace: We have struggled in the past to find solutions for problems that may not exist. I think the sort of evolution of the digital journey has come up with some that have been around, not really been implemented. But I don’t think that’s fair in the sense of the journey that’s being made, especially with the EDTA.
Michael Vrontamitits: So a couple of thoughts for me on this. I mean, first of all, there’s a lot of companies out there that have a solution that are looking for a problem. So I think that’s just the reality. And, you know, when I used to run a trade finance business globally, I did actually meet a lot of FinTechs and a lot of technology companies. And I would say probably 90% of them were in that category. So I think the reality with what I call the FinTech winter that’s occurred over the last 18 months as a lot of these companies that had problems that they were looking for have since disappeared. And so unless you can get a profitable company growing you’re going to struggle to raise funding. And we’ve seen that happen time and time again, which is which I think is a positive long term for the industry.
But the reality is that when you start to think about trade finance, there’s three legs that trade finance sits on. There’s your letters of credit and your documentary trade, your Z guarantees and your sureties. And then you’ve got open account. And each of them are on different parts of digitization and they require different actors.
The reality with banks who are the majority provider of financing in the trade finance space today is that they’re takers of information. They’re not creating information. So in the documentary trade finance space, banks are only going to digitize when the ecosystem digitizes and make it able to accept electronic documents. So the onus is not on the bank to to to digitize the documents, the onus is on the counterparties, the buyer and the seller and the counterparties within the trade trends, the actual supply chain transaction to digitize, which then allows for the banks to then digitize in an open account space.
Andre, you covered it brilliantly, which is, you know, you can start from day one. There’s the buyer, there’s the seller and there’s the bank. Maybe you go to another bank, but like there’s only three counterparties. It’s relatively easy to digitize. What’s really interesting is in the guarantee space, you’ve got three counterparties. In most instances, except for cross-border where you have four. And only part of that process are digitized. A lot of it is still on paper. So there’s a lot of opportunity in, say, the guarantee space, which I would say is about a third of the overall space.
Clarissa Dann: Dave, what about these guarantees? Do you think that’s going in the right direction?
David Meynell: Well, I assume that’s a solution looking for a problem. We can look at the last ten years certainly from the ICC side of it about the rules. Now, it was very difficult to set up a rule base for an environment that wasn’t really there. Many banks had these proprietary solutions from emerging FinTechs. And we were aware that somewhere in the middle we would need an organization that would set up established trade rules. And that’s what the ICC is great at. So it was a solution looking for a problem in a way, but these rules needed to be in place originally so they could be developed from that space.
And Mike will remember when we started with the EUCP a number of years ago, version 1.0, its quite a long time ago now. There wasn’t really any work out there to fit into it. Then we moved into a further state, so 1.1 version 2, now version 2.1. Suddenly the market has seen these rules work. We have now got an environment in which we can bring them in place. So there was an element of a solution looking for a problem, but I think we’ve now passed that.
Andre Casterman: We definitely need multiple building blocks to come to the right solution and definitely the legal side With the EDTA Act and other developments taking place in G7 countries like France, US and Germany are critical on this. I think the problem we have to focus on as an industry is the SME financing gap. Your third pillar, open account where when you’re a large bank like Deutsche Bank or an SME working capital platform, you’re trying to extend liquidity to those who need it. And there is the problem.
In the industry, the 2 trillion funding gap and the EDTA Act with the electronic promissory notes and a bill of exchange can help in that particular use case. It’s important for any kind of funder, because it’s all around indeed funding the last few weeks of the payment of the invoice having been approved, preferably by the buyer, potentially covered by credit insurance and any funder, as I said, large bank or smaller non-bank originator, like those supply chain finance platforms, will benefit from this development. Also, the ones in the distribution space, asset managers, institutional investors will also recognize that a standardization as offered by the EDTA Act on irrevocable payment undertakings, is definitely beneficial to them as well because they are there to fund the funders basically.
Michael Vrontamitits: So I have a slightly different view and we did a lot of work at the World Trade Board to deliver what is known as the Financial Inclusion and Trade Road Map, which was really about looking at, ‘what does it actually take to close the $2.5 billion trade finance gap today?’ And while the EDTA is an important part and MLETR is an important part of the overall digitization of the ecosystem, which is going to be beneficial to the closing of the gap, the reality is, it’s actually a lot simpler, right?
So when we looked at the digital side of it and we came up with five different pillars, one of which was digital infrastructure. The digital infrastructure is actually the delivery of electronic invoicing because, you know, back to open account, if you have an electronic invoice, that is what you require in order to do financing. You don’t require necessarily a bill of lading. You don’t necessarily require a bill of exchange. A bill of exchange will help and will enable financing potentially, but it’s not necessary. Everyone’s got an invoice financing product that they can do from a from a financial institution or from an alternative asset manager. So we looked at that. And the other one that was really important was legal entity identifiers and we covered this in the digital roadmap as well, but LEIs are a really, really critical part of ensuring that everyone knows who they’re dealing with in the ecosystem. And I think those are the two key pillars from my perspective of how you enable the SME financing gap to start to close.
Clarissa Dann: I think there’s still back to this whole business of transaction visibility through the chain and how do you get to that. Stewart, what are your thoughts on that?
Stewart Pace: It’s about consistency. So if you are in a situation where you’re producing documents on the letters of credit, you want universal acceptance. So I don’t think you want to be in a situation where some LCs are going to be electronically presented, some are going to be manually presented. That’s where we’re sort of getting into a bit of a quandary, I think, in that a lot of corporates will look at it and say the process isn’t broken at the moment. You know, ‘why do we want to try and fix it?’
Clarissa Dann: Yeah.
Michael Vrontamitits: That’s a really critical point because when I talk about ‘digital islands’ and I’ve unfortunately talked about it for a very long time now, it’s about how you connect processes in one entity to another entity. So if you think about all the FinTechs that are out there in the space today, connecting to a bank, the ability for a bank to onboard all the FinTechs that have sold their solution to corporates is actually really, really hard because each time you build a point to point connection, it becomes really hard.
And this is where I see the evolution of technology really making a huge difference in that ability to build that and connect the point to point. The EDTA helps in terms of enabling the legal framework. Really, really critical to all of this. But ultimately, technology is going to solve it. And from my point of view, it’s not going to be blockchain. I think the blockchain thing has sailed, but it’s going to be more about, not cloud, I think it’s more about generative AI.
So I think there was a lot of talk at SIBOS around Gen AI. I didn’t go to SIBOS this year, but I caught up on some of the stuff and I see Gen AI was a big topic and we’ve seen a lot of progress in this space, particularly around regulated processes. And I think that’s really where the thematic, ‘how do you connect this whole ecosystem together now that you’ve got the legal framework?’ is going to be around that, because it’s about reducing the cost per connection and not doing point to point, but doing multi to multi.
Clarissa Dann: So is there a single source of truth in trade? Sounds like there isn’t and there might never will be.
Andre Casterman: No, there are multiple custodians, banks, platforms, electronic bill of lading platforms. All those islands trying to be custodians. But the key is to make them interoperable so that an electronic bill of lading or a bill of exchange or from notes or even a warehouse receipt can really navigate from one to the other. And that’s where the trade finance world has the opportunity. And we have proven it with early adopters like Lloyds Bank to get to a point where you take advantage of, indeed, new technologies like Web3 technologies where digital assets are basically the single source of the truth, whether they are being processed by one platform at one point in time and a few minutes later being processed by another platform or another bank.
So Web3 technologies could become the glue. Yes, definitely what is suggested as well to have really an interoperable framework. On the European Commission side is interoperability is really being well understood in another context of the gaps where they’re looking at interoperable messaging in the retail space. But definitely that’s what we see with early adopters of electronic bills of exchange from notes and some new entrants in the electronic bill of lading world that really want to demonstrate how interoperability can be achieved.
An example is CargoX, a new entrant in the electronic bill of lading, really demonstrating that they want to interoperate on the basis of digital assets. And I mean the issue we’re facing, not only on the banking side, but also on the platform side, is many incumbents don’t want to change, don’t want to open up, don’t want to interoperate. So we need new entrants to show the way to using new technologies, AI, Web3 and so on, and putting pressure on the market or at least attracting user adoption in order to to start kicking off the process. And certainly at the interoperability level, that’s what we see today.
Clarissa Dann: So Dave, on the rules side, they’ll just continue to evolve as the technology evolves, is that right?
David Meynell: Oh, absolutely. I mean, one great thing about the ICC rules these days is that they’re longer in versions that are only updated every ten, 15, 20 years. And now in version numbers, we’ve started the EUCP with this, we’ve now URGDT. What it means is when we have a revision process now, we can do it in a matter of months rather than years. We proved that quite recent with an update to the EUCP. We made many of the definitions more MLETR compliant, which by the way also means EDTA compliant as well. So yes, we had some warnings of what’s going on. It’s very important.
I got to pick up on a couple of points. First of all, the term Andre’s mentioned and also was mentioned by Stewart, these facts about change. I always like to use the phrase ‘inertial tradition’. In other words, this is how we’ve always done it, it’s easiest to maintain the status quo. It’s not quite a resistance to change, but there’s perhaps never been a convincing enough argument to the markets to make the leap. Now, I’m hoping that the EDTA, among other things, will accelerate the move to this leap.
And regardless in a single service of truth, obviously we’re going to need some kind of method to aggregate the data from many sources. So a primary single source of truth location. And one area we can look at that is the ICC Digital Standards Initiative. And they are compiling what we call a digital standards and data elements analysis for seven key trade documents. That’s what we’re beginning with. The result is going to be a glossary of key trade terms. We’ve recommended standards. The reason I mention this is that the significance of the project is that data elements, when shared, could form this single source of truth, and that will enable transactions that are needed to move along the supply chain. That’s one of the trade finance processes. So bottom line, although technology is a real imperative enabler, the fact is without the common standards and the legislation, digitalization is going to remain within a number of private clubs. And that can’t be the future.
Michael Vrontamitits: Focus of the rules has always been, Dave, to be technology agnostic.
Clarissa Dann: Yes, yes.
Stewart Pace: It’s almost a like for like replacement really, isn’t it?
Clarissa Dann: It is.
Stewart Pace: That’s really where we’ve got to go. So to say to, you know, corporate customers change, markets they trade in change all the time. Requirements change as per individual contracts. So when you can present to them a solution to say this is no different from what you’re usually doing, but has all the following benefits, that’s when you’re going to hit the Holy Grail.
Michael Vrontamitits: So I think yes, but, right? And the but here is about business case. So I don’t think people are resistant to doing things different as long as the ROI stacks up. And I think the challenge has been in digital trade is the ROI doesn’t stack up for different parties in the chain. So it might, you know, if it doesn’t stack up, you’re not going to do it. So I think the key and this is why, you know, doc checking has been really, really successful with banks because the ROI stacks up. So I think the digitization is going to really come down to ROI at the corporate level, at the bank level, at the FinTech level.
Clarissa Dann: I think we’ll have to leave it there, but I’d like to thank our guests, Michael, Dave, Andre and Stewart for all their insights and of course, all of you for watching.
Stewart Pace: Thank you, Clarissa. It’s been a pleasure.
Andre Casterman: It has been a pleasure. Thanks again for the invite, Clarissa.
David Meynell: Yeah, Thanks, Clarissa. It’s been a pleasure.
Michael Vrontamitits: Thanks for having us on.