At Societe Generale, Christian Cazenove, group head of trade oversight, Charline Profillet, deputy head of structured trade finance, and Pierre Courquin, director, head of forfaiting, highlight the ways in which the transition from paper to digital documentation is reshaping trade finance.

 

The transition from paper-based to digital trade documentation is steadily transforming global trade, despite the industry’s persistent reliance on paper. The introduction of the Model Law on Electronic Transferable Records (MLETR) by the United Nations Commission on International Trade Law (UNCITRAL) in 2017 was a significant step, providing digital trade documentation with the same legal value as paper. Although adoption has been gradual, recent developments in the UK and Singapore, and impending changes in France, suggest that digitalisation is on the verge of a breakthrough.

 

The continued dominance of paper

Global trade remains heavily dependent on paper documents. According to the International Chamber of Commerce (ICC), about four billion paper documents circulate annually in the trade finance ecosystem, with each transaction involving around 30 original documents and more than 200 copies. This reliance on paper not only complicates the trade process but also introduces inefficiencies, delays, fraud risks and environmental impacts. One key component of trade finance, the letter of credit (LC), which is essential for risk mitigation, still involves extensive manual processing of paper documents, governed by numerous complex rules requiring significant expertise and compliance checks.

 

Pandemic-induced digital push

The Covid-19 pandemic exposed the vulnerabilities of paper-based trade.

With many offices operating minimally or shutting down, accessing and handling paper documents became challenging.

A bill of lading, for instance, is crucial for releasing goods at ports. The pandemic made it clear that continuing trade amid such disruptions necessitated digitalisation. This period served as a wake-up call, highlighting the need for legally recognised digital processes, which until then were not deemed equivalent to their paper counterparts.

 

MLETR’s legal framework

The MLETR framework aims to confer “functional equivalence and technology neutrality” to digital trade documentation, both domestically and internationally. This framework, alongside the ICC’s Uniform Customs and Practice for Documentary Credits (UCP) and its supplementary ruleset eUCP, promotes the use of electronic records in trade finance. Since its introduction, MLETR has driven significant momentum towards digitalisation. For example, Singapore adopted MLETR in 2021, giving electronic bills of lading and other electronic trade instruments the same legal status as paper documents.

 

Support from the trade finance ecosystem

In France, the government mandated efforts to digitalise trade, leading the Paris Europlace (the French financial services lobby group) to establish a working group comprising banks, corporates, shippers, lawyers and platform providers. This group’s recommendations include transposing MLETR provisions into French law. The UK’s Electronic Trade Documents Act 2023 also aligns with MLETR, while the US is moving towards similar legal frameworks. These steps reflect a broad consensus across the trade finance ecosystem on the need for digitalisation, driven by the promise of reduced paperwork, faster and cheaper processing, increased profitability and improved controls.

 

Challenges and slow adoption

Despite the clear benefits, digitalisation faces challenges. The ICC Banking Commission aims for MLETR adoption in 100 countries by 2026, but currently, only eight countries have implemented its provisions. Interoperability between digital platforms remains a significant hurdle. To address this, the Paris Europlace working group is focusing on advocacy and encouraging legal adoption while involving fintech firms to enhance digital trade services. Large banks like Societe Generale are leading these efforts, promoting digitalisation among their corporate clients and working towards establishing fully digital trade corridors with major commercial partners.

 

Forfaiting and SME benefits

Digitalisation has the potential to revolutionise trade finance products like forfaiting, making them more accessible, especially for SMEs. A digital forfaiting draft can be processed within hours instead of days or weeks, significantly reducing transaction costs. This quick processing allows financial institutions to discount drafts shortly after issuance, enabling faster payments to suppliers. This acceleration improves the working capital positions of SMEs, who traditionally face challenges accessing trade finance products.

 

Environmental and operational benefits

Widespread digitalisation will reduce the industry’s reliance on paper, thereby lowering environmental impacts and enhancing sustainability. Digital solutions provide greater transparency and allow firms to monitor and reduce greenhouse gas emissions across their value chains. Improved data streams from digital systems enable comprehensive and accurate reporting on emissions, meeting increasing regulatory and stakeholder demands for sustainability transparency.

 

Client experience and profitability

Digitalisation not only reduces delays but also improves the client experience by offering more transparency throughout transactions. For instance, digitalisation in forfaiting provides clients with full visibility and an audit trail of their drafts, enhancing trust and security. Furthermore, reducing the physical movement of paper documents can lead to substantial cost savings, reducing the total cost of global trade operations.

 

Towards a fully digital ecosystem

The global trade finance ecosystem stands to gain significantly from digitalisation, with increased accessibility, reduced risks and improved efficiency. Legal recognition of digital documents is crucial, but interoperability between platforms is essential for practical implementation. Societe Generale and other key players are facilitating discussions to establish criteria for platform interoperability, addressing challenges such as sanction-screening capabilities and ensuring protection and indemnity insurance for shipping firms.

 

Maintaining momentum

Businesses must embark on their own digitalisation journeys, with banks like Societe Generale providing guidance and support. MLETR adoption needs to accelerate, with countries like Germany, Spain, Italy and several African nations making progress. The adoption by major economies, particularly in Asia and China, will be a significant step forward. The ICC’s ambitious target of 100 countries by 2026 highlights the importance of continued efforts to achieve a fully digital trade world.

In conclusion, while the transition to digital trade documentation faces challenges, the momentum is building. The benefits of digitalisation – efficiency, cost reduction, improved sustainability, and enhanced client experience – are driving the trade finance industry towards a more robust and profitable future. The collaboration between industry stakeholders and policymakers is crucial to overcoming obstacles and realising the full potential of digital trade.