Across the industry, efforts are being made to revolutionise trade finance, with progress on the legislative front being hailed as a major game-changer. But the legal recognition of electronic documents, although critical, is only the start of the journey towards a fully digitalised trade ecosystem. Bruno Francois, deputy global head of trade finance at BNP Paribas, examines some of the other elements necessary for a practical approach to digitising trade instruments.


Q: What are your thoughts on the progress we’ve been making as an industry towards the end-to-end digitalisation of trade finance?

Francois: The industry is making excellent progress, in large part driven by the adoption across a growing number of jurisdictions of the UNCITRAL Model Law on Electronic Transferable Records (MLETR), which gives electronic trade documents the same legal standing as their paper-based counterparts. At BNP Paribas, we are optimistic that MLETR will be transposed into French law by the end of the year.

We are also seeing promising developments in the harmonisation of digital trade standards, led by the work of the International Chamber of Commerce (ICC) Digital Standards Initiative (DSI).

While these measures are critical, it is important to remember that new legislation and data standards are only enablers, and alone are not enough to fully revolutionise the industry. They are crucial steps, but are still just the very initial steps that need to be taken on the road to trade digitalisation. Their provisions need to be put into practice on a collaborative and incremental basis, starting with the digitisation of fundamental trade finance instruments.


Q: What approach to the digitisation of trade finance instruments do you think would be likely to gain the most traction in the market?

Francois: Rather than trying to transform the entire industry at once, it would be prudent to begin with digitising one or two products that are significant from a client perspective.

At BNP Paribas, we believe it would be a good idea to start with the so-called ‘légumes oubliés’ or ‘forgotten vegetables’ of trade finance instruments – those left behind by the modern world – such as the bill of exchange and documentary collection.

The bill of exchange, in particular, is a truly brilliant, but neglected, instrument – one which could be resurrected by being brought into the digital age.


Q: What makes these ‘forgotten’ trade finance instruments ideal from a client perspective, and ripe for digitisation?

Francois: There are plenty of positive elements embedded in a bill of exchange, which as we know is independent from a trade transaction itself, and involves a limited number of parties: the drawee, payee and drawer. It presents strong risk mitigation measures in that it relies on well-established legislation and convention; once accepted, the drawee undertakes unconditionally to pay the bill of exchange at maturity; it can be mobilised by endorsement; it can be avalised to guarantee payment; and there are formalities in place in the case of non-acceptance or non-payment. Likewise, in terms of its financing features, the bill of exchange is highly self-liquidating.

However, there are some drawbacks linked to the fact that legal environments generally only recognise the bill of exchange in its paper form. We’re all familiar with the disadvantages of dealing with paper documentation, which include the operational risks and the fact that manual processes require many time-consuming and often very costly resources. Moreover, in the case of a bill of exchange, should a protest need to be made, the rules governing the process are very onerous, including that the bill must be protested at the place where it is dishonoured and often within a limited period after its maturity.

As a result of these challenges, we’ve seen a gradual decline in the use of bills of exchange, which is a shame given its numerous advantages as a protective instrument, a self-liquidating financing tool – both highly sought-after features for corporate clients – and as a convincing alternative to open account.

Given recent shake-ups in physical supply chains brought on by geopolitical and pandemic-related challenges, with companies now having to deal with new suppliers in different jurisdictions, the ability to combine risk mitigation elements with a payment undertaking in a finance instrument is key. These are also very popular features in the fast-growing B2B marketplace space, which is shaping the future of e-commerce.

We believe that the uptake of the bill of exchange could be boosted if we were to dematerialise the paper form so that it may be converted into a digital version, enabling all parties within the supply chain, notably SMEs, to get access to risk mitigant tools and trade financing solutions, which is not always the case today.

Documentary collections also offer an element of risk mitigation compared to open account, and are very much more in demand than bills of exchange, but they’re incredibly expensive for banks to process given that we apply rigorous compliance controls even though we are simply acting as an intermediary between the exporter and importer. Banks are very defensive about this solution despite the demand. Again, if this was a process that we were able to automate and digitalise, there would be significant benefits to reducing the cost to serve.


Q: As an industry, when will we reach the tipping point in terms of digitising trade documents? What will help get us there?

Francois: MLETR is one route that will eventually get us there but, as an industry, we also need to be thinking about establishing the necessary frameworks that will drive such initiatives, as well as identifying the operators responsible for managing these systems.

One real-world example of this, albeit on a domestic basis, is China’s bank acceptance drafts, a popular settlement instrument regulated by the People’s Bank of China that can now be issued electronically.

If the global trade industry were to establish a kind of international bill of exchange mechanism, for example, we would need a jurisdiction or an entity – a supranational such as SWIFT, for example – to take the lead on putting together a globally recognised framework with associated rules. This is an important step, and it will take time.

The tipping point will come when all stakeholders see the value in the digitised document. We’re not yet there, even with an instrument as fundamental as the letter of credit because of the complexities thereof, which we’re all familiar with. I think we may face fewer challenges with the bill of exchange, where the ecosystem is less complex than a letter of credit because it is easier to define.

Once the legal framework is established, data standards are drawn up and harmonised, the requisite systems are put in place, and this is all applied to an instrument like the bill of exchange, the trade finance industry will be given a renewed impetus to make use of the product. That could prove to be a pivotal point on the road to fully digitalised trade and provide the market with the momentum that it needs.


Q: Can trade finance ever be truly paperless and fully digitalised? How can we achieve that?

Francois: I am naturally optimistic, so I would say yes. I don’t think we have a choice but to try and attempt to achieve that. Many other, equally complex, industries have been successful in that regard, so why not trade finance as well?

There is still a lot of good headway to be made in order to fully embrace the digital era. But it will not be done in one go – that’s a fallacy. We need to be practical and incremental in our approach, starting either sector by sector, or with essential, relatively uncomplicated instruments, like the bill of exchange, so as to ensure solid traction and long-lasting change.