GTR speaks to one of the common members of three trade bodies at the forefront of driving digital rules and standards. Michael Vrontamitis, head of trade, Europe and Americas at Standard Chartered, is the chair of the ICC’s digitalisation of trade finance working group, as well as a member of the World Trade Board and Baft’s global trade industry council. Here, he talks about the headway that has been made, why these initiatives are necessary, and the stumbling blocks being encountered along the way.
GTR: What has been the progress of the ICC’s working group on the digitisation of trade finance, which you co-chair?
Vrontamitis: The working group was set up to help accelerate the pace of digitisation. It’s creating a framework for digitised transactions in the trade finance space.
The activities are comprised of three streams: one looks at the e-compatibility of ICC rules for trade finance. Are the existing ICC rules sufficiently e-compliant for today’s world for banks to accept data vs documents?
There’s been some really good progress from the team: we’ve recently come up with a version of the uniform customs and practice for documentary credits for electronic presentation (eUCP) and created a first draft of an eURC – an electronic rule for collections. These are being distributed to national committees, and we’ve asked them to comment.
We’re trying to do this as quickly as possible: usually these rule processes take up to two to three years to get done, but we’re looking to see if we can accelerate it to a 12 to 18-month process.
Very recently we have also initiated a new sub-stream within this first stream to look at the revision of the URBPO (uniform rules for bank payment obligations). This is in line with the emergence of new technology such as distributed ledger technology (DLT) and also to include rules and responsibilities around buyers and sellers, because previously, with the BPO, it was just bank to bank communication around BPO.
So, if you look at initiatives like we.trade – these are fundamentally payment obligations that are being created. And there isn’t a rule set that exists in the market place – these platforms will probably go off and create their own rules. We’re trying to offer the ability to have a single rule book for that. And potentially also for other products we imagine being created in the future. So, realising that smart contracts are potentially going to be the way of the future, and how we create a payment obligation based on these in the future.
The working group’s second stream is examining the legal and practical issues related to the validity and value of data and documents in digitised form. As part of this, we’re going to conduct a legal survey to understand the rights of third parties and compare this under paper and electronic bills of lading (eBL). That’s the first piece of work. We’ve appointed a legal firm and we’ve just finalised the list of countries for the eBL study.
The third stream is developing a set of minimum standards for digital connectivity of service providers – particularly across legal, liability, information security and technology.
What this means is: each of the digital trade agendas that we see in the market today tend to be a digital island, and don’t connect with one another. For banks to onboard one of these third-party platforms or fintech providers can take anything up to 24 months-plus. And every bank deals with it differently. Sure, banks have similar processes asking for similar information and standards, but there’s no defined standard: a fintech can’t get information as to how to connect to a bank. These minimum technology standards will outline what needs to be applied and where liability sits.
Just by getting these standards right and the ability to onboard platforms, this will accelerate digitisation by four to eight times.
GTR: Outside of these three streams, what else is the ICC working on in terms of digitisation?
Vrontamitis: We’ve had a few national committees coming to us with ideas, some of which have been really good. One was about creating a roadmap to communicate what needs to be done in the digitisation space to governments and other industry bodies, which I think is going to prove to be very valuable.
GTR: How does the work that the ICC is doing compare to that of the World Trade Board (WTB) and Baft?
Vrontamitis: They’re trying not to replicate what the ICC is doing.
The WTB has had a couple of meetings in the last 18 months, and we have a few streams too. For one, we’re starting to look at how to operationalise eUCP for a sub industry. It’s been a bit slow in traction, but moving in the right direction. We have also set up a corporate group to look at procurement and invoices and how we can digitise that process.
We are also looking at setting up a legal entity under the WTB, working with players like Mastercard and the Asian Development Bank (ADB). Working with the Singapore government, this Digital Standards Board for Trade (DSTB) will create some of the formats that allow multiple industries to connect with each other.
This is different to what we’re doing at the ICC, and much more focused on the underlying technical formats.
Baft is working on a bunch of things. Ultimately, its role is going to be about how we have the conversation with regulators to enable digitisation.
GTR: How do you avoid stepping on each other’s toes?
Vrontamitis: We’re trying not to. There’s a few of us that sit on a number of these initiatives. This helps ensure that everyone has got their focus.
GTR: Understanding the terminology: digital standards, rules and laws. These terms are often used interchangeably – how do they differ?
Vrontamitis: When we talk about standards, these are generally drafted guidelines which are easy for people to understand. Fintechs don’t have to follow if they don’t want to, but if they do, there is greater likelihood of them being able to connect with banks more quickly as banks are likely to follow such standards.
Rules are typically drafted in a more specific language than standards. ICC rules, such as the UCP600, set out industry rules and practices which, while not mandatory, will be applicable to the documents or agreements that are made subject to it.
Laws are passed by governments of countries and are legally binding on people who are subject to the laws or who have elected the laws to govern a contract between them.
GTR: Some countries still don’t recognise digital signatures: the paper trail runs deep, and there’s a lot of customs money to be made along the way. How does this impact standardisation efforts?
Vrontamitis: At a strategic level you’ve got the World Trade Organisation and the World Customs Organisation setting the framework and signing up countries to enable trade facilitation and customs clearance to be more digital. There is a commitment by countries that have signed up to these initiatives to digitise their customs clearance. It increases the transparency and helps the flow of information, and therefore the ability to create other activities around customs clearance becomes very difficult.
The reality is that paper is going to remain in the world for at least the next decade. As a trade financier, I need to decide how I’m going to digitise my internal processes and how I’m going to connect to an increasingly digital world. We need to create a work flow that can capture both.
GTR: Is a lack of standards holding back digitisation in trade finance?
Vrontamitis: It depends on the product construct. If you’re talking about open account financing, these products can be digitised for trade relatively quickly, and most payable finance programmes are already digitised.
On the documentary trade side, it is constrained – not by standards, but by the fact that we don’t have wide-ranging solutions for the underlying documents in trade. So even though a company may have an eBL, they may convert it into paper in order to clear customs.
Standards will definitely help accelerate the pace, but it doesn’t stop you from doing something.
GTR: Many industry experts have told GTR that getting banks to agree on standards is likely to be an unsurmountable task, because their systems for onboarding are so vastly different. What hopes then for creating standards?
Vrontamitis: It is certainly not going to be easy, but nothing is impossible. It requires engagement with technology and procurement and a few large institutions to take the lead and put something out there that is credible and can be refined over time. Many technology companies are integrating into a number of banks and already have to go through this process. Bigger fintechs are organised around preparing the required information/documents and have standardised answers to the common questions meeting 80% of their clients onboarding questionnaires so it is already happening to some extent. Putting in place a standard is the natural next step that will save everyone time and money.