Joon Kim, Global Head of Trade Finance Product and Portfolio Management, BNY Mellon Treasury Services, explains how banks are addressing short-term challenges, and looking to a digital future.


The Covid-19 pandemic is presenting global trade with exceptional challenges. With disruption to many supply chains due to large-scale logistics obstacles, and many sectors seeing significant decreases in demand, exporters must traverse an uncertain, unfamiliar landscape.

We are already in uncharted territory. Typically when events occur that put stress on global trade, open account activity decreases and there is a shift towards traditional trade instruments, such as letters of credit (LCs). But in the current situation, that does not appear to be the case.

Not only are open account trade volumes down, LC volumes are also substantially down, indicating that total global trade volumes have fallen or, perhaps, that more local and regional supply chains are being sought, and used, to help address the issue of longer days for settlement due to the pandemic. As the industry adapts to this challenging environment, it is more important than ever that banks are positioned to support their clients with effective trade finance solutions.

But the measures that have been introduced to protect company employees in countries across the world have caused many bank offices to close. With global trade still heavily reliant upon paper, many of the traditional, manual processes involved in trade finance transactions are currently not viable.

In response, banks are modifying existing procedures in order to carry out their business operations and enable trade finance to continue effectively. While global trade may not be synonymous with innovation and fast-tracking change, circumstances are forcing the hands of many in the industry and new processes are rapidly being introduced to overcome logistical obstacles.


Adapting to change

Considerable efforts are underway to identify and translate paper-based processes to digital formats. Already, significant progress has been made.

In the case of trade distribution, for example, e-signatures are being used as an alternative to printing a document and authorising via wet ink. Also, outsourced export collections instructions are being delivered via digitised covering letters rather than being physically mailed to banks, eradicating the need for manual pickups.

In instances where paper documents do have to be presented and sent to an issuing bank, banks are actively communicating with the issuing banks prior to sending out the documents to ensure they are able to receive original documents. In cases where there could be complications, LC parties are trying to create alternative arrangements in which a digital format could be accepted.

Communication within the chain is crucial to enabling such change to occur, as participants need to be aligned to ensure new procedures can be effected smoothly and efficiently. Until the world settles, it is important that banks have regular dialogue with their clients and continuously adapt their business continuity plans so as to drive efforts to increase the digital submission of documents and be positioned to maintain the delivery of valued trade finance solutions.

Of course, banks can only introduce change to a certain degree – some areas require regulatory change or wider industry alignment, which can take far longer to implement. Banks are therefore focused on controlling and adapting what they can. BNY Mellon, for instance, is exploring ways to digitise the processes involved with standby LCs. Usually, when a beneficiary wants to draw on a standby, the request has to come via an original paper instruction. BNY Mellon is exploring internally with its legal teams and market participants involved in the chain to potentially develop a solution where demands for payments, as well as the delivery of the standby to the beneficiary, can be effected via digital instructions.


Continuing digitisation efforts

Prior to the pandemic, significant efforts were already being made by many banks to enhance trade finance through technological innovation. But events of the past few months have spurred a flurry of activity.



For example, blockchain initiatives, such as Marco Polo, are driving enhancements in the open account space. Marco Polo is a consortium of financial institutions, their corporate clients, service providers, and the fintech companies TradeIX and R3. Its aim is to increase efficiency in international trade. The Marco Polo platform, which is powered by distributed ledger technology, provides a network for trusted participants, enabling the safe and seamless exchange of data and trade assets. This integrated hub removes the historical software siloes that meant participants had to separately enter details into their own enterprise resource planning (ERP) systems or spreadsheets and correspond via authenticated email messages or paper documents. Marco Polo provides real added value, with reduced manual and paper-based processes, enhanced alignment and increased efficiency.

A number of similar networks are being established within the industry and, going forward, it is crucial that there is interoperability among these proprietary platforms to ensure trade distribution opportunities can be optimised amongst trusted participants.


Optical Character Recognition (OCR)

Blockchain is just one form of technology that is being applied to enhance trade. BNY Mellon, for example, is applying optical character recognition technology to its internal operations to improve efficiencies and streamline transactions. Currently, due to formatting discrepancies between systems, trade finance processes require banks to manually input – i.e. completely re-type – a client’s trade instructions into their own applications. Optical character recognition enables images of typed or handwritten text to be digitally converted into machine-encoded text, with content auto-populated into the required fields. This eradicates the need for manual input, potentially reducing the risk of error – improving speed and accuracy, and enhancing productivity by enabling staff to focus on higher-value tasks, such as client service and relationship management.

The technology is currently being phased in, with the first phase – which is close to going live – focused on compliance. By utilising and integrating both the OCR technology and a custom-built compliance API, compliance reviews will be able to be done automatically through machine learning. This will significantly enhance efficiency and, with the technology able to be taught to recognise some of the common reasons for unnecessary flagging, could also help to reduce the number of false positives identified, thereby improving straight-through processing (STP) rates.


Maintaining momentum

The Covid-19 pandemic has created a unique environment in which the industry has had to rapidly introduce new processes. Participants have been required to move away from ingrained, paper-based procedures and adopt digital solutions in order to ensure their businesses can continue to operate effectively. Yet, will these electronic channels that have become a lifeline for the industry turn out to be just interim solutions?

The current landscape increasingly requires participant exposure to digital methods, helping to drive greater acceptance and support of the migration away from paper – and the longer-term goal of optimising transactions through technology. As a result, not only could some of the solutions that have been brought in to overcome pandemic-related challenges become permanent, but the mindset shift could accelerate the wider move to digital solutions across the industry in the future.

Some paper-based elements are, of course, easier to digitise than others. For example, it may take greater efforts to introduce electronic channels for LCs, where participants are still largely in favour of following the rules of the Uniform Customs & Practice for Documentary Credits (UCP 600), which requires original documents. The industry will therefore need to work together to drive broader acceptance of the electronic version, the eUCP.

The industry continues to face profound, relentless challenges as a result of the pandemic. The focus in the shorter term will be to continue to navigate the unfamiliar landscape and seek ways to deliver trade solutions effectively to clients. But, in the longer term, we have been presented with the opportunity to create a new norm, one in which the world of trade finance can be more efficient, streamlined and optimised.


The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.