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Non-bank financial institution Mercore has carried out what it says is the UK’s first digital bill of exchange transaction, marking a further milestone along the journey to bring trade into the modern age.

The underlying transaction, valued at around €118,000, involved the sourcing of sugar by Abercore, a UK-based sugar trader and advisory firm, from agro-industrial organisation Pantaleon in Nicaragua for onward supply to a UK food manufacturer. Mercore completed the financing using an electronic payment undertaking (ePU) based on the International Trade and Forfaiting Association’s (ITFA) Digital Negotiable Instruments (DNI) initiative’s digital bill of exchange text and dDOC specification. The digital document was issued via trace:original – a solution for digital original documents provided by Swedish fintech Enigio, and the transaction was entirely digital, with no parallel paper bill of exchange being created.

“Mercore is delighted to execute the UK’s first digital bill of exchange transaction and with many further pilot use cases in the pipeline, we hope to support market adoption and get much-needed funding into the well-publicised US$1.7tn global trade finance gap. Given this digital approach to trade finance is new, we are extremely grateful to our client, Abercore, for joining us as an early adopter and for promoting the benefits to their customers, enabling us to complete this transaction,” says Anthony Wadsworth-Hill, COO of Mercore.

Largely unchanged since the Middle Ages, the bill of exchange is a signed, unconditional, negotiable instrument binding one party to pay a fixed sum of money to another. Widely used in trade finance transactions, it can also be traded on the secondary market. Much like other paper-based trade processes, bills of exchange are cumbersome and time-consuming to operate, but a lack of legal recognition for electronic versions of the instruments has held back progress on their digitalisation.

In English law, this is due to a section of the Bills of Exchange Act 1882 that is premised on the idea that trade documents must be physically held, or “possessed” – a concept that is currently associated only with tangible assets such as paper.

In 2020, as Covid-19 social distancing measures laid bare the fragility of a system based on the transfer of physical documents, ITFA launched the DNI initiative, which promotes the use of the ePU as a means to overcome this legal hurdle by fulfilling the requirements of a traditional negotiable instrument under contract law rather than common law.

The Mercore transaction is the latest “first” achieved using this framework. In August last year, the UK’s first digital promissory note transaction, which also used Enigio’s technology, was carried out by Lloyds Bank – which shared its learnings and experience with Mercore.

“The use of the ITFA ePU by Mercore and their client, Abercore, demonstrates the scalability and commercial value of digital negotiable instruments,” says Sean Edwards, chair of ITFA. “Just as importantly, and following the use of ePUs by a major UK high street bank, Mercore have shown their relevance to the SME market and how they can be used to finance UK trade flows now and into the future.”

For Abercore, the SME trader in the Mercore transaction, the digital version of the bill of exchange brought speed, cost and process improvements, enabling it to execute the deal more quickly.

“It is our view that for far too long, sugar trade finance has been overly complicated and slow to adapt,” says Luca Galbiati, the company’s director. “Mercore’s impressive use of new digital technologies to deliver finance will allow us to offer an enhanced level of service to our customer base in Europe and the UK. Importantly, it will allow us to significantly reduce the time it takes to pay sugar producers as well as allowing us to offer delayed payment terms well beyond the point of delivery.”

Far from being a one-off pilot, this transaction is the first of many for Mercore, says David Stafford, Mercore’s CFO and co-founder. “Abercore has considerable forthcoming contractual commitments for both the sale and purchase of sugar, and Mercore plans to support these contracts through digital bills of exchange and promissory notes now we have successfully executed one,” he tells GTR. “We expect regular ongoing, monthly transactions to follow on swiftly, with this structure becoming the new norm.”

This development comes as the UK gears up for legislative change in the shape of the Electronic Trade Documents Bill, which is currently making its way through parliament and will enable electronic documents to be “possessed” in an equivalent way to their paper counterparts under English law. While Mercore – like Lloyds Bank before it – has now proven that the ePU-based structure works even in the absence of legal reform, Stafford is optimistic about the bill’s potential to drive a far wider shift away from paper.

“One of the challenges in using an ePU in digital bill of exchange format is that the ePU is still a new concept, and execution currently requires additional, often unfamiliar, legal inclusions in the documentation,” he says. “We believe some parties would shy away from using this structure due to innate reticence for adopting something different. Giving explicit legitimacy and therefore enforceability by passing into law will bring greater legal confidence for corporates and lenders to engage with the new types of digital instruments and systems. This should act as a big boost to adoption in the market.”