As the open account trade space continues to grow – with demand now far outstripping that of traditional trade finance instruments – the trade finance industry is actively collaborating with technology providers to create a standardised, global network to enable the safe and seamless exchange of data and trade assets. Joon Kim, Global Head of Trade Finance Product and Portfolio Management at BNY Mellon Treasury Services, explores this changing digital landscape.
The trade finance industry is quickly evolving. The Covid-19 pandemic and the accompanying working-from-home environment has highlighted the very real – and pressing – need for digitalisation within existing processes. Much has been achieved throughout the pandemic in this respect, with e-signatures now commonplace and certain scanned documents now being accepted in lieu of physical ones. These breakthroughs have been profoundly positive – not just in terms of business continuity, but also in terms of advancing the digitalisation agenda more broadly.
But digitalisation is not a new topic for trade finance. For the past few years, the industry has been hard at work leveraging innovative technologies, including blockchain, optical character recognition (OCR) and machine learning, to drive efficiencies, visibility and streamlined processes within trade finance. To address the evolving needs of many corporates across the globe, one area of particular focus is the enhancement of open account trade.
Open account trade: the missing element
While traditional trade finance, such as letters of credit (LCs), remain popular, approximately 85% of trade is now performed in the open account space, where goods are shipped and delivered before the payment is due. As this trend continues to build – in spite of the uncertain global trade landscape caused by the Covid-19 pandemic – it has become increasingly important for the industry to implement an effective structure to support, facilitate and optimise such transactions. With traditional trade finance, financial institutions (FIs) are able to leverage the SWIFT network to effectively and securely exchange information. But a comparable network in the open account space has been lacking.
In the absence of such a network – which provides security and efficiency – corporate treasurers have historically been forced to onboard a host of proprietary systems, which comes with a great many downsides. For instance, structuring trade finance on a bilateral basis creates an environment that is far more susceptible to financial crime. A fraudster may take an invoice to multiple banks and, as there is no standard network for banks to exchange information, and given that much of this business is still done via email and paper documents, it is possible that multiple lines of credit could be secured against a single transaction. What’s more, corporate treasurers simply do not have time to log on to multiple platforms; they need a single point of entry for all of their open account business to drive greater efficiencies, convenience and an overall enhanced, streamlined client experience.
Creating an open account network
In order to move away from maintaining numerous bilateral agreements for each counterparty and solution, and towards a standard set of processes for trade finance structuring, networks are being developed for open account trade. Collaborative initiatives across the industry are key to delivering this.
One such example is the Marco Polo Network – a consortium of FIs, their corporate clients, service providers and the fintech companies TradeIX and R3 – which aims to increase efficiency in international trade. Powered by blockchain, Marco Polo provides a network for trusted participants that enables the safe and seamless exchange of data and trade assets. The network removes the need to integrate various external or proprietary systems – creating a single point of access through which multiple working capital solutions can be accessed and customised.
In a world of increasingly long, global supply chains, this single point of access is proving critical. It often does not make sense for corporates to work with a single FI, credit insurance company or provider across all jurisdictions, currencies and parties. As such, corporates are increasingly looking for partners that can work together as a global network, rather than within their own individual siloes. The Marco Polo Network is helping to unlock this vision. Once connected to the network through a provider’s platform, users can access not just the provider’s services, but also access the services provided by other banks that are on the network without having to build new interfaces. This means that if one provider on the network cannot meet a client’s needs, the client can easily turn to another provider on the network that can.
There are multiple forms of receivables finance, such as factoring, forfaiting and receivables discounting, which are used by businesses throughout the world. Today, however, there are several challenges that limit the number of companies that have access to this type of financing.
Current solutions are relatively expensive to manage – owing in part to the paper-based and manual processes that underlie them – and, as a result, are primarily focused on large corporate clients. This often leaves mid-market and smaller companies with limited access to finance their working capital. What’s more, receivables finance is not a one-size-fits-all solution, and corporates often find themselves having to integrate different receivable finance solutions from multiple providers, making the process complex and inefficient.
Harnessing innovative capabilities, it is possible for FIs to enable a fully digitalised workflow, replacing paper-based trade documents and thereby reducing manual efforts, time and costs. Leveraging blockchain-based platforms helps to ensure faster, assured payments by preventing disputes arising from contract ambiguities. This is achieved through the early discovery of discrepancies and the automated matching of trade data. The blockchain technology also ensures there is only one version of the underlying trade and finance data at any given time and that all parties are able to view and work on this version based on their access rights, which helps to reduce the risk of fraud.
The Payment Commitment, a solution offered on the Marco Polo Network, essentially serves the same function as an LC in the open account space. It is an irrevocable payment undertaking that provides a digital assurance that the buyer will pay its supplier – enabling the supplier to ship the product before receiving the payment itself. With this assurance in place – should it be required – the supplier can work with its bank to secure pre- or post-export financing to optimise their working capital. This is all performed in a real-time, transparent environment, removing the risk of non-payment, reducing the risk of fraud and eliminating the need for many of the associated paper documents.
For BNY Mellon, the partnership with TradeIX represents a significant milestone in our efforts to develop origination capabilities for our corporate clients in the open account space – and will ultimately enable the rollout of our entire range of open account products and services. In addition to the Receivables Finance and Payment Commitment capabilities, a third product – Supplier Pay – which is a supply chain finance solution, is currently in development.
Away from paper
As these platform solutions develop, there is one historical and perpetual challenge that cannot be forgotten: paper documents. Trade finance remains a largely paper-based business, with shipping documents and invoices still used as standard evidence of goods sold and delivered. In fact, a single transaction often requires the interaction of more than 20 entities, and involves between 10 and 20 paper documents and 5,000 data field exchanges. Processing paper is therefore considerably time consuming, resource intensive – slowing many operational processes for banks and their clients – and also less attractive from a sustainability perspective than digital processes.
For many FIs, the paper-to-digital journey is well underway in many areas. A key part of applying this strategy into trade finance processes is ensuring that banks have full integration with their clients’ enterprise resource planning (ERP) systems, such that no documents need to be manually retrieved or reprinted. As part of this, FIs can use OCR technology to enable images of typed or handwritten text to be digitally converted into machine-encoded text, with content auto-populated into the required fields. This makes the current process, which requires banks to manually input trade instructions into their own applications, far quicker and more accurate, while also enabling staff to focus on higher value tasks, such as client service and relationship management.
The OCR technology can also be used in combination with a custom-built compliance API to improve the due diligence process. Currently, to structure receivables or payables financing, a spreadsheet is exchanged back and forth between bank and client. Once agreed, the spreadsheet is printed out and inputted into a system for compliance checks – with the long chain of manual components creating a host of inefficiencies. Now that the information can be automatically input into the system, machine learning capabilities can then be used to automatically perform compliance reviews, thereby helping to reduce false positives and improve straight-through processing rates.
It has been an unusual year for trade finance, with the Covid-19 pandemic driving the industry to move away from a number of ingrained, paper-based procedures and adopt digital alternatives to ensure their businesses can continue to operate effectively. While significant progress has been made, the journey to digitalisation is only just beginning. But, as the focus shifts from business continuity and back to long-term digitalisation projects, such as the rapidly developing Marco Polo Network, it is clear the industry is on the right track. Going forward, continued investment and greater collaboration between trade finance participants will be the key to pushing the industry to the next level, enabling optimised trade finance solutions and processes – and optimised global trade.
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.