Joel Schrevens, China Systems’ Global Solutions Director & Head of European Ops, shares some analogies on the complex shift from physical to digital trade documents, and provides an overview of China Systems’ own strategic approach.
You must have heard the expression “one good analogy is worth three hours of discussion”. When faced with technological challenges and innovation, I am a strong believer that analogies can improve someone’s insights and decision-making processes.
If we look at trade and supply chain finance, there is plenty of technology available to improve trade processing, using Big Data analytics and Artificial Intelligence for analysis; APIs, distributed ledger technology and digital signatures for more efficient and secure interaction; optical character recognition and Internet of Things for data sourcing/extraction; and cloud computing for more flexible on-demand services.
But that is not enough, for one simple reason: all major trade decisions are triggered by documents. They are the information carriers allowing the many parties involved in documentary flows to perform their jobs and give the green light for a transaction to proceed. We have all seen the slide showing 20-plus trade participants interacting with about 10 to 20 key documents in trade, resulting in about 5,000 field interactions. And they all use their own systems, which may be heavily integrated with dozens of other systems.
If you want to replace physical with digital interaction, besides technological enablement needed to establish trust, we also need regulatory change and industry alignment. That will be a gradual process, but with the ICC’s Digital Standards Initiative, the growing adoption of and alignment with the UNCITRAL Model Law on Electronic Transferable Records, ITFA’s Digital Negotiable Instruments, BAFT’s Distributed Ledger Payment Commitment, the Digital Container Shipping Association’s Bill of Lading UN/CEFACT aligned standards, the focus of governments on establishing Digital Economy Agreements and much more, I have no doubt that we are heading in a positive direction, but also that it will be an ongoing journey with no final destination, just like a ‘standard’ is subject to perpetual motion. What has become clear though is that the digital document move is not just another phase in the trade automation process; it has become an absolute necessity.
Here come the analogies. The complexity of the trade ecosystem and the challenge to move from physical to digital documents can be compared to many of the challenges that exist within our transport infrastructure, in terms of reach and range of destinations.
In a world not ready yet for electric (not to mention ‘self-driving’) cars, because of cost or limited infrastructure, hybrid vehicles and range extenders provide a viable alternative. Similarly, there are technology solutions to also achieve this transformation and adoption approach with documents, depending on your destination or your business case.
When I travel to our Nanjing office via Shanghai, I always like to take the Maglev bullet train from the airport to Longyang Road Station and then switch to the Intercity High-Speed Train to Nanjing.
That is after a bus or car trip, a train trip and a minimum of two flights. I wish there were a bullet train from my house to the Nanjing office, but that is never going to happen. I will have to use the existing infrastructure as it evolves, carrying and checking in my data, sorry, my luggage, every time I switch infrastructure. I count on easy connectivity and short transfer times.
This offers quite an advanced network infrastructure with useful lessons for digital trade. If I fly long-distance, I try to avoid having to check in luggage, pick it up in another airport, check out and in again, each time having to show my passport. There is the wonderful invention of ‘codeshare’, and there could not have been a better word to describe analogies between transport and technology. If all goes well, your baggage is handled from the city of origin to the final destination and you only perform one check-in for all segments of the trip. That collaboration does not just exist between airlines, but also between airlines and other modes of transport, such as the railway network. The lessons for digital trade are that, for the benefit of the end user, we need to ‘codeshare’ our services seamlessly, taking the customer from the starting point as close as possible to his final destination. Another lesson is that we have to move to portable digital identity across different partner solutions, not forcing users to log in to different platforms with different rules. Just like with ‘codeshare’, which requires partners to agree on baggage policy, technology partners need to agree on data and security policies. The future of digital trade will be determined by the level of collaboration that will be achieved. That collaboration can take the shape of project-based integration initiatives or a predefined marketplace where an aggregated set of related services and/or data is provided to a customer. For bulk products that are easy to commoditise, I do not doubt the marketplace potential. For trade and supply chain finance transactions, I have reservations depending on transaction complexity and current status of digitalisation and industry alignment.
I have described how important collaboration is to optimise your data strategy. But we all know that data and documents in most cases still have a LAT relationship, and they are not always aligned. So, this still leaves us with a challenge on the exchange of trade documents, especially those that provide the owner certain rights, whether financial (for example bill of exchange and promissory note) or physical receipt of goods (such as bills of lading and warehouse receipts).
Today, courier companies can send physical documents anywhere, without parties having to be onboarded onto the same platform. It should be the industry’s aim to provide the same reach for digital documents, to safeguard digital inclusion, but with a much higher degree of security to establish trust to all trade parties involved. The method of communication with the widest reach and lowest friction is email. Several platforms already have solutions in place based on the use of email for exchange of documents, combined with a solution guaranteeing immutability of document content and the issuer of the document. For non-title documents, this is often sufficient. For title documents however, this is not enough, so electronic bill of lading platforms also offer the ability to transfer ownership of the document, as long as parties involved have been onboarded to the platform. Pending rulebook standardisation restricting interoperability between the different platforms, this is an understandable approach – at this point in time.
For digital negotiable instruments, being part of ITFA’s DNI initiative, China Systems’ strategic approach is to use business platform neutral digital document technology. Digital documents should be able to be securely exchanged between platforms, just like physical ones. This technology is based on the usage of digital signatures, PKI and a public DLT-based solution acting as a digital notary ensuring integrity, originality and ownership of the document. Tactically however, and based on our customers’ needs, we will ‘codeshare’ with any platform that allows us to optimise our customers’ business flows.
Enough theory, what we are most proud of is how we practically apply the ‘codesharing’ concept to viable business cases by taking today’s paper-based trade instruments and digitally optimising them. We achieve this by establishing collaborative workflows between our solution, which acts as a financial institution’s trade control tower, and complementary trade solutions, which could be corporate-centric platforms, eBL platforms, document-checking platforms, vessel-tracking solutions, compliance engines, asset-tracking systems, etc.
By the beginning of September, we will be ready to demonstrate a fully digital collection process combined with a receivables financing capability, allowing an exporter to obtain finance on a digital bill of exchange, using ITFA’s Electronic Payment Undertaking (used as digital equivalent to bills of exchange and promissory notes). Upon buyer’s digital acceptance of the ePU, we automatically trigger eBL transfer of ownership to the buyer or his agent, upon which the remitting bank will finance the exporter. This enables a real-time secured exchange of commitments (goods against financial) between buyer and supplier using digital signatures, not requiring any physical transmission of documents. We are hereby bridging the physical and financial supply chain. An introduction to this development can be found on our website.
We are aware of the fact that we and our customers heavily depend on regulatory change for adoption of digital solutions, but we have decided to be proactive. We are future-proofing our solution by extending our omnichannel capabilities, reusing all our existing transaction processing capabilities. The functions to process paper or digital collections and guarantees are the same, so from a user perspective, the experience is consistent and fully transparent.
As a leading trade solution and services provider, we consider it our responsibility to establish ‘codesharing’ agreements with trade technology partners. A holistic trade ecosystem approach is what our customers need and it will help paving the digital path to a bright future for global trade.