At a time when stability and access to working capital are essential, there is an urgent need for more effective, robust supply chain finance (SCF) solutions.

This makes the passing of a concise but extremely powerful piece of legislation particularly pertinent. The UK’s Electronic Trade Documents Act 2023 (ETDA) came into force in September.

While most businesses will likely have paid little heed to this development, its relevance is profound for companies of all sizes that trade domestically or internationally.

The legislation has an immediate global impact as between 60%-80% of all global trade is governed by English law, regardless of the domicile of the counterparties.

The ETDA reflects the essence of the 2017 UNCITRAL Model Law on Electronic Transferable Records (MLETR), that has been adopted by Singapore and the UAE amongst others, and which will form the root of similar legislation being adopted by G20 nations.

So, what is the ETDA? And importantly, what does it mean for businesses?

One small step for legislation

The processes behind funding trade and drafting their documentation largely rely upon the same laborious, manual methods. Consequently, they are insecure, inefficient, siloed, and impractical. Digitalisation is widely acknowledged as being the way forward for both physical and financial supply chains but applying digital capabilities to trade finance is not straightforward.

Unlike in other sectors of finance, where digital progress is more advanced, the rules upon which trade finance is governed date back centuries. Trade finance is therefore built on entrenched, longstanding legal specifications established for a paper-based age. The principles of “possession” and “transfer”, for example – which pertain to the exchange of trade documentation and are vital to facilitating trade finance – have remained largely unchanged in most jurisdictions.

In effect, according to the wording of global trade rules, paper documents are the format by which trade finance has to be conducted. And this has been the fundamental barrier to digital trade document adoption.

What the ETDA does is give certain documents commonly used in global trade the same legal status in digital form as their paper-based equivalents.

Superficially a small change, this amendment is the breakthrough that has been needed to allow digital documents to become mainstream and come into their own.

One giant leap for businesses and their balance sheets

Specifically, the ETDA has significant implications for negotiable documents such as promissory notes and bills of exchange. It is the digitalising of these documents – and their legal recognition – that is key. Free from the inefficiency constraints of paper, digital versions of negotiable instruments (or “DNIs”) are creating an avenue to transform and optimise SCF, and, in the process, discard inefficient and insecure paper-based processes.

From a corporate treasurer’s perspective there is considerable value to be gained – including, fundamentally, improvements to working capital through more effective funding and cost savings, with earnings within their existing supply chains.

DNIs are a scalable, flexible and binding promise of payment by a business. Crucially, this enables today’s fractured, impractical funding structures that result in lengthy payment cycles and strains on working capital to be completely inverted – from a “bottom up” approach to a “top down” one.

This means tying funding to the balance sheet of the issuer, rather than that of the generally weaker creditworthiness of businesses’ SME suppliers. A business can therefore borrow from a financial institution (FI) and then cascade funding down to their suppliers by issuing DNIs.

DNIs dispense with the separate assignment agreements and irrevocable payment undertakings (IPUs) that are currently necessary for the transfer of trade documentation. And, with the DNI the basis of the lending rather than non-negotiable invoices, not only can 100% of invoice values be financed, but payments can be made immediately, thereby massively speeding up access to funding across supply chains.

This approach enables smaller suppliers to optimise their working capital through early payments which, in turn, ensures supply chain security for the business, generates opportunities for supplier discounts, and improves buyer-supplier relationships.

DNIs also allow corporates to have far greater control of how and when they use SCF, including being able to negotiate payment terms with suppliers to pay early or on time, depending on their liquidity needs. They are inherently more flexible than existing solutions, meaning treasurers can effortlessly switch between different funding methods – such as employing either their own or third-party cash – depending on which is the most effective for them at any given time, predicated, for instance, on their business cycle or cash position.

For example, if a typically cash-rich business runs into liquidity issues, instead of having to limit their dynamic discounting programmes, they can use DNIs to access external liquidity to extend payment terms as needed.

In terms of bottom-line contribution, a typical supplier early payment programme using digital documents such as this, can result in annual net benefits of between 1-7% of cost of goods. Furthermore, regardless of whether supplier early payment discounts are negotiated, businesses can also use digital instruments to avail themselves of post maturity finance and can thereby ‘buy’ themselves an approximate additional 50% cash in hand (i.e. a 60 day supplier invoice is settled with a bill or bill drawn for an additional 30 days) to plug financing gaps as needed.

Harnessing Digital Negotiable Instruments (DNIs)

One consideration that must be made regarding DNI adoption is the ETDA stipulation that the use of a reliable electronic trade document system and sufficient security on electronic documents is required for a DNI to be legally recognised. While clarity regarding exactly what constitutes a “reliable system” is currently being sought, there are DNI solutions readily available that, by passing key possession and reliability tests, already conform with the ETDA’s definition.

These solutions, such as the TradeSecure platform, place quantum-secure digital seals around DNIs that require a specific cryptographic key and protect electronic signatures using quantum notary technology. Such capabilities ensure DNIs cannot be duplicated or tampered with, thereby assuring the ownership and authenticity of the instrument. Easy trackability also streamlines and automates the audit process.

ETDA: Enter The Digital Age

One can reasonably ask that, if the use of promissory notes is already possible, why don’t businesses employ them? Simply put, without digitalisation, this process was heavily reliant on physical, paper documentation, the inherent administrative costs that accompany it, and the slow pace of transfer via mail. As a short-term financing process (between 90-120 days), long turnarounds have made them previously not worthwhile.

With digital documents, there is no long waiting period for paperwork to move through the supply chain, creating a far more readily available cash pool. This is because digital instruments can be exchanged in (close to) real-time, expediting processes by approximately 10-12 days, and thereby enhancing time to revenue and operational efficiency.

DNIs can easily be integrated into current SCF programmes via APIs, making them interoperable with existing global trade platforms and businesses’ ERP systems. For smaller businesses that may not use ERP, invoice data can be uploaded simply using CSV files. DNI adoption is therefore non-disruptive, straightforward, and efficient.

Once onboarded, using digital trade documents rather than paper versions will bring direct cost savings, with costs linked to paper trade documents estimated to be three times more than their electronic counterparts.

There is little doubt that to the bystander that the ETDA is a dry and inconsequential piece of legalese. However, by enabling the digitisation of trade documentation, it and similar legislation being implemented across the G20 and beyond, promises to create opportunities for corporates to conduct trade financing unlike what has come before.

By issuing a digital promissory note (DNP) or bill of exchange that gets immediately financed by a financial institution and discounted by suppliers, and then being able to choose the timing and frequency of the use of these solutions is transformational for businesses – driving extensive commercial advantage. As businesses seek to seize the opportunities abound and adoption inevitably accelerates, let us enter the age of SCF 2.0.

The global trade landscape is evolving at a considerable pace, with new developments resulting in both challenges and opportunities for banks and businesses across the world.

A number of factors are at play that are contributing to this, but undoubtedly, a key influencer is the rapid advancement of emerging economies. This is particularly true of the Asia Pacific region, with Latin American markets also gaining prominence as global commerce has become more integrated.

China has been at the forefront of this transformation, growing at a phenomenal rate in a short period of time, and coming to dominate world trade in terms of the volume of goods shipped and delivered. What’s more, as China evolves to become a middle market economy, trade dynamics are evolving yet further as it begins to shift its focus to consumption and the production of higher value goods, such as jet engine components and LED screens. In turn, the manufacture of cheaper goods that has traditionally been associated with China is now increasingly moving towards markets including Indonesia, Bangladesh and Vietnam.

The network of new trade corridors resulting from these economic shifts means that today’s global economy is more interconnected and interdependent than ever before.

Lower trade tariff barriers and advances in transportation and communication have supported the spread of global value chains, while the fragmentation of production processes has helped to boost trade growth, as components cross borders multiple times.

Of course, the global trade community is also facing numerous challenges, including the rising trend for protectionism, which is a significant barrier to trade. The U.S.’s stance towards anti-globalisation in particular, has spurred free trade advocates across the globe to examine new deals to reinforce global commerce and safeguard exports.

It is clear that we are no longer seeing the same levels of world trade growth as in the two decades preceding the financial crisis. These levels were inevitably going to trail off due to being fuelled by “one off” factors, including the rapid growth of the Chinese economy since joining the WTO in 2001, and the reintegration of the Communist bloc into the world economy. However, crucially, global trade remains a dynamic economic force with significant inter- and intra-regional opportunities for businesses to capitalise upon.

Harnessing supply chain data

Alongside the changes to the physical supply chain, technology is also playing a crucial role in paving the trade landscape we see today. New capabilities are coming to the fore and presenting the opportunity to enhance existing processes across the trade finance spectrum.

Advancements include documentation exchange and approval, harnessing rich data sets through analytics to unlock value throughout the supply chain, and the adoption of common documentation standards to help ease the passage of goods and services across the globe.

What’s more, the technology emerging around transparency and access to information is helping banks to equip clients with tools to manage their trade flows and accounts payable and receivable far more effectively than before.

Fintech advancements streamlining global transactions

Trade finance is increasingly becoming a data-led, data management business – and data could be extremely valuable with regard to improving the ease of doing business. Creating technology platforms for use by trusted user groups could facilitate the interchange of trade data and information, providing resources that can be shared and used by different participants in the supply chain to enhance existing processes. This is certainly an area where all participants could leverage technology and stand to gain significant benefits.

Developments are underway in this respect. Singapore-based CCRManager, for example, recently announced the launch of an electronic platform for secondary market trading. The platform supports risk distribution by enabling financial institutions to trade assets more actively and with a broader range of counterparties to help optimise their balance sheets. Of similar note is TradeIX, the world’s first shared platform for trade finance, built using distributed ledger technology and driven using application programming interfaces (APIs).

Shared platforms could also play a vital role in streamlining current processes for identifying and verifying clients by removing the need for multiple banks to duplicate due diligence on the same companies.

This will reduce costs and ensure data integrity, while maintaining the probity and sanctity of the global financial ecosystem. One such example is the Global Legal Entity Identifier (LEI), developed by the International Organization for Standardization (ISO). It connects to key reference data that enables clear identification of legal entities participating in financial transactions, thereby helping to contain market abuse and financial fraud.

Such capabilities could bring considerable value to the world of trade. With tightened regulations in the wake of the financial crisis making client on-boarding costlier and more complex, many banks have been forced to de-risk. This has been a prime contributor to the trade finance gap – which currently stands at US$1.5 trillion according to the Asian Development Bank, and has a detrimental impact on emerging economies and SMEs in particular.

With the long-term global economic trend for continued globalisation, the effect of financing shortages on trade growth is a pressing issue, and ensuring smaller nations and businesses are able to access trade finance is of paramount importance. By harnessing technology, the industry could potentially look to address existing issues to further support business growth and unlock new global trade opportunities.

Banks are beginning to provide the tools cross-border businesses need

In this increasingly complex, far-reaching and digital landscape, it is important that banks are able to provide effective, robust solutions that meet evolving market and client needs. By leveraging new technology capabilities, it is possible to not only enhance the client experience through improved efficiency and transparency, but also utilise data to gain a deeper understanding of clients’ businesses.

Banks can gain insights into clients’ trading patterns and business trends throughout the supply chain, and identify opportunities to nurture and add real value to existing relationships.

Investment into technology innovation can be a challenge for many local and regional banks. However, through local-global correspondent banking partnerships, smaller banks are able to benefit from new technology capabilities without the need for considerable upfront investment.

Such non-compete relationships are powerful means for banks to share expertise and digital solutions, thereby helping to ensure clients are positioned with the tools they need to navigate effectively and grasp trade opportunities to the full. BNY Mellon is a strong advocate of the correspondent banking model, and is investing heavily in its capabilities to help support its banking partners and the global trade landscape.

Technology developments are integral to the success of trade finance, and trade finance has never been more broad reaching and data-led. As global trade continues to evolve, it is by working together that banks can deliver new data-driven solutions, optimise the supply chain, and allow clients to confidently tap into the new opportunities and new corridors on offer in this vibrant, diverse trading landscape.

Despite increasing regulatory challenges, banks are collaborating to help bridge Asia’s trade finance gap.

Asia is set to contribute 60% of the world’s economic growth in 2017, driven by growing external demand as well as domestic reforms. Yet, a recent Asian Development Bank (ADB) survey estimates that approximately US$600 billion worth of trade in the region is failing to secure the financing it needs – out of a total US$1.5 trillion of unmet demand worldwide.

This “trade finance gap” is partly due to the increased regulatory requirements introduced in the wake of the global financial crisis, which have forced many banks to withdraw or reduce business in certain countries and sectors due to compliance costs. This de-risking has disproportionately hit small and medium-sized enterprises (SMEs) in emerging markets.

It has been estimated that globally, 74% of trade finance requests by SMEs and midcap firms are rejected. Moreover, Asia and the Pacific has the highest rejection rate with 39% of global rejections.

So whilst Asia needs increased liquidity to support its burgeoning trade, banks are decreasing the amount of liquidity available. Yet, through support from multilateral lenders, the application of new technology, and local-global bank collaboration, banks can help to address the trade finance gap. They can work to ensure businesses in Asia can access the support they need to seize the trade opportunities available.

Increase in compliance checks providing obstacles to trade finance

One of the most pressing constraints on trade finance is increasing compliance checks which inflate the costs, time and labor required to on-board new clients. Know-Your-Customer (KYC) requirements compel banks to gather increased data and information on each customer, including validating primary documents and identification.

According to an ADB survey, 90% of banks cite anti-money laundering and KYC requirements as a hindrance to their ability to offer trade finance.

Moreover, available liquidity is often misplaced against what is perceived to be “high risk”, from both a financial and compliance perspective.

One example of an initiative aiming to rectify this is The ADB’s Trade Finance Program (TFP). Through the provision of guarantees and loans from partner banks, the program has supported over 9,200 SMEs and US$25.6 billion worth of trade since 2009.

This type of program can back a range of transactions – facilitating the flow of everything from consumer goods to commodities and with quick response times of as little as 24 hours. Trade finance specialists are also available to support companies in the region by providing advice on how to engage in import and export activities.

For partner banks, this type of program allows increased country credit lines, capital relief, and expanded relationships with regional correspondent banks. Such a partnership helps banks build upon their longstanding provision of Asian trade services, and bring their services to a wider range of customers across the region.

Digitalization can help

Financial technology, or “fintech”, can also help bridge the trade finance gap. Blockchain, the emerging distributed ledger technology, could potentially enable cross-border transactions to be digitized, and hence verified and recorded in a matter of minutes, rather than the current processing time of up to several days. The technology holds substantial potential to help streamline the trade process, prevent fraud and accommodate KYC requirements by providing increased transparency and efficiency when it comes to verifying parties involved in a transaction, and processing a cross-border payment.

For their part, the SMEs and companies that have access to blockchain can pinpoint where a payment is and know exactly when it will be delivered. This has the potential to increase efficiency within supply-chain processes, provide greater assurance to companies and minimize payments disruptions.

Awareness of digital solutions and their potential to improve the trade process remains lower in developing countries. But this is something many global banks are working to address.

Increased collaboration between international, local and regional banks through correspondent banking partnerships is perhaps the most important element to bridge the trade finance gap.

Not only can partnerships between local and global banks help to kick-start a renewed buoyancy in trade, they are a powerful means for banks to share expertise and capabilities in order to provide the very best for clients and their trade experiences.

Local banks often lack the investment necessary to access new technologies that global banks can offer. In turn, local banks can provide a deep understanding of regional markets, as well as the unique challenges that customers face. Through partnerships and collaboration, local and global banks can bring to bear what the other lacks. Indeed, many global banks are deeply committed to working with local banks and their clients to help support the region’s trade needs.

With the Asia-Pacific predicted to continue as the fastest-growing economic region of 2017, it is crucial that banks are able to support the needs of local businesses and global trade. Establishing partnerships to combine local experience, global connections, a breadth of knowledge, and sophisticated technology can help ensure trade opportunities are accessible.