Innovation in trade finance: Integration of electronic trade documents and new age technologies

In international trade, digitizing trade documents saves billions annually. Examples include invoices and packing lists, which are being digitized successfully worldwide. However, when it comes to negotiable instruments like Bills of Lading, Promissory Notes, Bills of Exchange and Warehouse Receipts, digitization is more complex and has yet to progress as much. Recent industry alignment and efforts around the UN Model Law for Electronic Transferable Records (MLETR) are now revealing the prospect of unmatched efficiency, cost savings, and new trade financing opportunities.

Vayana’s CEO & Founder, Ram Iyer, and Casterman Advisory’s Founder & MD, Andre Casterman, explored the impact of emerging regulations on electronic trade documentation and its implications for trade finance, incorporating technologies like Blockchains, Smart Contracts, and Artificial Intelligence.

Here are some key takeaways from their discussion during this webinar.

Inefficiencies in the current Trade Documentation

Before diving into the digitization process, let’s understand the challenges the current paper-based issuance system poses. Bill of Lading, the cornerstone of trade, faces issues due to:

  • The lack of a global standard
  • The legal requirements to use paper documents for negotiable instruments
  • Requires cross-referencing with many physical documents, needing to be couriered to multiple partners

A digital-first approach is priority

The major challenge is that Digital documents must be legally recognized as valid. Legal recognition of digital documents requires updating existing laws or introducing new ones. Additionally, multiple stakeholders are involved, particularly for logistics documents, such as shipping companies, carriers, warehouses, importers and exporters, and their respective port authorities. All these entities have different interests, needs, and systems, which must be approached individually, contributing to the overall complexity. Open platforms and interoperable technologies facilitate more seamless and efficient data exchange between supply chain participants.

Let’s explore some digital platforms and practices that can pave the way to unleash the full potential of making everyday trade easy.

1. MLETR: A Pathway to a Unified Global Pattern

The United Nations Model Law on Electronic Transferable Records (MLETR) is a visionary framework drafted to solve the dilemmas of digitization. Designed to create a coherent, uniform regulatory approach, MLETR empowers governments to enact laws for accepting digital trade documents. MLETR paves the way for a unified global paradigm in issuing and financing electronic trade documents by establishing consistency among jurisdictions and eliminating inconsistencies. It covers all negotiable instruments, whether used in logistics or banking.

2. Interoperability: Embracing Open-Source Standards

MLETR advocates open banking standards to ensure all stakeholders, from shippers to carriers, can participate effortlessly in digital trade transactions, irrespective of their chosen technology platform. Envisioning a simple trade transaction in an MLETR-compliant world, where emails and internet banking become powerful tools for global traders.

3. DLT in Digitizing Trade Documents

While MLETR remains technology-neutral, Distributed Ledger Technology (DLT) steals the spotlight as the preferred choice for digitizing trade documents. Its reliability, ability to track the document lifecycle and support for digital identities using e-signatures align perfectly with MLETR’s vision. DLT-based solutions possess the potential to transform trade by providing an impregnable foundation for the digitization of crucial documents.

Embracing new modes to automate processes and mitigate risks.

The digitization of trade documents will open the floodgates for trade financing, especially in open account trades. One can expect newer sources of liquidity, increased competition, and reduced cost of borrowing. The digital promissory notes and bills of exchange will facilitate the financing of SMEs. Smart contracts can automate payment processes, promote faster settlement, and improve liquidity management for both buyers and sellers. Moreover, digitization will allow lenders to underwrite better and manage risks more efficiently. Digital identities will enable faster onboarding of SMEs into the global trade ecosystem.

The Future of Global Trade

As we navigate through the shift in the world of trade digitization, it becomes evident that the days of paper-based inefficiencies are numbered. Embracing technologies like e-signatures, DLT and smart contracts has the potential to usher in an era of unprecedented trade efficiency and cost savings. Global supply chains, led by the smallest SMEs, will flourish with quicker and cheaper access to financing. But to truly unleash the full potential of digitization, governments and regulatory bodies need to evolve in tandem with technological advancements. The future of global trade is within our grasp, and digitizing trade documents will be instrumental in creating a borderless, seamless, and thriving international commerce landscape.