The digitisation of supply chain finance – state of play

This article was first published on BCR Publishing’s website in TRFnews on December 13 2019

Ahead of  BCR’s 2020 Supply Chain Finance Summit in Amsterdam which is to be chaired and moderated by both Lionel Taylor and John Bugeja, the founders of Trade Advisory Network discuss the impact of digitisation on supply chain finance.

Lionel Taylor and John BugejaThe physical supply chain is the underlying driver of supply chain finance. The financial supply chain is a closely related parallel process. The two concepts are connected by the flow of data, referred to as the information supply chain. Full, end-to-end digitalisation requires that data arising from each event in the physical supply chain and each event in the financial supply chain be captured automatically and used to drive processes, actions and events.

This is an aspirational goal which, in practice, will be impossible to deliver in a single leap, not least due to the sheer number and diversity (global and industrial) of stakeholders involved in international trade. What we are seeing instead is the development of digital solutions, often but not necessarily underpinned by distributed ledger technology (DLT), which seek to address elements of the end-to-end process. This pragmatic approach is sensible provided each initiative takes us a step closer to the ultimate goal and delivers tangible benefits to participating stakeholders.

The various consortia that have sprung up in recent years such as MarcoPolo, we.trade, Voltron and Komgo are good examples of collaborative platforms that seek to digitalise part of the end-to-end process.

This piecemeal approach tends to lead to the creation of digital islands where data has value and validity only within the closed community that subscribes to the relative consortium’s rulebook. In essence, the relationships between parties is governed by a contract to which all members have to agree. An obvious consequence is the lack of inherent interoperability between different platforms using different technologies or standards. The lack of standards is not just a technological issue but also an issue regarding definitions, practices and interpretations.

A project to address the technology standards is now operating under the auspices of the ICC – the ‘Digital Standards Initiative’ (DSI), building on the initiative formerly known as the ‘Universal Trade Network’ (UTN)*. This project is intended to promote and maintain standards-based interoperability between competing platforms/technologies leading eventually to an effective ecosystem that facilitates global trade and related finance.

At the same time, a set of rules governing definitions, practices and interpretations in respect of digital trade have been drafted by the ICC and are currently the subject of consultation with ICC National Committees. The resulting publication, Uniform Rules for Digital Trade (URDT), once finalised and approved, will provide a consistent basis on which digital trade can be transacted, financed and settled. URDT addresses the relationships between primary parties (seller and buyer), involved parties (e.g. carrier, insurer, 3PL etc) and finance providers (non-banks as well as banks).

…a set of rules governing definitions, practices and interpretations in respect of digital trade have been drafted by the ICC and are currently the subject of consultation with ICC National Committees.

URDT does not seek to create or rewrite jurisdictional law. The legal status of data created and shared across platforms is, in fact, a significant hurdle to widespread adoption. In trade and trade finance, certain documents confer obligations and rights on signatories and holders respectively and the simple replacement of a traditional document with an electronic record, of the type used to drive transactions across platforms, does not replicate these rights and obligations.

Take a negotiable payment instrument, such as a bill of exchange or a promissory note, for example. This confers upon the holder the right to get paid which is separate from, and independent of the underlying commercial contract. Such rights can be transferred by endorsement and delivery to the new holder. The essential characteristics that allow these instruments to be acceptable in law revolve around the concepts of originality, possession and delivery. A simple electronic record does not meet these criteria. To address this, the consortia have developed rules that govern their own version of a payment undertaking.

Similarly, a document of title, such as a bill of lading, confers upon the holder the right to take possession of the goods and such right can be transferred by endorsement and delivery. A simple electronic record is not a bill of lading in law, even if it is referred to as an ‘e-bill of lading’. Once again, the relationship between parties is governed by a rulebook.

The problem with the rule-based approach is that legal validity applies solely to parties that have signed the platform’s contract. Though this works perfectly well within the closed community, the platform’s electronic records have no validity in law beyond the closed community.

Ideally, we would have a digital document that replicates all of the characteristics of a paper document (i.e. originality, possession and delivery) without the disadvantages of creating, storing, validating and moving paper records. Such a solution, which is designed to work equally well with any platform/consortium or on a standalone basis, has been developed by EnigioTime AB and is being commercialised in collaboration with ITFA (International Trade and Forfaiting Association).

Given these developments, there is now greater confidence that digitalisation is poised to progress from ‘talk’ to ‘delivery’.

*The International Chamber of Commerce (ICC) is working on a Digital Trade Standards Initiative (DSI) to develop cross-industry digital trade standards that will build on existing work that has been done in the industry by the Universal Trade Network (UTN) as well as other initiatives and organisations.

Upcoming Events

Upcoming Events

ICC SCF SUMMIT, LONDON, 3RD & 4TH MAY 2017
Trade Advisory will be key contributors at the London ICC SCF Summit on 3rd & 4th of May and the pre-summit workshop on 1 May. In its sixth edition, the Summit will provide a unique opportunity to learn from experienced corporations and bankers about their visions and strategies in the new area of supply chain finance. You can expect insight and commentary on a wide range of issues: Developments in the Physical Supply Chain, Automating the Financial Supply Chain, compliance agenda in Supply Chain Finance, the role of credit insurance, ECAs and supra-nationals in facilitating Trade and Supply Chain Finance and more. The agenda will be carefully designed to address topics that are globally important from Europe’s perspective. While the first day will give a comprehensive overview on the emerging issues, the second day will be more focused on challenges in Europe.

Events

Events

The ICC Academy pre conference training workshop will be run by John and Lionel and take place at Maxwell Chambers, Singapore, 1st March 2017