The financial services industry is in an exponential phase of digital transformation. In many areas, we are seeing a sharp decline in paper-based processes, such as payment transactions or liquidity management. In trade and supply chain finance, on the other hand, digitization has progressed slowly due to outdated systems and internal processes.
Trade is a complex business that requires a lot of documentation across the trade lifecycle, such as bills of lading, packing lists and origination certificates. For electronic documents (eDocs) to be used effectively and efficiently, all stakeholders must be able to process and create them. The frequent lack of these competencies is a major hurdle for digitization. And like in many other areas great practice is to be led by example and supported by regulation.
Impetus to digitize
Paper documents and original signatures are costly and neither sustainable nor secure. They can be easily duplicated and are the main cause of friction in trading. The Model Law on Electronic Transferable Records (MLETR) creates the basis for the legal validity of eDocs, paving the way for the digitization of trade. The adoption of MLETR in the UK and other markets will have a significant impact on international trade, making it easier and cheaper for companies to buy and sell internationally and help to reduce financing gaps for SMEs.
The Electronic Trade Document Bill is officially an act of law in the UK now. The industry is roaring about it and calls it the most important bill.
Improved access to digital data in conjunction with technologies such as AI will enable banks to automate processes such as credit decisions. This is especially important in the area of supply chain finance where short-term financing is predominant. Adopting digital identities can also reduce the processing time and costs for compliance in loan processing. This is particularly advantageous for SMEs, whose loan applications are often rejected in the Know-Your-Customer (KYC) or Anti-Money-Laundering (AML) phase because they do not always have the necessary proof of identification.
By reducing barriers to entry, costs and friction in trade, while improving accessibility and availability of liquidity, companies can grow faster, increase their trading volume, and thus contribute to stronger economic growth.
Digitizing trade is not an easy task. Financial negotiable documents have specific requirements that need to be considered, and trade processes are often fragmented, complex and subject to different legislation around the world.
To create a broad acceptance of MLETR, close cooperation between the public and private sectors is particularly necessary to raise awareness among stakeholders about the initiative and its benefits. Many experts from the public sector are currently working on MLETR, yet most of the financial services sector and SMEs are not yet prepared for the changes.
The passing of the UK’s eDocs Bill is a key impetus for global change. Given a large proportion of global trade transactions are based on UK law, it’s expected that now that the bill has received Royal Assent, many other regions will follow suit and introduce their own laws similar to those of the UK.
The ultimate goal is universal handling of eDocs in all countries, which would accelerate adoption and promote a modernized and seamless global commerce economy.
Importance of an open ecosystem
Through MLETR, the international trade ecosystem will become more open, digital and transparent, as well as increasingly characterized by smooth processing across borders. This also places new demands on banks and their role in international trade. For banks to remain relevant and not be superseded by other providers, they must first ensure that their middle and back-office processing systems are up-to-date and support the adoption of new processes, technologies and improved data access.
However, digitization is not just about the software – additional partners are needed to help banks improve their end-to-end processes. In addition, the road to interoperability is long and arduous. Banks should drive digitalization through an ecosystem that enables the integration of third-party services and the transfer of information between institutions in a standardized way.
By leveraging open APIs and open finance, the industry can better collaborate, integrate, and communicate. This will connect "digital islands" and create a truly digital and inclusive trade and supply chain finance industry, that’s open, dynamic and agile to respond to future needs.
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