The collapse of traders like Hin Leong Trading Pte Ltd and Zenrock Commodities Trading Pte Ltd (“Zenrock”) left banks that made payments under letters of credit (LCs) out of pocket when their customers went under without reimbursing them. The banks in this predicament have, in a spate of recent cases, attempted to recoup payments under LCs made to beneficiaries whom they allege have received payments for fictitious trades. By and large, banks have had an uphill task when it comes to recovering or refusing LC payments. The law’s recognition of LCs as the “lifeblood of commerce” has permitted very limited instances of refusal to pay on LCs or recovery of sums paid under them. 

A significant clarification for banks resisting LC payments came from the Singapore Court of Appeal last year (in Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corp Ltd and another suit [2024] SGCA 31). The Court of Appeal clarified that a bank may refuse payment for a presentation that the beneficiary not only knew to be false but also in respect of which it was reckless as to whether the statements it made to the bank were true or false. This is particularly acute in the oil trade where payment letters of indemnity provide representations as to the shipment of the goods and the title relating to it, which may turn out to be untrue. 

Another significant decision on the subject of LC payments from the Singapore courts last year was Banque de Commerce et de Placements SA, DIFC Branch & Anor v China Aviation Oil (Singapore) Corporation Ltd [2024] SGHC 145 (“BCP v CAO”). This Singapore High Court decision makes a number of points of practical significance which we cover in this update. 

Facts: Two parallel sales chains or one circular chain? 

The Geneva branch of Banque de Commerce et de Placements (“BCP”) issued a letter of credit to finance Zenrock’s purchase of an oil cargo from China Aviation Oil (Singapore) Corporation Ltd (“CAO”). The LC was confirmed by UBS Switzerland AG (“UBS”). In line with the usual practice in oil trading, the LC permitted payment against a payment letter of indemnity (“LOI”) (instead of original bills of lading (“BLs”)) and invoice. UBS paid against CAO’s presentation of an LOI, and was reimbursed by BCP. 

BCP sought to recover the sums it paid under the LC on the basis primarily, that the contract between CAO and Zenrock was a sham and/or fraudulent transaction, and hence that CAO had made fraudulent and/or negligent misrepresentations to BCP in its LOI. The sales chains for the cargo, as found by the Court, can be summarised as follows: 

• A chain of sales involving Petco – Zenrock – Petrolimex (“Series A”). Title in this chain passed from Petco to Zenrock when the oil passed the flange connection between the delivery hose at the loading port and the vessel’s permanent hose connection. Title, however, passed from Zenrock to Petrolimex only upon receipt of the full contract price (which was due only 30 days after the bill of lading date).  

• Another circular chain of FOB sales, Zenrock – Intermediate Seller – SEIS – CAO – Zenrock (“Series B”). Title for each of the contracts in Series B passed simultaneously when the oil passed the flange connection between the delivery hose at the loading port and the vessel’s permanent hose connection.

The thrust of BCP’s case was that the CAO-Zenrock contract was a sham and/or fraudulent transaction. As such, BCP alleged that CAO did not sell any physical cargo to Zenrock. Among other things, BCP argued that physical cargo only moved in the Series A chain, not the Series B chain. It accordingly argued that the representations in the LOI were false. These included representations as to 

1. The existence, authenticity and validity of documents which included the “full set of signed [BLs] issued or endorsed to [BCP Dubai] (the “BCP OBLs”)”, 
2. Entitlement to possession of the documents which included the BCP OBLs; 
3. Entitlement to possession of the cargo immediately prior to the cargo coming into Zenrock’s possession; 
4. CAO having title to the cargo immediately before title passed to Zenrock. 

Zenrock was found to have acquired title from Petco before the Series B transactions commenced and was required to pass title to Petrolimex only after it was re-vested with title in Series B. 

As such, the Series A transactions were found to co-exist with the Series B, instead of being mutually exclusive. 

The evidence from the Court’s judgment supporting a co-existence of both trades appears to be grounded on the provision that title to Petrolimex passed on payment while the rest of the parties operated on title passing at the load port flange. It remains open for consideration if the same finding would have been found if all parties, including Petrolimex, operated on the basis of title passing at the load port flange – after all, only one party can have title at any time and the sequencing of the passing of title is critical. 

Finding: Was the Zenrock-CAO Contract a sham? 

One of the arguments asserted by BCP was that there was no physical shipment because the CAO-Zenrock contract was a sham. The Court disagreed with this assertion for a number of reasons, for example:

• CAO’s personnel gave evidence of having conducted due diligence and negotiations for both the purchase and sale leg of the transaction; exchanged deal recaps; and performed operational tasks concerning vessel nomination, the appointment of an independent surveyor to witness cargo loading and inspect its quantity and quality, and checking the documents presented under the purchase leg and documents to be presented to the LC bank under CAO’s sale leg to Zenrock.
• There was a legitimate commercial reason for Zenrock to conclude Series A and Series B transactions: to secure funds for an additional 35 days. 
• The mere fact that the transaction was concluded speedily, and did not envisage the exchange of original BLs, did not point to it being a sham since it is not unusual for oil cargoes to be sold promptly, and it is industry practice for LOIs to replace BLs for oil trades. 
• As a matter of industry practice, there was nothing unusual with a CAO not investigating the participants in the entire sales chain beyond its immediate buyers and sellers. 
• As title passed simultaneously in Series B, Zenrock was revested with title, and had good title before it passed title to Petrolimex. There was accordingly no reason why Zenrock would have orchestrated a sham circular trade in Series B when it could have performed both the Series A and Series B contracts legitimately. 

The Court found that on a proper interpretation, by way of the LOI, CAO represented that:

1.  The BLs had been issued (i.e., they existed, and were authentic and valid), but that 
2. They were unavailable in that they had yet to be issued or endorsed to BCP Dubai at the time of presentation, and 
3. The BCP OBLs would be endorsed to the order of BCP Dubai in due course (i.e., once CAO received them from its seller). 

None of these representations were found to be false since BLs for the cargo existed and CAO was entitled to them under its contract with SEIS. Further, since the CAO-Zenrock contract was not sham, and the full sales chain was known, the Court concluded that CAO was entitled to possession of the cargo immediately prior to it coming into Zenrock’s possession, and had good title immediately before passing title to Zenrock. 

The Court noted that BCP’s claim for misrepresentation failed for the additional reason that none of the representations in the LOI were made to BCP. The LOI was addressed to Zenrock, and in any event, presented to the confirming bank, UBS and not BCP. 

Comment: Arguments on sham and shipment

This case confirms the arduous task that a bank resisting an LC payment bears and the importance of industry practice of the particular commodity in question in deciding whether a sale contract is a sham contract. 

BCP’s argument that CAO did not ship any physical cargo to Zenrock was seemingly predicated on its position that the CAO-Zenrock contract was a sham and/or fraudulent transaction. This contrasts with how the banks argued the case in Winson. There, in alternative to arguing that the underlying sale contracts were sham, the banks also separately argued that the cargo was not shipped as described. The Court in Winson did not have to address the issue of sham as it was satisfied that the cargo was not shipped as described. 

Given sham entails an enquiry into parties’ subjective common intentions, it is preferable for a party resisting payment to plead it as an alternative argument to an objective challenge regarding the underlying shipment, which may be easier to establish. However, the outcome in BCP v CAO is unlikely to have been different even if the underlying shipment was challenged since the Court found that the sales chains in Series A and Series B were not mutually exclusive. 

It is further noted that BCP curiously failed to plead that CAO’s presentation under the LC was fraudulent, i.e., the fraud exception to payment under LCs. Rather, its pleadings focused on the fraudulent representations in the LOI, i.e., the tort of deceit. Whilst the Court noted that the elements of the fraud exception and the tort of deceit are similar, BCP was not allowed to rely on the fraud exception as the two causes of action have different juridical basis and CAO would be prejudiced if BCP is allowed to rely on the fraud exception. A payment LOI is often used as one of the documents needed for an LC payment. Careful consideration needs to be given to the interplay of these two documents when seeking to raise arguments based on fraud.

The post Clawing back LC payments: BCP v China Aviation Oil appeared first on Trade Finance Global.

The aforesaid differentiates deferred payment LCs from sight payment LCs; however, the two are not merely opposites. Apart from deferred payment credits, non-sight payment LCs may be available by acceptance and negotiation.

Deferred payment, acceptance, and negotiation are each a separate method of LC availability defined in the Uniform Customs and Practice for Documentary Credits (UCP). They represent extant customs and practices of LC issuers and their correspondent banks that have developed over time. UCP requires that an LC state its method of availability, i.e. whether it is available by sight payment, deferred payment, acceptance or negotiation.

For payment at a future maturity, the methods of deferred payment, acceptance, and negotiation may be used. Key differences between the three methods are found in the acts of the nominated bank when they are available with a nominated bank:

• In deferred payment credits, a nominated bank honours by incurring a deferred payment undertaking (DPU) and paying at maturity. 
• In acceptance credits, a nominated bank honours by accepting a bill of exchange (draft) drawn by the beneficiary and paying at maturity. 
• In negotiation credits, a nominated bank negotiates by advancing or agreeing to advance funds to the beneficiary on or before the due date for reimbursement.

A nominated bank (NB) is a bank with whom the LC is available, apart from the issuing bank. By making its LC available with an NB, the issuing bank allows presentation to be made to the NB and undertakes to honour a complying presentation made to the NB.

Whilst an NB is not obligated to act on its nomination unless it has prior expressly agreed to do so with the beneficiary, an NB may opt to act on its nomination when it receives a presentation.

A notion exists that deferred payment credits are issued for the avoidance of drafts. In certain jurisdictions, stamp duty is levied on drafts, driving up the cost of LCs if drafts are used. Deferred payment credits are the most direct alternative to acceptance credits, given that in both of these methods, an NB honours a presentation by providing its promise to pay and paying at maturity. In an acceptance credit, this promise is by way of accepting a draft, whereas in a deferred payment credit, this promise is by way of a DPU.

However, deferred payment credits have likely been used most as an alternative to negotiation credits, rather than acceptance credits. Anecdotally, the majority of LCs available by negotiation call for drafts. Although the use of drafts is unnecessary for negotiation credits, banks have nevertheless called for it, likely a legacy practice that has not been revised even as the UCP has been revised over the decades.

Clearly, drafts can be avoided in a negotiation credit just as they are in a deferred payment credit. Hence, the avoidance of drafts is not relevant to the choice between a deferred payment credit and a negotiation credit.

For the issuing bank, its obligation to honour a complying presentation is the same regardless of the method of availability with an NB. The issuing bank must honour by paying at maturity if the NB does not honour or negotiate. (If the NB has honoured or negotiated a complying presentation, the issuing bank must reimburse the NB at maturity.)

When an LC is available with the issuing bank solely (i.e., there is no NB), the issuing bank has the option of only issuing its LC by deferred payment or acceptance unless it is a sight payment LC. A negotiation credit cannot be issued, as by its definition, negotiation is the act of an NB of advancing or agreeing to advance funds to the beneficiary prior to reimbursement by the issuing bank (or a confirming bank, if any). If it wishes to avoid drafts, it can only issue the credit available by deferred payment.

When an LC is available with an NB by deferred payment, the NB honours by incurring a DPU and paying at maturity. It is also authorised to purchase or prepay its DPU, i.e. to pay before maturity. When acting on its nomination, the NB adds its undertaking (in addition to that of the issuing bank) to pay the beneficiary. The effect is akin to a confirmation of the LC by the NB. Payment by the NB is without recourse to the beneficiary since it would be a discharge of the NB’s own obligation or liability to the beneficiary. 

When an LC is available by negotiation, the NB negotiates by advancing or agreeing to advance funds to the beneficiary ahead of the due date for reimbursement by the issuing bank. A confirming bank must negotiate without recourse. When an NB that is not a confirming bank negotiates, it need not be akin to a confirmation if bilaterally agreed with the beneficiary that the negotiation is not without recourse.

When you would issue a deferred payment LC?

The question may be asked of whether the beneficiary has an understanding, agreement, or arrangement with the nominated bank for the NB to incur a liability on the LC by issuing its own undertaking to pay the beneficiary at maturity. If the NB is not prepared to incur a DPU, it would hardly matter to the beneficiary that the LC is available by deferred payment with the NB, as the NB is not going to act on its nomination. If however the NB is prepared to incur a DPU for a complying presentation, it would make a lot of sense to the beneficiary as it would then have a payment commitment by the NB in addition to that of the issuing bank under a complying presentation. 

Flexibility in the arrangements

In regard to flexibility on the arrangements between the beneficiary and the nominated bank, availability by negotiation would appear to be the most convenient if the NB is prepared to negotiate. 

If the NB is not prepared to either honour or negotiate, its role will be simply that of providing the beneficiary with a place to make a presentation, which, if complying, binds the issuing bank: if the NB is prepared to handle the presentation. 

The choice of LC availability ought to be the beneficiary’s, rather than that of the issuing bank or applicant, subject of course to agreement of the issuing bank which takes its instructions from the applicant. 

• Noting that drafts are unnecessary for negotiation credits, the avoidance of drafts does not serve as a consideration for preferring availability by deferred payment to negotiation, from the perspectives of both the issuing bank and applicant. 
• For the beneficiary, if the NB is prepared to act on its nomination under a deferred payment credit even without confirmation, that is arguably the ideal method of availability. 
• From an issuing bank’s perspective, the method of availability does not affect its undertaking to honour a complying presentation or to reimburse an NB that has honoured or negotiated.

The post When would you issue a letter of credit available by deferred payment? appeared first on Trade Finance Global.

Our data team poured through the analytics of hundreds of podcasts, videos and stories published on Trade Finance Global in 2024, to bring you most loved podcasts, videos and stories of the year.

The post 2024 unwrapped: Who topped the charts for trade, treasury and payments? appeared first on Trade Finance Global.

This article will explore digitisation vs digitalisation, explaining the differences between these two concepts and providing examples of their applications and implications in especially trade finance industry.

What is trade digitisation?

Garther’s definition of digitisation:

“Digitisation is the process of changing from analog to digital form, also known as digital enablement. Said another way, digitisation takes an analog process and changes it to a digital form without any different-in-kind changes to the process itself.”

So, digitisation means converting data from analogue format, like paper trade documents, into digital files. It’s like making a digital copy of originally existed in a non-digital form. This is often done via scanners to improve storage, to enable accessibility and to share data.

Examples of digitisation

Documentary credits (L/C)’s are one of the most worked areas of digitisation. For automation of document examination under documentary credits (L/C), the following flows are done by banks;

– Paper trade documents are scanned,

– The scanned trade document images are processed by OCR,

– The party names, countries, ports, dates, amounts, currencies, etc. are extracted,

– Reading of structured messages, such as SWIFT MT 700 to determine baseline data set,

– Captured trade data are used to support the document examination process for consistency, (for example, applicant & beneficiary details in invoice or B/L literally match)

– Machine Learning and Natural Language Processing (NLP) and RFP can be used.

All of this L/C automation process is digitisation. The paper based, analog structure is converted digital format within the bank, while the business format remains unchanged.

Another pertinent example is from supply chain management: an exporter has to use paper invoices in all processes involving government bodies (such as customs), banks, and buyers, even though all invoice data already exists in the exporter’s ERP system. After these parties receive the invoice for their processes, each of them scans the document to use it within their internal workflows. As a result, every stakeholder creates its own data silo to support their operations. This demonstrates that with digitisation, traditional process flows have changed very little, beyond having accelerated.

It is very difficult to determine the origin of data items in digitised PDF documents, even if they are digitally signed. While the PDF may include structured data for purposes such as AML, ESG, and deep-tier financing, its authenticity is limited to the document itself. 

The individual data items within the PDF cannot be traced back to their originators, leaving deep-tier suppliers unauthenticated. This creates a significant barrier not only for financing downstream firms, especially SMEs, but also for tracking the ESG lifecycle of goods.

What is trade digitalisation?

As mentioned in ICC Digital Standards Initiative (DSI)’s – Trust in Trade – Verifiable Trust report:

“Trade digitisation leaves the biggest portion of the digital dividends untapped by ignoring most of the digitalisation’s change potential.” 

Full digitisation in trade means that paper documents are replaced by structured data. This data can be transmitted through APIs, enabling real-time processing and integration with downstream systems. These systems can instantly acknowledge receipt and provide feedback, also via APIs. A completely digital system for structured trade data transmission and processing is referred to as a “data supply chain.” This data supply chain can support the movement of physical goods in a connected supply chain.

Conveyed trade data via APIs should retain its attributability to its source, no matter how often it has been forwarded, transformed and processed along the data supply chain. The authenticity of data is ensured through a chain of cryptographically verifiable steps linking it back to its source. So the provenance or origin of supply a good or deep-tier suppliers can be proved.

The rise of digitisation coincides with the acceleration of new digital technologies like using cloud computing, machine learning, artificial intelligence, business intelligence, and the internet of things in the last decade.

Examples of digitalisation

An invoice issued in the ERP system of a vendor in Germany must remain traceable to that vendor when it reaches the ERP system of a buyer in Singapore for processing. If routed through a B2B platform beforehand, the invoice must still retain its link to the original vendor. Additionally, any data in the invoice from an upstream supplier, such as a manufacturer, must also remain traceable to that supplier. This would make possible not only deep-tier financing, AML, KYC controls and enabling sustainability measures.

Regarding L/C processes, full digitisation means that:

– Banks would use structured invoice data directly pulled via APIs from the ERP systems of corporates. Similarly, banks could access B/L (Bill of Lading) data as soon as the goods arrive at the port.

– Verifiable trade data would be sufficient to determine compliance with L/C requirements. All checks could be performed automatically, eliminating the need to scan paper documents or process data images using OCR to verify consistency.

As another example, Türkiye has introduced new import inspection rules to determine whether certain goods, identified by their GTIP codes, are suitable for their intended use. These goods are prohibited from being used in the food, agriculture, and livestock sectors. The inspections are to be conducted by authorised customs brokers and the Ministry of Agriculture. 

Although the regulation’s intent is reasonable, without digitalisation, it is nearly impossible to track imported goods throughout their long supply chain journey. A single imported item might be resold up to ten times within the country, with each buyer potentially processing it further. Tracking these goods manually becomes a daunting task under such circumstances.

—

Digitising trade by merely scanning papers and processing data images using OCR does not meet the modern demands of supply chain and finance, ESG compliance, AML regulations, or Know Your Product (KYP) requirements. Achieving effective traceability requires supply chain data to flow through verifiable supply chain data chains.

Digitalisation in trade is not yet fully mature. To enable this transition effectively, we need robust trade data standards, reliable data-sharing frameworks, digital legal identities, and, most importantly, legal frameworks that facilitate the shift from digitisation to digitalisation.

Jurisdictions must adapt their legal systems to recognise and enforce key principles such as reliability, integrity, exclusivity of control, and singularity in electronic records. These adaptations should align with international standards, like those outlined in the UNCITRAL Model Law on Electronic Transferable Records (MLETR). Additionally, any solution must comply with local legal frameworks to reduce trade parties’ reliance on private rulebooks, ensuring broader adoption and legal certainty.

This article was originally published on LinkedIn, here.

The post Digitisation vs Digitalisation in trade and finance appeared first on Trade Finance Global.

The bank’s Trade Institute, launched earlier this year, secured the accreditation following what LIBF described as a “rigorous assessment” of its curriculum. The programme has already trained more than 1,000 clients through virtual and face-to-face sessions. It focuses on trade industry guidelines and banking solutions.

Angel Cheung, Standard Chartered’s global head of trade client service, said the accreditation contributed to “raising industry standards” amid a global trade environment which is increasingly hard to navigate.

This marks LIBF’s first-ever accreditation of a bank’s external trade training programme. Alex Gray, LIBF’s director of trade and transaction banking, noted the partnership’s historical significance, especially as “both institutions have a shared history dating back to the 19th century.”

The curriculum covers various aspects of trade finance and aims to enhance clients’ understanding of industry practices whilst familiarising them with Standard Chartered’s trade solutions. Topics include letters of credit (both import and export), guarantees, standby LCs, and fundamental trade finance concepts with Incoterms coverage. 

The curriculum combines in-person and online learning sessions, featuring practical applications on how to handle documentary credits and managing international trade risks.

The accreditation comes as banks face increasing pressure to provide more sophisticated support in terms of client-focused financial education.

The post Standard Chartered secures LIBF accreditation for client trade training appeared first on Trade Finance Global.

The acceptance credit differs from credits available by other forms by being the only type of credit which obligatorily stipulates that drafts are to be drawn.

The other methods of availability are:

• Sight payment: a drawing is honoured by paying at sight.      
• Deferred payment: a drawing is honoured by incurring a deferred payment undertaking and paying at maturity. 
• Negotiation: a nominated bank may negotiate by purchasing drafts drawn on another bank and/or documents by advancing or agreeing to advance funds to the beneficiary on or before the due date for reimbursement.

UCP 600 requires that an LC must state whether it is available by sight payment, deferred payment, acceptance or negotiation.

By authorising a nominated bank to honour or negotiate, the issuing bank undertakes to reimburse the nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.

Although LCs available by sight payment and negotiation may call for drafts, these types of LCs can be issued without calling for drafts. Deferred payment credits have traditionally been issued for the avoidance of drafts.

Availability by acceptance should be the exception, not the norm     

An LC is first and foremost the issuing bank’s undertaking to honour a complying presentation. It follows that drafts, if any, should be for the issuing bank to honour. With this in mind, if an issuing bank did not know that a nominated bank (NB) wanted drafts to be drawn on the NB, why would it make its LC available with the nominated bank by acceptance?  

Drafts should not be required under LCs unless there is an arrangement with the nominated bank to honour by way of acceptance.

Whilst there is no requirement for it do so, the issuing bank might wish to enquire of the applicant the reason for its application for an LC available by acceptance.

It might well be that the beneficiary requested an acceptance credit, and this presumably so because the nominated bank to which the beneficiary intends to present documents has indicated that it wants drafts drawn on the NB.

Some confirming banks stipulate that drafts must be drawn on the confirming bank. When this is the case, the correct method of availability of the LC is acceptance with the confirming bank. 

It would not be correct for a confirming bank to negotiate drafts drawn on itself, given that UCP 600’s definition of negotiation relates to drafts drawn on a bank other than the nominated bank. The definition of negotiation does not necessitate drafts, because it states that negotiation means the purchase of drafts and/or documents, i.e. the purchase can be of documents without including drafts.

In 2019, the International Chamber of Commerce published a guidance paper on the use of drafts under documentary credits. The paper shows how successive revisions of UCP have progressively diminished the relevance of drafts in LCs. The gist of its recommendations was that drafts should not be called for in LCs and that deferred payment credits should be the preferred alternative to acceptance credits unless there were specific commercial, regulatory, or legal reasons to create an acceptance under the LC. 

—

It ought to be noted that whilst an acceptance credit calls for drafts, the issuing bank’s undertaking to honour a complying presentation does not depend on whether drafts have been accepted. This is because UCP 600 is clear that if a complying presentation has been made to a nominated bank and the nominated bank does not accept a draft drawn on it or does not pay after having accepted such a draft, the issuing bank must honour it. 

There is no provision in UCP 600 requiring the beneficiary to redraw drafts on the issuing bank if the nominated bank does not accept drafts drawn on the NB. Hence, even when an LC is available by acceptance, payment by the issuing bank for a complying presentation does not require that drafts be accepted.

Given the case that even in an acceptance credit, the issuing bank’s undertaking to honour a complying presentation stands regardless of whether drafts have been accepted, the question is: Why call for drafts at all? All in all, rather than standard practice, acceptance credits should be viewed as the exception.

The post When would you issue a letter of credit available by acceptance? appeared first on Trade Finance Global.

• Digitalisation can lubricate the onboarding process.
• Universal standards and regulation are a necessity for simplified digital trade document handling.
• Advanced data analytics can allow financial institutions to better predict risk.

Digitalisation, long viewed as the catalyst for revolutionising trade finance, is one of the most promising avenues to enhance access to financing, particularly for SMEs. The trade finance sector has historically been weighed down by laborious, manual processes—many of which are time-consuming, costly, and prone to error. 

Onboarding at scale

For decades, one of the most persistent pain points has been the complexity of Know Your Customer (KYC) processes. These compliance-driven requirements, which mandate thorough client verification, are particularly resource-intensive for smaller transactions and newer businesses. 

The financial burden of these procedures, which include extensive documentation and verification, often incentivises financial institutions to focus efforts on their larger clients, who need to finance larger transactions, making it difficult for smaller businesses to secure credit. 

Digitalisation, however, promises to automate much of this onboarding process. By digitising KYC checks, banks and financial institutions can reduce the time and resources required to evaluate clients, thereby lowering costs. This shift makes it feasible for financial institutions to serve SMEs at scale without compromising the rigour of due diligence or regulatory compliance.

In summary, as one participant emphasised, “We need to scale. We need to get ready for the potential influx of the origination business coming from the primary centres.”

Standardise to enable document digitalisation at scale

One promising advancement towards achieving this scale has been the Digital Negotiable Instruments (DNI) initiative, which has gained significant traction, outpacing other platforms with similar objectives. The DNI has simplified trade document handling, enabling smoother, faster, and more transparent cross-border transactions. 

Electronic documents can be processed faster than paper ones, reducing the time it takes to complete trade transactions. Moreover, digital records offer enhanced traceability and audibility, further strengthening the integrity of trade finance operations.

Another promising development is the rise of the ICC DSI’s KTDDE (Key Trade Documents and Data Elements), which is helping to align data throughout the trade finance ecosystem, reducing the cost and risk associated with constantly transforming data as it moves between systems. The KTDDE also recognises the DNI standards for negotiable instruments as the preferred international format.

In a sector that has long relied on paper-based tools, such as bills of lading and letters of credit, which are slow and susceptible to fraud, loss, or mismanagement, document digitalisation is a critical step forward. However, it cannot be efficiently done without a standardised environment. 

As of the KTDDE November 2023 report, only 21 of the 36 key trade documents analysed are standardised. While more work is needed in these areas, the industry has made significant strides in 2024 and has the potential for further innovation and scaling in 2025.

environment.

Source: ICC DSI, Key Trade Documents and Data Elements, 2024

Beyond standardisation and streamlining the onboarding process, digitalisation allows for better data collection and management, a critical aspect in improving the underwriting and risk assessment processes.

Leveraging data 

Through advanced data analytics, financial institutions can draw on a wealth of real-time information to predict risks more accurately and make better-informed decisions. This is particularly vital for SMEs, which often lack the credit histories or financial data that larger corporations can offer. 

As one participant noted, “If the transactions are digital with data from the beginning, we are in a different position when it comes to sharing data and harvesting it for downstream processes like sanction screening or risk assessment.” 

This real-time data, gathered from digital transactions, enables institutions to assess creditworthiness more effectively, providing a clearer understanding of risk profiles, especially for lesser-known businesses. As more accurate data is fed into the system, financial institutions can build confidence in lending to SMEs, which might have previously been considered too risky.

However, as financial institutions increasingly rely on data-driven algorithms to assess risk, monitoring for potential algorithmic discrimination becomes crucial. Without careful oversight, these systems could unintentionally reinforce biases, disadvantaging certain groups or businesses. Ensuring transparency, fairness, and accountability in the way algorithms process and interpret data will trust and foster inclusive access to trade finance for all SMEs, which are essential steps.

Regulation enabling digitalisation  

Regulatory changes, such as the adoption of frameworks like the Model Law on Electronic Transferable Records (MLETR), are also supporting the move towards digitisation. 

This regulatory shift is crucial in providing the legal backing for electronic trade documents to be recognised across borders. There is no bigger hurdle to digital document adoption at the firm level than the fear that such a document would not be recognised by the legal system in the event of a dispute. 

As more countries adopt MLETR or similar frameworks, the potential for global digital trade finance increases exponentially. One participant said, “We need a more widespread regulatory movement for more geographies to adopt it because trade doesn’t work in isolation. Just the UK passing regulation or one more geography will not be enough.”

Another added, “If we see more adoption, more geographies, and therefore more companies and clients adopting it when our clients push us, we will move.”

SMEs, in particular, stand to benefit from a shift towards a digitally friendly legislative environment. With electronic trade documents reducing the friction in international transactions, SMEs can access new markets and expand their global footprint, backed by faster and more secure trade financing options.

Digitalisation in the years ahead

Digitalisation will help to reshape trade finance by addressing longstanding inefficiencies in processes like KYC, underwriting, and document management, which will narrow the funding gap by making it easier for smaller businesses to access credit. 

The use of automated tools, such as AI, for onboarding, policy writing, and risk underwriting will help to consistently lower the costs of servicing clients. These developments, both among the major providers and smaller providers augmented by specialised platform providers, will help make credit insurance cheaper and more open to the smaller end of the SME segment.

But there is more to digitalisation than just digitalisation; without standardised methods and enabling legislation, there can be no digital transformation at scale. 

As digital platforms and tools are adopted more widely, they will improve access to financing for SMEs, making it easier, faster, and cheaper for smaller businesses to participate in global trade. By leveraging the power of digital tools, trade finance institutions can open up new opportunities for SMEs to grow and thrive in the international marketplace. 

The traction gained in 2024, particularly with initiatives like DNI and KTDDE, indicates a promising future, as the industry looks to build on these advancements and overcome the scaling challenges ahead in 2025.

Download the Whitepaper Now

The post Digitalisation across segments: Are we doing enough to bridge the trade finance gap? appeared first on Trade Finance Global.

Technical Committee 68 of the International Organisation for Standardisation (ISO) for financial services standardisation created a common standard,  ISO 20022, around two decades ago. This development was transformational. It was adopted as the soul and core of the Single Euro Payments Area (SEPA) payments market infrastructure clearing, which kicked off in 2008. Within a few years, the interoperability between the payments of over 15 countries using EUR was created.

Now there are over 70 similar ISO 20022-based payment market infrastructures in the world. Finally, in the international payments context, the SWIFT banking system will move to ISO 20022 in November 2025.  So, in payments or cash management, all market stakeholders know how and with which standard to exchange data between any party in the payments value chain. 

This is exactly what we need to achieve in the trade and trade finance domain as well.  Moving from proprietary Swift message type (MT) standards to openly and freely accessible data standards and detailed documentation of business processes across trade finance lifecycles is essential to ensure foundational interoperability. In short, stakeholders will be able to speak the same data language.  

Five or ten years ago, talking the same data language was a distant dream, but suddenly now, by the work of various trade domain stakeholder groups, the industry is heading well into the same direction. It will be a long and winding road, but the endpoint is in sight.

Straightening the winding road

Everything starts with the business case. It might have been partly the COVID-19 Pandemic which showed that old, paper-based, and honestly tedious manual processes have to be improved. Additionally, the open standards-based approach in the payments domain has likely spurred digitalisation within the trade sector. 

In the context of international trade and trade finance, key components of digitalisation include necessary legal reforms, digital identities with robust digital trust, and access to open standards and development documentation. 

The Model Law on Electronic Transferable Records (MLETR) addresses the need for a legal framework that permits digital processing alongside traditional paper-based methods. Many technical, functional, and even regulatory solutions are developed for digital trust enablement. Focusing on the last pillar – for all documentation to be openly available at the various community channels – is essential for full digitalisation. Meanwhile, the Standardised Trust community has focused on transparency, ensuring that all documentation of the team’s contributions and outcomes is accessible through various community channels.

Solving these prerequisites makers on the trade digitalisation base work try to offer key building blocks for open and harmonised data exchange between various trade and trade finance parties. 

And finally, all aims to secure the payments in global trade mitigating its risks with digital approach. More complex and challenging geopolitical situations and existential challenges (climate change and various other sustainability risks) don’t allow for slow and paper-based processes on the goods delivery and their payments anymore. 

Ensuring an inclusive transition

A majority of national economic welfare comes from small- and medium-sized enterprises (SMEs). This is challenging in the context of global trade, as this group of operators are also the ones unable to invest in the latest digital solutions – unless they are offered in an easy and reachable manner.  

The same is true for financing. Letters of credit and bank guarantees are neither the easiest nor the cheapest instruments. By digitalisation and better risk management, there should emerge easier ways to manage trade risks and lower costs and complexity through higher levels of automation. Facilitating accessibility to various platforms where both actual instrument use and related risk mitigations can be covered as a holistic solution, would also improve the standing of SMEs. 

To reiterate: there is no way to safeguard solutions with legacy or proprietary approaches when digital data and information exchange with a common semantic model are needed.

For Standardised Trust’s part, offering a semantic model for letters of credit and bank guarantee data exchange with an understandable and structured data model explained through clear semantic definitions, aids in SME inclusion.   

Standardised Trust doesn’t develop its own application solutions or platforms, but each solution provider may use its model when planning and designing the data exchange with other relevant trade and trade finance platforms. Digital security and trust are important prerequisites for reliable data exchange and can best be provided and implemented by area specialists. 

To this end, Standardised Trust has created GitHub environments to share technical documentation, and it works as one channel to promote the Standardised Trust artefacts. It includes JavaScript Online Notation (JSON) schemes for the letter of credit and bank guarantee technical data structure for anyone interested in exploring and using it for their own application development. JSON schemes are a good way of designing application programming interface (API) integration interfaces to any existing or new platforms. 

The current trade ecosystem development effort is very promising. The rationale of the trade digitalisation business case has been finally approved, which has likewise improved the willingness to participate in the next steps.  

The Standardised Trust team’s contribution of open, easily accessible, and usable tools and documents may help any party interested in offering digital information exchange capability. Having a semantically common language makes digital communication happen smoothly. 

The post The crux of the trade finance interoperability challenge appeared first on Trade Finance Global.

• 2024 ICC Trade Register report reaffirms low risk nature of trade finance assets, despite a slowdown of global trade volumes in 2023.
• Receivables finance is outpacing traditional documentary trade products, marking a shift towards open account trade and flexible working capital solutions.
• The report highlights a notable shift towards trade in regional blocs, particularly growth in non-USD settlements.

The annual Trade Register from the International Chamber of Commerce (ICC) in collaboration with Boston Consulting Group (BCG) and Global Credit Data (GCD) has been released, analysing the landscape for trade, supply chain finance, credit risk, and proprietary trade finance risks for 2023. 

The report surveys partner banks of the ICC Banking Commission, representing 5% of global trade flows and 18% of financed trade flows. The conclusions are indicative of the industry’s trajectory and highlight opportunities down the road.

2023 was mired by ongoing geopolitical tension, stilted market demand, corporate deleveraging, and high interest rates, transforming the industry. Overall, though, indicators for 2024 are positive, while the low-risk nature of trade finance remains a pillar of stability.

Trade: 2023, 2024 forecast, beyond

Global goods trade saw a year-on-year decrease in both real terms (-0.7%) and nominal terms (-4.8%): a slowdown from growth post-pandemic in 2021 and 2022.

The variance of this by sector is interesting in defining the future of commodity demand. The energy sector fell by 19% in nominal terms (while demand remained steady, increasing by 1% in real terms). Modest downturns were seen in metals and mining (-7% and -9%), semifinished intermediate good such as chemicals (-10%), semiconductors (-10%), and agribusiness (-4%).

On the other hand, automotive trade increased by 12% in nominal terms while the aerospace sector saw a 16% increase. 

This was offset by an 8% increase in services trade, now making up one-third of all trade. In nominal terms, this constituted $7.9 trillion, with Middle-Eastern countries (Saudi Arabia, UAE, Qatar), India, and Ireland witnessing the fastest growth.

Sectorally within services, the travel industry rebounded strongly, returning to approximately 25% of the global services trade. Financial services and information and communications technology (ICT) also saw steady annual growth. Conversely, construction services reported slower growth.

Global inflation fell from 8.0% in 2022 to 6.5% in 2023. But despite the moderation of inflation, consumers continued to suffer expensive essentials like energy bills.

In terms of trade currency, while the US dollar is likely to retain its dominance in the short term, non-US dollar trade is on the rise. This is driven by increased use of Chinese currency in cross-border payments; and by US foreign policy affecting specific sectors, with around 20% of the global oil trade settled in non-USD currencies.

Having said this, the USD’s dominance is still decisive, with 55% of international payments and 83% of trade finance market payments made in the American currency.

Looking forward, as central banks have reduced interest rates in response to waning inflation, 2024 should theoretically be reviewed as a year of relative normalisation. Yet the year has been defined by shifting geopolitics, the result of elections for more than half the world’s population and conflict.

Supply chains have seen monumental rerouting. The drop in trade between the US and China has pushed both parties closer to their allies. Similarly, the EU has been seeking to diversify from Russia and China.

But surprisingly, the strongest growth has come from the ‘Global South’, which largely consists of emerging economies. India’s trade growth is expected only to accelerate, at 9% CAGR over the next decade. The benefits of campaigns like ‘Make in India’, as well as continued growth in projected trade with China, reinforce India as a rapidly emerging platform.

Trade and supply chain finance

Slowing trade volumes, compounded by higher interest rates, posed challenges for trade and supply chain finance. Banks reported the following as the greatest threats to their businesses:

• Disrupted trade flows from ongoing geopolitical conflict (40% responded this to be a high or severe threat)
• Margin erosion (36%)0
• New regulation on capital treatment (30%)
• Increased competition amongst financial institutions (25%)
• Increased fraud risk (21%)

Trade and SCF revenues declined overall, with the most notable contraction in the Asia-Pacific region. But the only modest reduction in the EU, which accounts for one-fifth of global trade finance revenues, lessened the severity of this decline.

While some expect receivables finance and payables finance to accelerate faster than the growth of documentary trade and trade loans, the proportions within overall trade and SCF revenue growth remain steady. 

In fact, documentary trade products are projected to have a below-average growth at 3.7% CAGR, and reduced demand for payables finance comes as a result of disclosure rules and Basel III capital treatment regulation.

Nonetheless, the wider picture is positive for trade finance. Much optimism comes from the modernisation of platforms, the result of the rapid evolution of technological solutions. As many as 90% of banks are investing in digital customer experience initiatives to meet client expectations.

Artificial intelligence (AI) and generative-AI have huge potential regarding data extraction, fraud prevention, document checking, and creating data model language universality. This technology can also improve accessibility for smaller, less technologically-literate parties by providing validation and assistance in contracts, and by using chatbots to simplify customer service.

In this regard, momentum picking up around digital trade and related regulation, such as the Model Law on Electronic Transferable Records (MLETR), is likely to have informed positive projections. However, 80% of survey respondents believe the digitalisation of trade is dependent on collaboration throughout the ecosystem – corporates, shipping companies, banks, insurance brokers, as well as regulatory bodies. 

Climate and sustainability remain important, with a notable change from banks. Over 90% of those already engaging in sustainable finance report positive growth. In Western Europe, regulations like the EU’s Carbon Border Adjustment Mechanism mandate this transition, but creating profit incentives around sustainability mean its significance will only grow.

Credit risk, proprietary trade finance risk

The report proposes that trade finance, SCF, and export finance have proven resilient from a credit risk perspective because they involve low-risk transactions, which constitute the bulk of global trade. 

These instruments represent a low-risk asset class, even during times of uncertainty: as elucidated by Figure 4. On an exposure-weighted basis:

• Global default rates for import letters of credit (LoCs) decreased from 2022 to 2023.
• Default rates for export LoCs are significantly lower than for other trade finance products, and defaults increased negligibly between 2022 and 2023.
• For loans for import/export, 2022 to 2023 saw a slight decrease.
• Default rates for performance guarantees decreased in 2023 (this was on an obligor-weighted basis too).

For export finance, most transactions are guaranteed by export credit agencies at up to 100% of their value. In the sample surveyed, the average was 94%. This grants banks the capacity to be indemnified by an export credit agency (ECA) up to the level specified, meaning export finance has a particularly low loss given default (LGD) levels.

—

The findings of the 2024 ICC Trade Register Report are consistent with commentary throughout the year, regarding the significant disruptions posed by geopolitical uncertainty as well as the opportunity provided by technology. It is in this opportunity that positive forecasts seem to stem.

Importantly, however, the findings in this year’s report align with previous reports: that trade finance, SCF, and export finance present a low risk for banks. These trade finance instruments appear, in their nature, to be insulated from inevitable disruptions.

The post 2024 ICC Trade Register report positively upbeat despite global trade goods slowdown appeared first on Trade Finance Global.

The project was conducted with participating banks including Lloyds, Emirates NBD Bank, and Federal Bank Limited. It tested the transmission of electronic trade documents between Swift member banks and WaveBL’s platform as part of letter of credit (LC) transactions.

The testing process utilised Swift FIN messages and FileAct transfers while maintaining document possession tracking on WaveBL’s distributed ledger. 

MSC issued two eBLs on the platform – one straight and one negotiable – which were subsequently processed through the banking system.

After the exporter added commercial documentation, including packing lists, invoices, and certificates of origin, the documents were transmitted to the advising bank via Swift’s network. The advising and issuing banks then exchanged the documentation while WaveBL’s system tracked the possession and title of the eBLs.

The process concluded with the issuing bank releasing documents to the LC applicant, including the endorsement of the negotiable eBL to the importer. Participants reported that this enabled payment processing within hours instead of days, allowing importers to collect goods without traditional documentation delays.

Andre Simha, Global Chief Digital and Innovation Officer at MSC, said, “MSC is committed to achieving full digitalisation of our bills of lading by 2030. This involves much more than streamlining processes. It embodies an ambitious vision that requires collaboration across both the shipping and finance sectors.”

The post Sibos 2024: MSC integrates blockchain bills of lading with Swift network appeared first on Trade Finance Global.