Digital Trade Finance - The Reality · Global Trade amidst changing macro-economic and technological developments. Following that we explore how digitalisation can help address current

Digital Trade Finance - The RealityA practical approach to digitalisation of Trade Finance for all market participants

2POWER OF PARTNERSHIP www.cttpartnership.com

Executive Summary

Digital Trade Finance - The Reality and the Way Forward

Introduction

The CCTC - Commercial Contract Trade Cycle

Phase 1: Contract Arrangement Component

Phase 2: Logistics Arrangement Component

Phase 3: Administrative Arrangement Component

Phase 4: Financial Arrangement Component

Market Participants: Objectives - Challenges - Recommendations

Winning Digital Strategies

OK to Fund

OK to Pay

OK to Release the Goods

Summary / Conclusions

The Author

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Contents


Globalisation and new technology have driven growth in world trade, while also resulting in increasingly complex supply chains. Increased participation from emerging markets in global trade has increased demand for financing solutions. At the same time, banks are looking to de-risk and de-leverage their businesses, creating unintended consequences of the new regulations resulting in reduced supply of Trade Finance funding. This reality of an unmet demand for Trade Finance presents both challenges and opportunities for established practitioners and new entrants to fulfil unmet demand more efficiently with digitalisation of the Trade Finance market.

This paper aims to make the digitalisation of Trade Finance accessible and easy to understand for both practitioners and non-practitioners alike. First we outline the objectives and challenges faced by various parties involved in Global Trade amidst changing macro-economic and technological developments. Following that we explore how digitalisation can help address current challenges and leverage opportunities presented from adopting a ‘winning digital strategy’ for Trade Finance, providing a clear and practical approach to digitalisation.

The 6 principles of Winning Digital Strategies for Trade Finance:

1. Any digital Trade Finance solution must be “Corporate-centric” - focused on the underlying needs and aligned with the business models of the corporations involved, providing benefits to either buyers or sellers or to both.

2. Digital connectivity is key – leverage existing and new connectivity tools to connect and collaborate with partners in the Trade Finance ecosystem to create commercial models that combine product offerings to provide end-to-end, value-added digital solution sets.

3. Focus the digitalisation on key data elements –those that initiate the most important trigger points of the Commercial Contract Trade Cycle and break down complex and laborious tasks and processes into discrete and manageable parts.

4. Create digital product solutions that combine elements from the existing solutions sets with new elements - provide compelling value added digital solutions that benefit all relevant parties involved.

5. Technology needs to be considered as an enabler, not as the main driver - the main driver of digitalisation should be the underlying commercial model that connects participants in the Trade Finance ecosystem.

6. Develop a network of networks approach - a holistic view of the entire Trade Finance ecosystem. This creates new opportunities, markets and commercial models that incorporate digital solutions connecting all participants. This will help optimise end-to-end processes to achieve cost and capital efficiencies.

Executive Summary


Digitalise the 3 key trigger points in the CCTC

The Commercial Contract Trade Cycle (CCTC), is increasingly complex...

...this environment presents opportunities...

...which can be leverged with Winning Digital Strategies which focus on the 3 key CCTC triggers...

Global Trade Environment ◾ Supply Chains are becoming more distributed and complex ◾ Technology and globalisation are creating an interconnected world ◾ Digitalisation is transforming physical flows into digital flows

Trade Finance Environment ◾ 50-75% of trade requires finance ◾ Trade Finance more accessible to large corporates than Mid-Corps and SME’s ◾ Banks de-risking, de-leveraging and downsizing due to regulatory requirements and profitability pressure ◾ Lack of interoperability between parties and their systems resulting in sub-optimal processes and operational friction ◾ New technology and new participants are entering the Trade Finance Industry

◾ Meeting the increasing unmet demand for Trade Finance

1. OK to Fund

2. OK to Pay

3. OK to Release Goods

◾ Implementing technology that reduces complexity and provides connectivity

◾ Collaboration between B2B and Trade networks with adjacent finance and technology companies

Principles of Winning Digital Strategies ◾ Corporate centric view of the entire eco-system ◾ Simplify individual components ◾ Focus on key data elements ◾ Create interoperability and connectivity between parties, processes and products ◾ Develop the network of networks approach by creating commercial models combining product offerings with adjacent space providers

Digital Trade Finance – The reality and the way forward


Over the coming decades, the following major trends will continue to have a more significant impact, or will emerge:

◾ The macro-economics for the next decades fuels constant, continued growth in cross-border trade, as forecast by the WTO, IMF, OECD. This in turn is predicted to create an increased demand for Trade Finance, despite the significant recent economic slowdown in Asia, US and Europe.

◾ While there is great variation in the estimated revenue pools for Trade Finance, with estimates varying from 50 to 75 percent of global trade flows being financed or risk insured in some way, global trade flows will continue to increase and so too does the demand for Trade Finance from the majority of trade participants.

◾ According to Boston Consulting Group (BCG), trade in developing markets will by 2025 represent 47 percent of global consumption and value of cross-border goods flows. The growth in developing market economies has been and continues to be significant, they represented only 6 percent of consumption and trade flows in 1990, and increased to 24 percent in 2012.

◾ While the supply of Trade Finance is readily available for investment grade multi-nationals and large corporates, it is less accessible for sub-investment grade medium-sized companies and SMEs, especially in developing economies. As medium-sized companies and SMEs in developing economies represent a significant component of their local economies, and further expand their domestic and cross-border commercial activities, the demand for Trade Finance will increase.

◾ There is a lack of research available on the impact of the de-risking and de-leveraging that is widely occurring in the banking sector on the provision of Trade Finance. However, there is widespread acknowledgment that the traditional banking sector alone does not have the capacity, nor appetite, to meet all Trade Financing demand for the decades to come.

The world economy consists of domestic and cross-border flows of goods and services, sold and purchased by millions of companies of all sizes, across all industries. For decades these trade flows have had rapid growth. The technology evolution of the last two decades further fueled connected trade flows. Today’s globally connected world economy has become incredibly complex and intertwined.

Increased demand for Trade Finance solutions, combined with a perceived shortfall in capacity from the traditional banking sector has resulted in an opportunity for non-bank Trade Finance providers to explore Trade Finance as a new asset class and invest in new processes, partnerships and emerging technologies to fill the Trade Finance gap and do it more efficiently.

IMPLICATIONS

Introduction


The following additional trends and forces in the banking industry are further driving the challenges in the Trade Finance Industry:

◾ De-risking as a result of increased compliance demands, and de-leveraging as a result of higher capital and liquidity cost in the banking sector has had a profound impact on Trade.

◾ Capital and liquidity requirements treat lower risk Trade Finance products in largely similar fashion as higher risk corporate and investment banking lending products. In addition, Trade Finance providers have to absorb additional costs to achieve compliance with new financial crime regulation.

◾ These new regulatory requirements have led large banks to revisit client relationships and downsizing their Trade Finance business significantly in certain areas. At the same time, regional and local banks in emerging markets are stepping up and widening their Trade Finance footprint and solutions.

◾ The current prolonged economic cycle of excess liquidity has placed credit spreads for Trade Finance assets under significant pressure. While this is expected to adjust as the economic and interest rate cycle turns, exactly when this will occur is difficult to predict.

Banks providing Trade Finance solutions are faced with profitability pressures which are driving cost reduction efforts, and the need to rapidly optimise their Trade Finance operations, technology set-up, internal processes. and their connectivity with clients and other parties.

IMPLICATIONS

New forces are also emerging that will significantly alter the landscape and ecosystem of Trade Finance in the future:

◾ Globalisation and the technology evolution are creating an even more tightly interconnected world economy.

◾ Supply chains are becoming more distributed and complex, with networks of global flows becoming deeper and broader. More countries and more parties are now participating in global trade flows.

◾ Digitalisation is transforming the flow of physical goods into digital flows which can be traded more easily, faster and tracked more precisely.

◾ Digital platforms are creating greater connections within Global Supply Chains. New talent and entrepreneurs are finding ways to connect companies, customers and suppliers with each other, and with funding sources in ways that were all but impossible a decade ago.

The future of global supply chains and Trade Finance will be empowered by new technologies and solutions which integrate and connect trade participants more closely. Collaboration and cooperation between B2B and Trade networks with adjacent finance and technology companies will be required to achieve a value added integration.

IMPLICATIONS


The Distributed Ledger Technology (DLT) has created widespread interest to engage with new technologies and Financial Technology (FinTech) providers and ventures to explore new solution sets and approaches to increase the efficiency of the Trade Finance Industry:

◾ At a high level DLT lends itself to digitise the Trade Finance industry, and has attracted many new players and participants to this emerging technology.

◾ DLT has forced banks to look differently at technology and change their technology deployment models and strategy.

◾ DLT has also moved banks to work together and/or team up with new technology or Fintech companies to design and build new solutions. The established banks have become more open to working with third party technology providers.

◾ The challenge is to find the right use cases, connect the right parties and place new solutions into commercially viable business models.

◾ The Optical Character Reading (OCR) technology is another technology that is helping banks to further automate their semi-automated back-offices and reduce cost while increasing quality of compliance related processes.

It is good news for Trade Finance that so many parties are interested and willing to fund the digitisation of the Trade Finance Industry, which for decades has been a grey mouse in the world of banking in terms of innovation and automation. At the end, buyers and sellers will benefit from a more tightly connected industry where adjacent players are teaming up and offering joint solutions which leverage new technologies.

IMPLICATIONS


The raise of Cross Border Open Account Trade:

◾ The trust factor, or lack thereof, between buyers and sellers are driving commercial contract settlement terms.

◾ While there are many settlement mechanisms, two of the most common are:

- Open Account Trade – where the seller ships the goods and sends the trade documents including the invoice to the buyer, which then the buyer pays at the agreed payment date.

- Conditional Payment through a Letter of Credit (LC) or a Bank Payment Obligation (BPO) where the seller ships goods against a written payment undertaking from a bank in the form of a LC or BPO. By issuing the LC or the BPO the bank commits to pay upon presentation of the trade documents, provided they comply with the underlying terms, irrespective of the buyer’s ability or willingness to pay.

◾ The contract settlement with an LC is administratively burdensome, creating operational friction, additional cost, and settlement delays.

◾ While Open Account Trade involves less operational friction and cost, it does carry additional risk, as there is no party guaranteeing payment, thereby making financing more difficult to obtain.

◾ Buyers and sellers who have established relationships and are operating in the same market or region, have traditionally settled their commercial contracts on Open Account terms.

◾ However, over the past two decades an increasing number of cross border contracts are being settled on Open Account between a wider range of counterparties. This means both buyers and sellers need to proactively manage their cash conversion cycle in order to ensure availability of working capital.

◾ This pressure on working capital has led trading counterparties to seek alternative financing arrangements, for sellers to receive payment faster, and for buyers to pay later by extending the payment terms.

◾ The increased demand for alternative trade financing has led banks and alternative supply chain finance providers to offer a more diverse range of trade financing solutions and options for Open Account Trade.

◾ The Bank Payment Obligation (BPO) is such a solution but so far has not been adopted widely and gained only little traction.

Open Account cross border trade will continue to grow faster than other settlement methods. This will create greater demand for alternative financing, delivered digitally, and from a more diverse range of providers including banks, alternative funders, supply chain finance platforms, and factors.While current initiatives are focused on each settlement method independently, real value can be created with a digital hybrid solution that builds additional check and validation points into Open Account settlement solutions solutions and connects the right parties. Especially the SME’s is a unique market segment that has yet to be addressed holistically.

IMPLICATIONS


Trade Finance is the fundamental fuel of economies around the globe. Regardless of economic cycles and the implications of macro events such as the financial crises in 2007/2008, Brexit etc., the economies of all countries around the world continue to be driven by trading parties that commercially exchange goods. They want a smooth settlement of their commercial contracts and a smooth exchange of goods in order to satisfy the demands of the end consumers.

IMPLICATIONS

Multi-National Corporations (MNC’s), Large Corporates &

Large Trading Houses

◾ Financing ◾ Risk management ◾ Balance sheet management ◾ Brand management ◾ Product management ◾ Insurance

Fortune 500 companies, most have easy access to

Trade Finance

Overall Needs

Mid Markets Corporates & mid-size Trading Houses

◾ Cash and cash flow management ◾ Debt management ◾ Payables and supplier management ◾ Receivables and client management ◾ Inventory management ◾ Equipment financing

Largest growing segments and back bone of most economies

but challenged at times to access Trade Finance

Working Capital Needs

The overall Trade Finance needs are the same irrespective of size, industry or geography

Operational Needs

Small and Medium Size Enterprises (SMEs)

◾ Physical goods handling ◾ Operational efficiency

- Contract settlement - Documents handling - Operational processes - Technology

Back bone of most economies but often struggling to access

Trade Finance

Corporate Needs and Market Segmentation

The exhibit below outlines a globally accepted corporate market segmentation, and trade finance needs. This serves to highlight that irrespective of company size, industry or geography, their overall trade finance needs, and the requirements to settle commercial contracts are the same.


Having looked at the drivers of increased demand for Trade Finance solutions, we will now explore the mechanics and interactions that enable the sale and purchase of goods and services around the world.

The following chart provides an overview of the main components and market participants that constitute the Commercial Contract Trade Cycle (CCTC):

◾ Buyers ◾ Sellers ◾ Traders ◾ Intermediaries

◾ Carriers ◾ Freight forwarders ◾ Logistics providers ◾ Warehouse owners ◾ Inspection firms

◾ Global, regional & local banks ◾ Non-bank trade finance arrangers ◾ Alternative funders ◾ SCF arrangers ◾ Credit and physical insurance ◾ Payment networks

◾ Banks ◾ Trade networks ◾ EIPP networks ◾ Insurance companies ◾ Customs and port authorities ◾ Document prep providers

[ContractArrangements]

CA LA

FA AA[FinancialArrangements]

[LogisticsArrangements]

[AdministrativeArrangements]

Commercial Contract

Trade Instruments & Documents

Physical Goods

Risk, Transfer, Funding & Payment

The CCTC - The Commercial Contact Trade Cycle


AA LA FAAA FAAA LALA FA

CA CA CACA AA LACA CAFA AA

Settling a commercial contract cross border is not an easy task and requires a well organized set of systems, organizations and partnerships that work hand in hand to ensure all the right steps and data recording happen to ensure a smooth settlement of the underlying commercial contract. The following representation of a typical CCTC is a significantly simplified version of what happens in real life - which is often even more complex with more steps, and involving even more parties.

Arrivals Notification & Custom clearing

Arrange Post Shipment Finance

Goods release process

Payment / Settlement of

Invoice

Reconciliation of Financing Risk Transfer

& Sellers Ledger

Who is the issuer?

Are my documents correct and match to the PO or other trade instruments?

When are my transport documents delivered and to whom?

Creation and delivery of

the Transport document

Physical shipment

& Customs clearing

Creation and delivery of Validation

Documents

Presentation & Matching of Transport & Validation Documents

Can I transport?

Are my goods insured?

Do I have all my customs clearing documents?

How do I ensure all my documents are correct and match to the PO and to the trade Instrument to trigger the post shipment financing or payment?

Have all the conditions been met to do the post shipment finance?

Who do I select as funder?

How do I ensure I have all documents required and that they are presented in time?

Who needs to be notified?

Have all the conditions been met to release the goods?

Have all the conditions been met to trigger the payment?

Who is the payment provider?

Are all the right parties informed?

Is all the required reporting in place to reconcile & liquidate the finance & risk transfer arrangements and the sellers ledger?

Who are the required parties involved to settle the commercial contract?

Contract Outline

Agreed terms

Purchase order

Arrange Risk

Transfer & Financing

Arrange Pre-

Shipment Finance

Raw materials & compo-

nents

ProductionAdvancedShippingNotice

Creation and delivery of Invoice

What guarantees & settlement instruments are needed?

What risks do I take and what risks do I transfer?

When do I want to pay or be paid?

What type of financing is required and when?

How do I manage the purchases of raw material and the inventories & and their impact on working capital?

Which systems or networks to us?

ERP recording?

Have all the conditions been met to do the pre-shipment finance?

Who do I select as funder?

How do I secure working capital through the production phase?

Does the ASN match the PO or other trade instruments and can I create the invoice?

ShippingInstruction

Which Logistics Provider, Freight Forwarder or Carrier and which booking system do I use?

Which system or network provider do I use?

ERP recording?


Phase 1: Contract Arrangement Component

ContractOutline

Raw Materials &

Components

Purchase Order

Arrange Risk Transfer & Financing

AgreedTerms

Production

◾ Buyers & Sellers

◾ ERP’s ◾ EIPP network ◾ Banks ◾ B2B marketplaces ◾ Proprietary system ◾ Country or industry networks

◾ Banks ◾ Alternative Funders ◾ Credit Underwriters ◾ Non-Bank TF arrangers

◾ Sellers own Commercial Contract Trade Cycle

◾ Production mgmt.

Choice of trading and settlement parties & networks

Triggers: ◾ Sellers confirmation ◾ Trade Settlement instrument creation

◾ Selection of the Risk transfer & finance arrangements

Triggers: ◾ Choice and instructions for the risk transfer & finance arrangements and

◾ The creation of the trade settlement instrument, if any

Triggers: ◾ Arrangement of the physical goods shipment and the creation of the advance shipment notice

Buyer & Seller

Buyer

Buyer & Seller

Seller

It all begins, stands or falls with the commercial contract between the buyer and seller. This is the initial trigger point, and fundamental basis of the CCTC. Buyers and sellers engage all the other parties required to execute the commercial contract’s logistic, administrative and financial arrangements.

Step in CCTC Providers & Involved Parties Action Trigger PointDriver


This component handles all the necessary steps to: ◾ Physically transport goods from seller to buyer, whatever the means of transport (sea, air, rail, road) ◾ Clear customs in the exporting and importing country ◾ Manage the change of control of the underlying goods

Step in CCTC Providers & Involved Parties Action Trigger Point

◾ Logistics Provider (LP) ◾ Freight Forwarder (FF) ◾ Carrier (Carr)

◾ Logistics Providers ◾ Freight Forwarders ◾ Carriers ◾ Customs authorities ◾ Port authorities

◾ Customs authorities ◾ Port authorities

◾ Logistics Providers ◾ Freight Forwarder ◾ Carrier ◾ Warehouse Owners

Creation of Transport Documents and delivery to the relevant paarties

Triggers: ◾ Physical goods shipment ◾ Transport and Validation Documents submission (Good Inspection, Export Customs)

Triggers: ◾ Transport and Validation Documents submission (Good Inspection, Import Customs)

Triggers: ◾ Physical goods release ◾ Transfer of control of goods ◾ Validation Documents for Inspection, Import Customs, Buyer

Seller Shipping Instruction

LP FF

Carr.

LP FF

Carr.

Seller Goods Release Process

Physical Shipment &Customs Clearing

Arrivals Notification / Custom Clearing

Driver

Phase 2: Logistics Arrangement Component


Phase 3: Administrative Arrangement Component

The administrative component handles all the recording and sharing of commercial data points in the form of documents (Transportation Documents, Validation Documents) that are created, exchanged and matched to the underlying trade instruments (Purchase Orders, Letters of Credit) to trigger the next phases of the CCTC.


◾Buyers ◾ Trade Networks

◾ ERP’s ◾ EIPP network ◾Banks ◾B2B marketplaces ◾ Proprietary system ◾Country or industry networks

◾ Logistics Provider ◾ Freight Forwarder ◾Carrier

◾ Seller ◾ Service Providers (SP) ◾ Inspection Firms ◾ Trade Networks (TN)

◾ Seller ◾Banks ◾ Trade Networks (TN)

Trigger the Invoice Creation

Triggers: ◾ Buyers confirmation ◾ Invoice presentation & matching

◾ Invoice financing ◾ Transport and Validation Documents issuance

Triggers: ◾ Creation of Invoice ◾ Creation of Validation Documents

◾ Preparation for the physical shipment, goods inspection and export customs

Triggers: ◾ Documents presentation & matching

Triggers: ◾ Post-Shipment Financing ◾ Payment ◾ Goods release

Seller Carrier

Seller

Seller

Seller

Seller

Advance Shipment Notice

Creation and Delivery of the Validation

Documents

Presentation & Matching of the Validation

Documents

Creation and Delivery of the Invoice

Creation and Delivery of Transport Documents


The financial arrangements provide the bridge from the physical world to the financial world to: ◾ Enable finance at various stages (pre and post shipment) ◾ Provide risk transfer ◾ Effect the payment of the final settlement

Phase 4: Financial Arrangement Component

◾Banks ◾ Alternative Funders ◾Non-Bank Trade Finance Arrangers

◾Banks ◾ Alternative Funders ◾Non-Bank Trade Finance Arrangers

◾ SCF Networks

◾Banks ◾ Payment Networks

◾Banks ◾ Alternative Funders ◾Non-Bank TF Arrangers

◾Credit Underwriters

Triggers the ◾ Raw material purchase ◾ Production ◾ Payment to Seller

Triggers: ◾ Transfer of control of goods ◾ Goods Release ◾ Payment to Seller

Triggers: ◾ Reconciliation on Sellers books

Triggers: ◾ Reconciliation on Funders and Credit Underwriters ledger

Buyer / Seller Arrange Pre-Shipment Finance

Buyer / Seller

BuyerTN’s

EIPP’sB2B MP

BuyerTN’s

Reconciliation of Financing, Risk Transfer Arrangement and Sellers

Ledgers

Arrange Post-Shipment Finance

Payment - Settlement of Invoice



The CCTC is a complex web of multiple actions that trigger further actions involving many different parties across the cycle. Currently these interactions are sub-optimal, and in many cases, only partially or not at all connected or integrated. While there is limited digitally-enabled information sharing, for example it is common practice to share documentation via email with PDF attachments, the CCTC is nowhere close to being digitally integrated.

Virtually all documents required in today’s CCTC are produced, sent and stored digitally. Trading has evolved from a previous world of exchanging handwritten notes, or creating documentation with typewriters. However, what is remarkable is that despite the availability of digital trade documents, most counterparties still need to take emails or PDF documents, and re-key the relevant data points into their systems. This is repeated for each party along the CCTC.

Hence, the main issue is a lack of digital connectivity among the parties engaged in the CCTC. Therefore, the current status of the CCTC can be described as follows:

◾ High handling and administration cost ◾ High customer service cost due to high error rate ◾ Negative impact on Working Capital caused by sub-optimal processes and document non-compliance resulting in delays ◾ Manual reconciliation ◾ High operational risk

◾ Complex ◾ Multiple parties across different jurisdictions ◾ Paper intensive ◾ Multiple data capturing in a myriad of systems that are not connected nor interoperable

There is a real need for greater end-to-end data integration across the CCTC, to address sub-optimal processes resulting from the lack of connectivity among counterparties. While digital documents are now commonplace, there is a significant process optimisation opportunity to cut the “digital to paper to digital” cycle and make it “digital to digital”.

IMPLICATIONS

Friction PointsCharacteristics


The CCTC includes various market participants, with different roles and responsibilities at different stages of the cycle. While participants have each a unique set of challenges, they also share a set of common challenges as follows:

Market Participants:Objectives - Challenges - Recommendations

! Interoperability among parties ! Too many networks to connect with ! Multiple jurisdiction ! Regulatory requirements ! Cyber security ! Fraud ! Sub-optimal processes ! Operational frictions

Main challenges for all market participants


The unique objectives and challenges of the different market participants are summarized below. It is these characteristics that should drive their digital optimization strategies, and therefore their objectives for deploying new technology across the CCTC. Some potential approaches are outlined in the recommendations below.

Objectives

◾ Quicker, cheaper and easier access to working capital

◾ Reduce cost, paper and manual processes

◾ Leverage technology to improve processes and connect with parties

◾ Improve reconciliation and working capital

◾ Retain and grow market share

◾ Increase level of automation

◾ Connect with financial world

◾ Expand product offering to existing clients and attract new clients and volumes

◾ Get better connectivity to logistics and financial space

◾ Increase level of automation

◾ Provide digital solutions that reduce compliance and fraud risk

◾ Get better connectivity to other parties involved in trade cycle

◾ Increase level of automation and reduce cost

◾ Multiple networks and niche providers to choose from and to connect with

◾ Semi-automated processes causing delays, increased cost and sub-optimal financing, settlement and reconciliation scenarios

◾ Desire to diversify finance providers to reduce dependencies and optimise financing cost

◾ Map operational landscape to highlight and prioritise pain points

◾ Choose partners and parties that provide easy connectivity and value added services to eliminate or smoothen those pain points

◾ Have an open mind to partnerships

◾ Semi-automated processes causing delays, increased cost and sub-optimal risk based financing and settlement scenarios

◾ Irregular transaction flow

◾ Looking for increased and regular flow of trade finance assets

◾ Often isolated from transportation chain data and only involved in first mile / last mile info

◾ Lack of integration of Warehouse Management System (WMS) into global transportation chains

◾ Inventory language (SKUs / Vol) at odds with freight language (kg / TEU / HS code)

◾ Highly regulated

◾ Political rather than commercial focus

◾ Ignorance of business fundamentals

◾ One-off rulings / deals mean lack of consistency

◾ Back-end processes semi-automated

◾ Forge strategic partnerships with B2B and Trade networks to combine product offering and offer end-to-end value add to the clients

◾ Forge partnerships with Logistic Providers, Freight Forwarders and Carriers to combine product offering

◾ Forge strategic partnerships with Trade networks and funders to combine logistics product offering with finance to offer end-to-end value add to the clients

◾ Forge partnerships with Logistics providers, Freight Forwarders, Carriers and Trade networks to customs processes into overall trade cycle processes

◾ Automate and facilitate the audit and red-flag approach

◾ Expand their network to more clients and attract more volumes and revenues

◾ Increase range of services to clients to improve profitability

◾ Attract new clients and grow market share

◾ Commodity product offering with shrinking margins, often loss making and difficult to scale

◾ Stand-alone product offering with limited cross-sell opportunities

◾ Desire to expand into trade finance but lack of expertise and infrastructure

◾ Clients asking for value added solutions, specifically finance

◾ Enhance existing and/or develop new solution sets with adjacent space partnerships that provide end-to-end value add to clients

◾ Develop strategic plan for connectivity and interoperability with these new partners

RecommendationsChallenges

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Objectives

◾ Find strategic growth opportunities

◾ Grow transaction flows

◾ Leverage B2C infrastructure to service B2B space

◾ Grow market share

◾ Access to low cost origination

◾ Lower operational and compliance risk

◾ Reduce capital cost

◾ Reduce transaction cost

◾ Increase Profitability

◾ Grow market share

◾ Stay relevant in an industry under attack from emerging payment providers

◾ Lower operational, technology and compliance costs

◾ Diversify investments into alternative asset class – B2B Trade Finance

◾ Looking for reputable and reliable partners

◾ Looking for regular flow of Trade Finance transactions

◾ Commodity product offering mainly focused on B2C

◾ Desire to expand into B2B and trade finance space but lack of expertise and infrastructure

◾ Clients pushing for value added solutions

◾ Leverage existing infrastructure and payment rails to provide value added services in the B2B space

◾ Forge strategic partnerships with B2B solution providers to combine product offering and offer end-to-end value add to the clients offer end-to-end value added services to the clients

◾ Limited funding origination capability and irregular transaction flow

◾ Regulatory pressure on finance and conduct regulation

◾ Profitability pressure – focus on core lending capability instead of servicing and processing capabilities requiring a costly infrastructure and causing high operational risks

◾ Profitability pressure – high cost infrastructures

◾ Regulatory pressure on conduct regulation

◾ Risk of dis-intermediation from emerging payment providers

◾ No operational and technology capability to invest in and monitor Trade Finance assets and transactions

◾ Cumbersome origination of Trade Finance assets in a very fragmented industry

◾ High cost for due diligence and risk assessment

◾ Digitise the back-office to reduce operational risk, transaction and capital costs

◾ Team up with adjacent space service providers to offer clients end-to-end value added services

◾ Forge strategic partnerships with emerging players to expand solution sets that offer enhanced client experience and reduce delivery and compliance costs

◾ Invest in or forge partnerships with emerging networks and platforms that play an aggregator role and have critical mass

◾ Grow market share and profitability

◾ Access to low cost mass origination

◾ Lower risk profiles

◾ Expand in Trade finance asset class

◾ Semi-automated processes causing delays, increased cost and sub-optimal risk based financing and settlement scenarios

◾ Irregular transaction flow

◾ Looking for increased and regular flow of trade finance assets

◾ Forge strategic partnerships with existing and emerging players to get access to low cost origination

RecommendationsChallenges

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The ability to take a holistic view of the entire CCTC ecosystem, while focusing efforts on digitising the most fundamental and critical component parts is key to the development of winning digital strategies. The following principles of deployment will help to create the right approach for the digitalisation of Trade Finance:

◾ Simplify individual component parts of the CCTC processes – don’t try to digitise the complex components of the manual world where human intervention and decision-making remain a requirement.

◾ Focus on key data elements only – digitise only what is absolutely necessary to trigger the next steps in the CCTC. Where appropriate, let complex data structures remain on paper or on PDF.

◾ Create interoperable digital connectivity among parties so that trigger points become actual instructions to execute the next step in the CCTC.

◾ To create real value, any solution of relevance must be a Corporate-centric solution with end-to-end scope, functionality and partnerships, offering clear benefits to both the buyer and the seller.

We have identified 3 key trigger points within the CCTC that digitalisation efforts should focus on in order to create meaningful value. The digitalisation of these key trigger points – “OK to Fund”, “OK to Pay” and “OK to Release Goods” will create the right connections between the commercial, physical and financial worlds.

Commercial PhaseContract, Logistics &

Administrative ArrangementsMain trigger points Funding, Payment and Goods

Release actions

◾ Commercial Contract ◾ Purchase Order Management ◾ Trade Instruments ◾ Physical Shipments ◾ Invoicing ◾ Document creation, presentment and matching of

- Transport documents - Validation documents

◾ Goods ownership management ◾ Customs clearing

Various Trade Finance funding techniquesOK to fund

OK to Pay

OK to Release Goods

Various Settlement Payment Options

Various Goods Release Options

Winning Digital Strategies


Any Trade Financing transaction requires a minimum number of data points about the underlying commercial arrangements to enable the Funder to make a credit underwriting and funding decision. These data points are usually captured in the underlying trade instruments (Purchase Order, Letter of Credit) and/or in the Commercial Documents (Invoice, Transport Documents), which are submitted by the Buyer or Seller to the Funder.

Buyers and Sellers are often connected to exchange trade instruments such as the Purchase Order (PO’s) and documents (mainly invoices) on proprietary or business-to-business (B2B) networks or through the banking world for the handling of the Letters of Credit (LCs). The core competence of banks is to provide financing, initiate and receive payments and run operating accounts. The end-to-end handling of full sets of commercial documents containing thousands of data points is hardly a core competency of the banks and thus creates operational, compliance and cost challenges.

Furthermore, an essential aspect of providing Trade Finance is the amount and cost of capital that banks are required to allocate to their lending products. There are practices and ways to reduce the amount of capital, and therefore the cost of lending, mainly in the form of collateral or security.

In a more integrated and digitised future CCTC world, the bilateral and mostly manual process to initiate trade financing would be significantly more efficient, and the high cost of capital reduced by:

◾ Reducing the number of data points via simple digital documents provided to Funders to complete the funding of a trade transaction, rather than the current practice of providing full sets of commercial documents or complete transport documents.

◾ Buyers and Funders acknowledge that often all they require to make a finance decision is an invoice of the commercial transaction and a validation from a third party confirming there is an actual shipment taking place. Therefore, similar to the Advance Shipment Notice (ASN) the transport industry could provide a simple, digital confirmation of the shipment, such as a digital Confirmed Shipment Notice (CSN).

◾ Give the banks control of the underlying goods and assets by creating a valid pledge through digital means. Effectively this would be a singular electronic record, or ‘unique key’ controlled by the bank. The pledging party would therefore be preemptively relinquishing their rights to the ownership of the goods to the extent that the electronic record would allow the bank to obtain the goods in the event of default. Banks would be able to demonstrate to the regulators, via the digital pledge, that their Trade Financing is fully collateralised and secured by the underlying goods. This would therefore lower the capital allocations and costs associated with each Trade Financing arrangement.

The end-to-end handling of full sets of commercial documents containing thousands of data points is hardly a core competency for banks and thus creates operational, compliance and costchallenges.

OK to Fund


Logistics Providers

e-PO’s and/or e-invoices

e-transport documents(e-ASN, e-BL, e-Warehouse

receipt, e-CSN

◾ ERP’s ◾ EIPP’s ◾ B2B market places ◾ Country or industry networks ◾ Buyers

◾ Carriers ◾ Freight forwarders ◾ Logistics Providers ◾ Warehouse owners

◾ Global, regional & local banks ◾ Non-bank trade finance arrangers and funders ◾ Multi Funder SCF and Invoicing Platforms ◾ Credit underwriters

B2B Networks

The proposed OK to Fund approach and electronic pledge mechanism would benefit from having a party in the middle to collate and validate the data points, and potentially manage the transfer of the control of the goods. This would enable that party to dynamically route and channel the “OK to Fund” instruction to the banks and funding providers. This instruction to fund a trade transaction could take a number of different forms:

◾ An electronic receivable, either confirmed by the buyer or not ◾ An electronic advance or confirmed shipment notice, ◾ An electornic confirmed goods ownership proof, or ◾ A combination of these electronic notices as shown below:

OK to Fund

Confirmed Funding request in form of either a:

◾ Confirmed Receivable or ◾ Confirmed goods ownership proof, or a ◾ Advanced or Confirmed Shipment notice ◾ Or a combination thereof

Banks and Funding Providers

OK to Fund

Instruct to Fund


Similarly and equally important to Trade Finance decisions, payment instructions require a minimum set of data points on the underlying commercial transactions for the payment provider to make the payment. Those data points are usually captured in the underlying trade instrument (Purchase Order or Letter of Credit) and/or the trade documents (Invoice) and are usually submitted by the buyer to the payment provider.

This stage in the CCTC process would also benefit from having a party in the middle to collate and validate the data points to dynamically route the “OK to Pay” instruction to banks or payment providers in the form of an electronic confirmed payment instruction. It is vital that the payment itself is able to carry all relevant data points to enable the supplier to reconcile the commercial transaction. However, traditional payment infrastructures are not built to carry sufficient data points to make reconciliation an easy task. Therefore, in order to realise the full benefit of digitalisation, it will be important for buyers, sellers and B2B networks to leverage payment systems and infrastructures that are able to transport sufficient information that will enable easy and potentially fully automated reconciliation.

OK to Pay

Logistics Providers



receipt, e-CSN)



B2B Networks

Confirmed payment instruction

◾ Global, regional & Local banks ◾ Card providers ◾ Other Payment Networks

Payment Networks

In order to realise the full benefit of digitalisation, it willbe important for buyers, sellers and B2B networks to leverage payment systems and infrastructures that are able totransport sufficient information that will enable easy and potentially fully automated reconciliation.

OK to Pay

Instruct to Pay


The goods release instruction requires a minimum number of data points of the underlying commercial transaction for the logistics provider, carrier, freight forwarder or warehouse owner to actually release the physical goods. It also requires data points confirming the transfer of control of the goods – in other words the party claiming delivery is entitled to the goods. The required data points are usually submitted by the Seller or a Service Provider to the logistics provider, carrier, freight forwarder or warehouse owner. A series of conditions need to be met in the goods release checklist, in order for the goods to be released.

This stage in the CCTC would also benefit from having a party in the middle to collate and validate these data points and able to confirm the transfer of control of the goods electronically, thus channeling the “OK to Release the Goods” instruction to the logistics providers, carriers, freight forwarders and warehouse owners. This could take the form of an electronic “confirmed goods release instruction” containing the right data points which would enable a fully automated goods release process as shown below:

OK to Release Goods


Logistics Providers


receipt, e-CSN)



B2B Networks

Confirmed Goods Release Instructions

Logistics Providers

◾ Carriers ◾ Freight Forwarders ◾ Warehouse Owners

OK to Release the GoodsInstruction to Release the

Goods

E-Confirmation of change of goods ownership

Banks / Seller

An electronic “confirmed goods release instruction” containing the right data points would enable a fully automated goods release process.


The global economy and market participants involved in the CCTC need digitalisation desperately, and have much to gain from deployment of the right technology. They need trusted digital ecosystems that connect all parties to facilitate the commercial contract settlement process.

The objectives of these types of cross-functional solutions should be to strengthen and connect the commercial and administrative processes of the various parties and stages within the CCTC. This can be achieved by cutting the “digital to paper to digital” cycle and make it “digital to digital”, leveraging the fact that these documents are created digitally in the first place.

Integration through collaboration is required. In order to achieve full data interoperability among the various domains of the CCTC, it is essential that all parties agree on what matters most to them, and together find a way to help each other achieve those shared objectives. Such integration and greater connectivity among the parties of the CCTC will result in cash-flow and working capital improvements, whilst increasing efficiency, quality, security and management control for buyers and sellers.

As part of such an integration scenario, it would make sense to create digital product solutions that combine the open account settlement mechanism with elements of the conditional settlement mechanisms, such as Letters of Credit or BPO. This hybrid solution could be achieved by leveraging combinations of the 3 key trigger points in the CCTC and by providing historic data-analytics that would support more efficient lending models, as described in this paper. This would allow buyers and sellers to access cheaper financing from a broader panel of funding providers, while giving the funding providers more certainty on the underlying commercial transaction, thereby reducing the risk profile.

New participants in these emerging and digitally-led ecosystems should not be seen as disruptors but rather as enablers to a more collaborative, mutually beneficial approach. Their objective should not only be enabling greater connectivity between parties within the CCTC, but also to provide value-added services with interoperable protocols that enhance the experience for the ultimate clients - the Buyers and Sellers.

There are hundreds of Trade Finance projects currently being worked on that are addressing the sub-optimal processes and semi-automated environments in the Trade Finance industry. It would far exceed the scope of this white paper to describe all the initiatives or name all projects that are out there. It can only be good news for the Trade Finance industry that so many parties are interested and willing to invest in the digitalisation of the industry, an industry that for decades has been a “grey mouse” in the world of banking in terms of innovation and automation. In the end, buyers and sellers will benefit from a more tightly connected industry where adjacent space players team up to offer joint solutions and leverage new technologies.

Digitalising the 3 main trigger points in the CCTC would create significantly more efficient and effective processes, thus facilitating the trading of physical goods and the handling of trade instruments and documents. This would also provide a seamless link into the risk transfer, funding and payment space to optimise the financing and the settlement of the underlying commercial contract.

Summary & Conclusions


The 6 principles of Winning Digital Trade Finance Strategies are relevant for all parties to answer the question: “What should our Digital Strategy focus on?”

1. Any digital Trade Finance solution must be Corporate-centric and provide benefits to both Buyers and Sellers.

2. Digital Connectivity is key - Connecting with partners in the Trade Finance ecosystem creates additional value with joint product offerings and sharing of cross-functional expertise.

3. Commercial models that combine product offerings with those of adjacent providers to create end-to-end, value-added digital solution sets

4. The digitalisation of Trade Finance should only focus on data elements for key trigger points in Trade Finance processes

5. Technology needs to be considered as an enabler, not as the main driver. The main driver of digitalisation is the underlying commercial model that connects participants in the Trade Finance ecosystem.

6. Taking a holistic view of the entire Trade Finance ecosystem, and create new opportunities and markets with new commercial models that incorporate digital solutions that optimise the end-to-end processes to achieve cost and capital efficiencies.

Here are 5 additional points that help to answer the question: ”How do we do it?”

1. Gain sponsorship from shareholders and executive management to take a holistic and cross-functional approach to digitalizing Trade Finance, with a specific, dedicated team in place.

2. Engage experienced consultant services to help you create a vision, strategy and specific plan for an enhanced ecosystem that provides added value. When choosing a consultant, look for deep domain expertise and experience.

3. Once you have agreed on a vision, strategy, and specific plan for a new ecosystem, deploy your best people and trusted consultants in your network to create partnerships and drive commercial discussions and negotiations.

4. Seize any and all windows to implement shot term opportunities if they fit with the larger strategy.

5. Don’t settle for mediocrity, strive for real added value. Test it with your clients before committing funding and resources – while there are potential quick-wins to be gained, it’s important to remember that digitisation is not a sprint, it is a marathon.


Daniel Cotti

◾ Founder and Managing Director of Cotti Trade & Treasury ◾ Chairman of the Board of Bolero ◾ Consultant to the IFC SME Banking Advisory Group of the Worldbank ◾ Member of the Trade Finance Faculty of the ICC Academy ◾ Member of the Board of Advisors, TinHill Capital, Singapore, a Trade Finance company that incubates, and operates trade finance related initiatives. ◾ Member of the Board of Advisors, Finance for Impact, Paris, an advisory and research firm focused on sustainable finance ◾ Member of the Board of Advisors, Finanz AG Zurich, Zurich, a Trade Finance company specialised in risk distribution services and advisory for both Corporates and Financial Institutions

Cotti Trade & Treasury (CTT) is a boutique consulting firm in the B2B Banking space with main focus on Trade Finance & Treasury Management.

Bolero is a cloud based messaging platform providing value added electronic trade document settlement services and has the ambition to become a trusted network of networks in the digitalisation evolution of internal commerce.

Daniel Cotti’s 30+ years experience working in global leading positions with P&L responsibilities for Citibank, ABN, AMRO, RBS and JPMorgan and his most recent involvement in B2B network businesses are positioning him extremely well to provide value-added advice to all parties involved in international commerce. With his deep subject matter expertise, he helps to develop sustainable growth strategies and new business models as well as execution plans focusing on client, solution, technology, partnership, connectivity and digitalisation strategies and roadmaps for traditional parties, B2B networks and FinTech start ups. Over the years Daniel has been actively involved with major industry associations (ICC, SWIFT, BAFT, WTO) to drive the Trade Finance Industry agenda forward. Daniel is very well-respected in the industry and has an enormous network of contacts around the globe.

Through deep domain expertise and experience of CTT’s owner and founder, combined with its wide network of Trade Finance specialists around the globe, CTT is an ideal partner for any party involved in the digitalisation of Trade Finance. CTT can act as a sounding board for new ideas and solutions by using its framework to discuss, review and shortlist possible use cases and scenarios. CTT also provides introductions to other market participants and is focused on helping you to set up partnerships and commercial arrangements. It can tailor its consultant services to the needs and priorities of your company.

The Author