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Cash against data - ICC UK Whitepaper (in full)

30 MIN READ
Nov 6, 2024

Digitalizing and financing trade in manufactured goods 

A white paper for CFOs and Corporate Treasurers

Co-authored by:

The whitepaper can be downloaded here as a PDF (no credentials required):

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ICCUK Primatrade Cash against data paper.pdf

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1. Executive summary

One of the key benefits of the digitization of trade is to increase the availability of financing in supply chains and potentially to reduce its cost.

Commodities, around 1/3rd of global trade in goods:

The focus has been on the development of digital approaches to securing a financier’s claims over the goods in transit – led by the Electronic Trade Documents Act 2023 (the “ETDA”), enabling digital versions of the bill of lading, bills of exchange and promissory notes, enforceable under English law.

Manufactured goods, around 2/3rd of global trade in goods:

Manufactured goods are usually transported by container and do not rely on financing based on controlling the goods in transit via a bill of lading. Financing for trade in manufactured goods typically relies on obtaining a commitment from the buyer to pay which can be relied upon by a financier who can then pay the supplier upfront.

A lack of digitization means that most trade in manufactured goods is not financed – we estimate that 90% of trade in manufactured goods is “open account” where either the buyer pays at shipment or the supplier gives credit to the buyer whilst the goods are in transit.

The resulting trade finance gap is considerable and potentially a large portion of the US$2.5 trillion trade finance gap identified by the Asian Development Bank, particularly affecting SME suppliers in emerging markets.

Cash against data” is a trade finance methodology that can be used efficiently to organise trade finance for supply chains of manufactured goods, aligned with the ICC rules for digital trade agreements (URDTT). This enables trade finance to be provided for manufactured goods in transit at scale, even for SME suppliers in emerging markets:

The benefits of “cash against data” can be significant.

A case study of a large UK fashion business that implemented a trade digitization strategy across its entire international supply chain showed working capital efficiencies for the buyer that delivered savings of over 1% on the value of the goods being supplied. Moreover, the digitization approach adopted was relatively quick and simple to implement, with the international supply chain moving to a fully-digital model in a matter of weeks and without a significant investment in IT.

Contents

For ease of reading, we use the term “digitize” and its variations to mean all of “digitalise”, “digitalize”, “digitise”, and “digitize” and their variations, which are often used interchangeably. We also use the terms “buyer” and “importer” interchangeably and also “supplier” and “exporter”.

This Cash Against Data Whitepaper is co-authored by the ICC (UK), IC4DTI, and PrimaTrade.

1 Executive summary

2 Trade in manufactured goods

2.1 What are manufactured goods?

2.2 Role of financiers

2.3 Different approaches to financing trade

3 Today’s “order to pay” process for manufactured goods trade

4 Trade finance: enabled by digitization, delivering significant cost savings

4.1 How big is the trade finance gap?

4.2 What might the savings for participants be?

4.3 Why is there a saving from using trade finance?

4.4 How important is more efficient trade finance for manufactured goods?

5 Other benefits: operational and compliance efficiencies

5.1 Operational efficiencies

5.2 Increasing compliance requirements, digitization reduces the cost of compliance

6 A digitization model for manufactured goods trade

6.1 Requirements

6.2 What paperwork needs to be digitized?

6.3 An operational process

6.4 “Cash against data” - digitization that drives trade finance

7 Case Study: large UK fashion retailer

7.1 Shipment volumes processed

7.2 Benefits

Appendices

1 Comparison of trade in commodities and trade in manufactured goods

2 “Cash against documents”, how documentary credit has historically financed trade

3 How much trade in manufactured goods is financed – approximate estimates?

ICC and cash against data - why this whitepaper?

About the ICC United Kingdom

About the Centre for Digital Trade and Innovation (C4DTI)

About PrimaTrade

2. Trade in manufactured goods

2.1 What are manufactured goods?

The World Trade Organization aggregates overall trade in goods into a single category, but this includes two distinct categories of transaction:

Manufactured goods include food, household products and appliances, clothing, electronics, toys and furniture. Bulk commodities would include cargoes of oil, metals, grain, sugar etc.

2.2 Role of financiers

A further key difference between these two categories is the role of financiers:

So financiers of trade in manufactured goods rely on obtaining a commitment to pay directly from the buyer to mitigate key risks including:

2.3 Different approaches to financing trade in commodities and manufactured goods

 

Commodities

Manufactured Goods

Who is typically being funded?

Owner of the goods

Supplier of the goods

How are financiers protected if there is a payment default?

Financiers can take possession and sell the goods

Financiers have an enforceable claim to be paid by the buyer

What do financiers need?

A secure way to attach to the goods in transit – eg: via the bill of lading

A clean and unconditional commitment by the buyer to pay

Weaknesses of current system

Fraud and other risks associated with reliance on paper bills of lading to obtain control over the cargo and the inconvenience of using paper bills of exchange

The fact that it is hard for a buyer to give an approval to pay before delivery because paperwork is not conveniently available earlier

Digitization delivers:

Secure electronic versions of the bill of lading and bill of exchange as established under the ETDA 2023 mitigate many of the risks associated with current usage of physical documents

Digitization by suppliers can be used to speed up the provision of data to the buyer, enabling approvals to pay to be given much earlier, potentially at shipment

3. Today’s “order to pay” process for manufactured goods trade

Order to pay manufacturing goods

In common with all forms of international trade, there are typically two basic questions that are embedded in the above arrangements:

These questions are inter-related. Obtaining the evidence that the exporter has provided everything as expected is exactly the step that can mean the importer will confirm it will pay, and this exchange is at the heart of trade.

There are a number of points to note from the above diagram:

Digitization is typically not used extensively because the existing capabilities of technologies available to importers and exporters do not support it (e.g. there is a lack of integration between accounting systems, compliance systems, payment processes and transport management systems in most corporate IT environments).

Supply chains are complicated

Converting paperwork into structured and useful data before it moves on towards the importer (buyer) in the process delivers the potential for significant efficiencies:

Solution to digitalize supply chains

4. Trade finance: enabled by digitization, delivering significant cost savings

Digitization resolves the issues that have led to a lack of availability of trade finance for trade in manufactured goods.

Digitization can address this by:

4.1 How big is the trade finance gap?

We estimate that more than 90% of trade in manufactured goods is on open account and is not financed.

There is significant unmet demand for trade finance to support trade in manufactured goods – see for example the Asian Development Bank view that there is a US$2.5 trillion trade finance gap, particularly for SME exporters.

Suppliers (exporters) would like to receive funds as they ship, whilst importers (buyers) would like to benefit from deferred payment terms and do not want to make payments before being satisfied that the supplier has supplied the goods in accordance with the contract. Trade finance could bridge that gap were it to be available as a practical matter at an affordable cost.

4.2 What might the savings for participants be?

There are significant benefits available from the use of trade finance in the trade in manufactured goods:

4.3 Why is there a saving from using trade finance?

The ability of trade finance to deliver cash to exporters as they ship whilst permitting buyers to continue paying later delivers a real and tangible efficiency to the trade process. It is nearly always more efficient for exporters to be paid as they ship rather than to make them wait for payment until after delivery – and this will often provide the bulk of the saving that the participants can realise:

4.4 How important is more efficient trade finance for manufactured goods?

The absence of efficient and widely available trade finance for manufactured goods leads to significant structural issues across the global economy. Most notably, it is a key contributor to:

Before the modern era of trade globalisation, suppliers of manufactured products were paid shortly after shipment using the traditional “cash against documents” model that has now fallen into decline – see Appendix 2.

Digitization offers an opportunity to re-establish the principle that suppliers should be paid quickly upon shipment – using the “cash against data” approach which is now demonstrably both technologically possible and available.

5. Other benefits: operational and compliance efficiencies

5.1 Operational efficiencies

The ICC, in its report Unleashing the potential of trade digitalisation”, noted that most importer buyers are operating with up to 9 different departmental silos, which expect different sets of information for each and every purchase. The paper-based processes involved in feeding these silos cause significant costs for all participants, both upfront in the flows of information and then later when data has to be reconciled within the importer.

Significant operational wins can be achieved by suppliers self-digitizing paperwork before transmitting it to the importer, to create a single source of truth which can feed the different silos on a fully coordinated basis. This can be achieved relatively easily using the methodologies set out in this paper (see section 6 for a description of an operational model for this).

The new forms of electronic bills of lading and electronic promissory notes enabled by ETDA 2023 in the UK can further support these operational efficiencies and, in combination,  mean it is now truly feasible to reach a 100% digital trade.

5.2 Increasing compliance requirements, digitization reduces the cost of compliance

Compliance has always been a part of the supply chain process to ensure that goods are fit for purpose. But legal and regulatory changes relating to ESG – environmental, social and governance matters -in particular mean that compliance requirements in supply chains are increasing, especially for companies that import manufactured products.

Companies need to obtain an increasing range of information about the goods they import for sale or production to be able to:

Laws and regulations relating to ESG disclosures and checks are tightening every year. In 2024, for the first time, in many countries commercial audits will start to include a “Scope 3” review of ESG policies and procedures in supply chains and how they have been implemented.

Demonstrating ESG compliance involves a considerable amount of paperwork, and this is likely to multiply going forward as demonstrating compliance with many ESG policies will likely require paperwork at purchase order or product level.

Without digitization, it is unlikely that ESG policies and procedures can be effectively monitored across supply chains – given the volume of information and paperwork that has to be requested, collected, checked and stored.

6. A digitization model for manufactured goods trade

6.1 Requirements

Manufactured goods trade, unlike trade in bulk commodities, typically occurs point-to-point – i.e. directly between a buyer (importer) and supplier (exporter).

Manufactured goods trade is simpler that trade in commodities in  number of respects, but also more complex in one important respect. These issues are all relevant to how digitization can be implemented to deliver benefits to participants:

These differences mean that digitizing trade in manufactured goods is both easier and more difficult than trade in commodities – likely requiring a different digitization model.

The supplier typically collects together all  the documents (in original or scan copy form) that the buyer needs to see and makes them available from a central location.

On the other hand, the buyer typically has multiple departments each of which takes responsibility for a different aspect of the trade. The ICC has found, in its research, that a typical corporate may have up to 9 different teams involved in dealing with data from suppliers – highlighting why digitization can drive significant benefits.

6.2 What paperwork needs to be digitized?

The paperwork for a typical trade in manufactured goods that flows from exporter to buyer directly has a number of components, each of which can be digitized:

Most buyers require sight of all these different forms of paperwork and a reconciliation between supply and purchase orders to be satisfied that the supplier has delivered the goods in accordance with the contract and before giving a commitment to pay.

6.3 An operational process

A successful digitization model enables:

The process may be handled by the supplier itself or by a freight forwarder / transport provider.

Technology systems have evolved so that it is now possible to provide a federated, secure and easy-to-use environment to suppliers through which they can faithfully and reliably upload and self-digitize their documents – ensuring that the documents which they provide can be transmitted to  buyers in the form of data.

Such a platform can work as follows:

This delivers data to the buyer on which it can rely to provide a commitment to pay - which in turn unlocks the availability of trade finance for the supplier.

So we can call this solution “cash against data”, in contradistinction to the historical “cash against documents” trade finance product provided by banks.

6.4 “Cash against data” - digitization that drives trade finance

As described in Appendix 2, the traditional documentary credit process (“cash against documents”) does work and does deliver trade finance to the exporting supplier – but it takes too long and the costs are high because of the involvement of banks, the requirement to provide the paperwork physically to the importer’s bank, and the level of human oversight required to review and assess whether the paperwork complies.

A digital version of this process – “cash against data” – can address the limitations and costs of the legacy paper approach and make trade finance truly efficient and much more widely available for trade in manufactured goods.

A “cash against data” process looks similar to the following:

Digitization process for trade in manufactured goods

Points to note from the above process diagram:

There is also a significant opportunity to combine “cash against data” trade finance with supply chain finance – extending and automating supply chain finance programs so that they can operate at scale on a post-shipment basis rather than only post-delivery (as most currently do).

This is both a technical and an operational model that is reliable, practical and scalable for participants to adopt.

It delivers on the key point set out at the start of this note “The effective take-up of trade digitization requires the benefits to be clearly and easily realisable by its participants”.

7. Case Study: large UK fashion retailer

The retailer implemented PrimaTrade as a digitization platform for their international supply chain in January 2023, which ramped within 10 weeks to involve over 300 of their international suppliers in more than 20 countries. By the end of 2023, the group was operating on a fully digital basis across all international suppliers many of whom are SMEs based in emerging markets shipping to the UK and the US.

7.1 Shipment volumes processed

Statistics for the retailer’s trade digitization program in 2023:

Total amount of spend handled on the platform

US$229m

Amount of supplier trade finance delivered (provided by the retailer itself and others)

US$125m

Buyer savings earned (ie: cash P&L benefit)*

confidential**

Number of shipments

15,800

Number of suppliers

359

Number of countries

22

Number of invoices

27,900

Number of purchase orders matched

62,600

Number of documents digitized by suppliers

~100,000

* Savings equal the difference between discounts that suppliers agree for accelerated payment and the funding cost that suppliers incur (suppliers have the option). PrimaTrade’s technology enables this saving to be received and booked in the buyer P&L.

** Savings are greater than 1% on spend.

The platform works using the operational model and cash against data system set out in section 6.

With the approval to pay available from the buyer, suppliers can then access immediate payments before delivery (ie: during the trade phase) and without having to wait for the remaining term of the invoice.

In coordination with the retailer’s treasury team, a third party trade financier is involved in the programme. The financier makes the early payments to suppliers upfront and enables the retailing group to settle invoices later on their due dates.

The financier provides trade finance against the flow of goods that are being shipped to the retailer based on the invoice being approved for early payment.

In this way, supply chain finance is extended into the pre-delivery space, adding a trade finance capability to a standard SCF product.

7.2 Benefits

The case study demonstrates that trade digitization can deliver significant financial benefits to participants in the trade of manufactured products. This can be achieved via automated early approval of invoices by buyers – which approval can then be used to unlock trade finance for exporting suppliers – “cash against data”.


Appendix 1.  Comparison of trade in commodities and trade in manufactured goods

 

Trade in manufactured goods

Trade in commodities

Typical transport model

Containers (part-loads, full-loads)

Bulk

Transport methods

Sea, road, rail, air

Sea or rail

Typical trade financing model

Based on the buyer’s obligation to pay

Based on the value of the goods being moved

Typical concern of the trade financier?

Will the buyer pay, and will the buyer pay specifically to me and not to the supplier?

Can I get hold of the goods if the financing I have provided is not repaid?

Is financing disclosed or confidential?

Typically financing is disclosed to the buyer and the buyer engages with the financier.

The ultimate off-taker (ie: destination for the goods) may not be involved in the financing of the trade.

Fraud risks

Are the buyer and supplier colluding or related parties?

Is the trade transaction real?

Impersonation of any of the parties.

Are the goods being double-financed?

Do others have a claim over the goods?

Do the goods exist?

Are the goods as described?

Key document needed for trade finance to be efficient

Obtaining a binding commitment to pay from the buyer, ideally with payment being to the financier directly.

Bill of lading (sea only) to obtain a possessory claim over the goods.

Other documents to control the movement of the goods.

Typical trade approach

Point-to-point from supplier to buyer

Traded via intermediaries between source and ultimate off-taker

What needs to be digitized to make trade finance work better?

OCR digitization to lift structured data from each set of documents – including invoices, packing lists, transport documents (evidence goods are handed over), and trade-specific documents such as certificates, inspection and compliance reports – all the paperwork required by the buyer to give a commitment to pay

Ledger-based digitization is required to ensure certain key documents are unique and useful as replacements for their original paper alternatives – specifically the bill of lading (sea) as supported by the ETDA 2023.

Other documents (trade specific) are required evidencing what the goods actually are which could be digitized via OCR into structured data.

Why does digitization make trade finance more efficient?

If the relevant documents can be digitized, the buyer can more quickly and more automatically give the undertaking to pay that the financier requires – and could do this before goods are delivered.

If the bill of lading can be digitized via a system (eg: using blockchain) which guarantees its state, it makes it harder for double-financing to take place and easier for financiers to attach to the goods.

Existing trade finance methods (ie: financing of the individual trade itself)

  • Documentary credit (eg: LC)

  • Dual-factoring

  • International factoring

  • Supply chain finance

  • Invoice discounting

  • Documentary credit (eg: LC)

  • Specialist transactional finance

Proportion of flows financed by trade finance

~10%?

~80-90%?

How is the balance financed?

Exporters give credit or buyers pay in advance – so using their corporate credit facilities. These are “open account “ trades.

Debt facilities made available directly to traders and trade participants enabling them to offer or accept delayed payment in the trades themselves.

What are the costs of not digitizing?

Importers have become used to receiving goods before paying them and expecting their suppliers (exporters) to give them credit to allow this to happen.

 

This is typically:

  • Expensive to arrange for the exporter

  • Contributes to the US$2.5 trn trade finance gap

  • Contributes to problems for SME participants in global trade that do not have the ability easily to provide credit to their customers.

  • Creates barriers to the growth of trade.

Banks have reduced participation in the commodity trade finance market, principally due to fraud risk because paper BLs are open to multiple financing and counterfeiting. There has been a reduction in liquidity available to participants, leading to:

  • A loss of confidence in the market.

  • Smaller commodity players have lost liquidity, and some have collapsed.

  • New entrants to the market find it difficult to get established.

  • Creates barriers to the growth of trade

Appendix 2.  “Cash against documents”, how documentary credit has historically financed trade

As already set out, the buyer needs to provide an undertaking to pay before trade in manufactured goods can be financed. Such an undertaking is typically only available after delivery and once goods have landed and inspected by the buyer – which is a problem because the “trade” period has by that point been completed.

A consequence is that suppliers typically need to give post-shipment credit to buyers using their own financial resources – ie: without trade finance. This contributes to the trade finance gap that the Asian Development Bank reports has reached US$2.5 trillion per year.

But banks do have a way to provide trade finance in support of manufactured goods trade, and this uses an approach often referred to as “cash against documents” – and this is a very well established approach that is built into the way that letters of credit typically work.

The buyer will want to verify three principal aspects of the supply that has been made:

A “cash against documents” transaction is based on the principle that documents are provided by the supplier that show the buyer that is fine to agree payment, or even actually to make payment – even though the goods may not yet have arrived.

This is not a digital process.

Original paper documents physically move between exporter, exporter’s bank, importer’s bank and finally to the importer. This means that the time period from shipment to payment is often several weeks. It also means that documentary credits – delivering “cash against documents” are expensive, often costing 3% or more of the value of the goods to execute.

Documentary credit support for trade in manufactured goods is certainly now below 10% of total volumes, and is most likely nearer to 1% or 2% - public statistics for the volumes are not easily available. This process – “cash against documents” provides a pointer to how digitization can be implemented to enable efficient trade finance to support trade in manufactured goods.

Appendix 3.  How much trade in manufactured goods is financed – approximate estimates?

The amount of trade that is financed is hard to know accurately or even approximately because these are typically private transactions that are executed between the parties involved.

Trade finance means that the transaction in the goods are financed whilst in transit and before they are delivered.

That is not the same as finance after delivery – when financing becomes much easier because buyers approve invoices. The trade finance period can be anything from a few days for a domestic transaction (not cross-border) to several months for long sea routes.

There are five main products that can be used to finance manufactured goods in transit, ignoring trade loans and other financings that are forms of direct balance sheet credit taken by participants in the trade.

Financing product

Typical costs for trade finance*

Time frame to cash (after shipment)

Typical finance amount

Estimated annual flows

(US$ trillions)

Documentary credit

2% to 5%*

1 to 3 weeks

100% of the invoice

0.5 (estimated)[1]

Dual-factoring

1% to 2%*

0.5 to 2 weeks

80% of the invoice

0.6 [2]

International factoring

1% to 2%*

0.5 to 1 week

80-90% of the invoice

0.1 (estimated)

Supply chain finance (as a trade finance product)

0.25%-1%*

1 to 3 weeks

100% of the invoice

0.21 (estimated)[3]

Domestic factoring (as a trade finance product)

1% to 2%*

0.5 to 1 week

0% - 60% of the invoice

No data reasonably available

* Assumes finance is provided for 30 days and the cost is expressed as a percentage of the invoice.

[1] Source ICC Trade Register 2022 –documentary credit flows = 9% of the world trade in goods = $2.4 trillion. This includes commodities, so the amount supporting manufactured goods is lower and we estimate that only 20% of documentary credits are employed in supporting trade in manufactured goods.

[2] Source FCI 2022 annual report

[3] Source BCR World supply chain finance report 2023 puts SCF total volumes at US$2.1 trillion, but most of this is post-delivery payables financing and not trade finance – we estimate that only 10% of SCF financing flows to suppliers before delivery.

Even a generous estimate based on this table suggests that only 10% of trade in manufactured goods is actually financed pre-delivery.

The balance of trade is moving on “open account” and therefore being financed by the buyer paying cash upfront at shipment or by the supplier giving credit to the buyer until delivery or later. In these cases, the participant is using its own credit capacity to do this.

The market has evolved to this point over a number of decades principally as a result of the decline in popularity of the letter of credit (“LC”) as an instrument of trade finance. Whilst statistics are not easily available, 50 years or more ago, the LC was a common way for importers to provide assurances to exporters that they would pay against compliant documents, and for exporters to provide importers appropriate evidence that the supplied goods matched what had been ordered.

The LC has been in decline year-on-year, noting that it is relatively expensive to use on transactions that are typically less than US$100,000 on average, involves a high degree of specialist knowledge to operate confidently, and is quite slow.

Alternatives have sprung up, but the principal issue in financing trade in manufactured goods is that the cooperation and commitment of the buyer is almost universally required. Obtaining this commitment in a timely and practical manner holds back the availability of finance.

ICC and cash against data - why this paper?

The ICC United Kingdom and the Centre for Digital Trade and Innovation have led the charge towards the digitalisation of trade. Their mandate is to reduce friction and cost in trade - which leads to significant economic benefits.

As set out in this paper, there are different approaches to trade digitalization, broadly leading to two models emerging:

Cash against data is a new methodology, upgrading the legacy approach of "cash against documents" which has historically anchored trade finance activities.

The purpose of this paper is to bring the cash against data methodology to a wide audience and encourage corporate treasurers, CFOs and their bankers to explore its potential to:

About the ICC United Kingdom

The ICC in the United Kingdom is part of the International Chamber of Commerce which is the world’s largest business organisation representing 45 million companies with 1 billion employees in over 170 countries. It is the only business organisation with UN Observer Status and acts as a leading voice for business at the UN, G7, G20, World Trade Organization and other major international institutions.

ICC United Kingdom is the representative voice for ICC in the UK and provides a mechanism for UK industry to engage effectively in shaping international policy, standards and rules. We are the leading voice on digital trade ecosystems and Co-Chair the B2B Cluster for the Commonwealth Connectivity Agenda.

About the Centre for Digital Trade and Innovation (C4DTI)

The Centre for Digitial Trade and Innovation focusses on making trade cheaper, quicker, simpler and more sustainable.

C4DTI is an ICC United Kingdom-led, global initiative based at Teesside University established with support from the Tees Valley Combined Authority. We are an industry-led, government-supported public-private partnership that works with the ICC Digital Standards Initiative, foreign governments, business groups, companies and international partners to digitalise UK trade. We are agnostic to technology and advocate for open, interoperable systems (laws, rules, standards).

About Prima.Trade

PrimaTrade is a UK-based financial technology company providing a platform which connects buyers (importers), suppliers (exporters) and financiers.

Using the platform:

See the case study in this paper for the significant benefits that can accrue to all parties to these transactions.

As of the publication date (November 2024), over 700 companies in 26 countries now trust PrimaTrade to digitize their shipments and deliver instant cash at shipment.

In April 2024, PrimaTrade won the ICC United Kingdom and C4DTI's award for best cross-border trade digitization technology:

PrimaTrade, ICC UK, C4DTi award

For an appreciation of what it is like to work with us, and what our technology can deliver, please see this case study, filmed at the ICC UK and C4DTI conference in Spring 2024: click here.

See more here: https://www.prima.trade

Contact us here or book a call via this link.

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