Digital bills in trade – who wins?
Another conference on digitalization of trade – and another round of micro-pilots and panellists exhorting us all to do more.
So what’s going on?
Who are the winners from trade digitization – and who are the enablers that can make it happen?
This post follows on from a previous post about digital negotiable instruments and what makes them special (and useful).
Do read that post "3 things to know about digital negotiable instruments" for important back ground.
Digitization of trade: the basic issue
The continued use of paper documents (bills of lading) or the lack of digital claims for payment (bills of exchange) means there is more friction in international trade than perhaps is necessary. This is a macro-cost for economies and a transactional cost for trade participants.
It would sound like we should all get on the bandwagon and go digital.
Many countries have passed laws to support digital negotiable instruments - typically following the MLETR principles that were created by UNCITRAL. This is a useful tracker that shows the adoption of new laws aligned with MLETR: https://www.digitalizetrade.org/mletr.
But even with the new laws coming into force, there remains a disconnect between the beneficiaries of trade digitalization and the people who need to enable it.
Digital bills of lading: who wins, who enables?
The winners from digitizing bills of lading are the traders: the importers and exporters.
They face additional costs because of the use of paper of at least four kinds:
Issuance, handling and other fees charged by the logistics industry
Delays caused by paperwork being in the wrong place, leading to demurrage or reliance on letters of indemnity
Courier charges involved in physically moving documents around
Additional costs of risk – eg: in more expensive finance, because financiers worry about where the paperwork might be, and whether it is authentic
Whilst these costs are much discussed, importers and exporters can do little about the continued use of paper bills of lading.
It is the carrier that decides whether or not a paper or digital bill of lading can be used for a given shipment.
Rarely does the instructing beneficial cargo owner have the leverage to impose its will in this regard.
And some of the costs of paper bills of lading directly benefit the carrier – for example, additional charges for delays and additional handling and administration charges. Moreover, 80% of container traffic is handled by only four major carriers – so there is little incentive for any one party to breakaway from the others.
No surprise then, that digital bills of lading have been slow to be adopted.
Digital bills of exchange: who wins, who enables?
A similar story applies here.
The winners from digital bills of exchange should be the importers and exporters who are able to benefit from a lower cost of finance in their trades by providing a simple, enforceable, tradeable payment obligation (a digital bill of exchange).
Go back 50 years, and bills of exchange were commonly used in trade. Whether that was to provide an exporter with an easy-to-enforce claim for payment that could be locally discounted for cash - or to enable a letter of credit provider to offer a deferred payment to an importer.
Today, digital bills of exchange would seem to offer the promise of more flexible and lower costs of finance supporting trade. But that’s not the reality.
The enablers here are the financiers – specifically the banks.
There is no point issuing a digital bill of exchange if no bank recognises it as a reliable payment obligation. With few exceptions, importers and exporters do not have the leverage to get their banks to accept digital bills of exchange – and the banks themselves do not really get a clear benefit.
Why go to the trouble and accept the potential perceived risk of a digital bill if a plain-old contractual promise to pay works?
From the banks’ point of view, the current system is not broken.
Where do we go from here?
There is a disconnect in trade based on digital bills between who wins and who enables.
The benefits of digitalization have to flow through to the enablers of digitalization – or, alternatively, the authorities have to apply real pressure.
Mere exhortation of the market to go digital is not the right answer.
For digital bills of lading, there is one area to highlight where beneficiaries can apply sufficient pressure. These are the large commodity players (traders and producers) who have enough leverage to require carriers to go digital. The resulting benefits can be significant in terms of reduced fraud and lower financing costs.
For digital bills of exchange, there is also one area to highlight – which is using digital bills of exchange to achieve longer payment terms in supply chains. If suppliers are ready to settle invoices with bills of exchange, then it is possible for corporate buyers to receive longer trade financing terms from financiers who can discount those bills – and the digital bill of exchange is the obvious instrument to use that delivers this. PrimaTrade’s platform facilitates that with operational ease and at scale.
Talk to us
PrimaTrade's platform is endorsed and recommended by a number of major European banking groups directly to their clients for international supply chains - especially in retail and manufacturing.
PrimaTrade's platform is integrated with Docusign and enables real-time generation of legal agreements that can be executed with Advanced Electronic Signatures without users leaving our platform. PrimaTrade is also a reliable system for the purposes of electronic negotiable instruments - and supports digital bills of exchange for its corporate and banking clients.
There is much more to this topic. If you would like to talk to us - or see if any of our partner banks would be happy to provide you with a limit - do get in touch here: