Digitization of trade
Digitization of trade enables "cash against data".
But the digitization requirement is different (and simpler) for supply chains of manufactured products when compared to bulk commodities.
Here we explain why.
Trade finance: history
We have moved, over many centuries, from simple face-to-face barter through to systems that enable distant parties to trade goods with each other.
Trade at a distance resulted in the creation of the "financial supply chain" on top of the "physical supply chain".
The financial supply chain manages the flow of commitments and payments between parties, given that underlying goods can take time to travel from supplier to buyer, giving rise to the birth of trade finance. An interesting blog on this topic is here.
Digitization of trade - cash against documents
None of us was there - but conventional wisdom has it that the financial supply chain started millenia ago when merchants would make notches in sticks that would then be split - enabling distant buyers to know that distant suppliers had been paid and to whom they might now owe the money.
And then we evolved to paper documents that dematerialised the physical and financial supply chains (goods and payments) into bearer instruments that could be independently traded and relied upon. Two key documents were developed and invested with additional rights, over and above their evidential role:
The bill of lading, which carries with it possessory rights over the cargo, and
The bill of exchange which carries with it possessory and enforcement rights over the buyer's obligation to pay.
These developments became essential to enable the financing and safe operation of trade at a distance - when parties did not know each other or trust each other - and where financiers were also operating independently.
Digitization of trade - cash against data
There are issues with relying on paperwork as the basis for trade and trade finance:
Physical paperwork can be forged and can be lost - it is not always reliable - see here for a good blog post on the probable costs.
Paperwork takes time physically to move - and time, as they say, is money.
Trade finance needs to move on from "cash against documents" to "cash against data" - and there are two ways that this is happening.
Cash against data: trade in commodities
Commodities trade operates within a low trust environment.
For good and efficient reasons, commodities are typically sourced and traded through a number of intermediate steps on their way from source to destination. The ultimate buyer of a cargo may have no direct relationship with the original supplier. Financiers engage with the details of individual trades and structures can be complex. See here for more on this.
In this environment, digital versions of the bill of lading and the bill of exchange provide powerful efficiencies. That's not just because they are faster, but principally because they are more reliable. Blockchain systems can be used to confirm provenance and ownership of a digital claim (represented by the digital "bill").
So "cash against data" in the commodities world uses digitization to improve the trust and security of claims over goods and payment obligations.
The adoption of "safe systems" to create and manage digital bills of all kinds and the passage of new laws (eg: ETDA 2023 in the UK) are delivering real value to commodities trade and a very active commodity trade finance market that sits alongside.
Cash against data: trade in manufactured products
It would be wrong to say that trade in manufactured products operates in a high trust environment - but the trust questions are different when compared to trade in commodities.
Most supply chains in manufactured products operate point-to-point.
The buyer selects the supplier,
the buyer places the order with the supplier,
the supplier makes and ships the goods to the buyer,
the buyer pays the supplier.
The parties know each other and have chosen to work together. The trust questions are usually:
Has the supplier performed?
Will the buyer pay?
Historically, these trust questions were resolved to enable trade finance by using "cash against documents".
The supplier provides paperwork to show it has handed over the goods, what it has shipped, the invoice and any inspection reports and certificates.
The buyer, reviewing these documents, gives a commitment to pay that a financier can rely upon, either paying the supplier itself ("CAD") or enabling the supplier to get cash early via a financier.
But today most trade in manufactured goods has moved to open account (we estimate 90%) and so there is no trade finance happening. Without trade finance being involved, we end up with the trade finance gap that the Asian Development Bank has calculated at US$2.5 trillion per annum.
This has happened because cash against documents takes too long and is expensive to operate, especially if documents have to go through intermediate banks to manage safekeeping and control.
Digitization for financial supply chains of manufactured goods is straightforward and speeds everything up. Trade finance can work again.
If the supplier can evidence its performance digitally - then the buyer could approve trades much more quickly. Moreover, if suppliers provide their evidence as data, it can be evaluated by computer to deliver, under buyer supervision, a high level of automation.
PrimaTrade's secure platform connects suppliers and buyers together directly. It enables suppliers to self-digitize their trade paperwork with the data arriving instantly at the buyer - and further enabling buyers to automate their approval decisions on early payment. Financiers on the platform can then pay suppliers immediately.
Working capital savings for buyers by re-introducing trade finance to manufacturing supply chains are significant - often 1% or more on the cost of goods.
Cash against data is a big win for supply chains of manufactured products. It enables trade financiers to re-engage with their clients in this substantial part of global trade.