November 2022 - Pay to play: overcoming challenges in the payments | Trade Finance Talks

THANKS TO

ALAN KOENIGSBERG

RISHIKESH TINAIKAR

JIM REGAN

ENNO-BURGHARD WEITZEL

SCOTT WELLCOME

PRADEEP NAIR

MICHELLE KNOWLES

GEORGE WILSON

GAYANE MIRZOYAN

CHYNARA ALYBAEVA

ANDY ROMANOV

VLADISLAV BEREZHNY

TULKIN YUSUPOV

DALTON LEE

PAUL WOLLNY

GORDON CESSFORD

RICHARD RAWLINSON

MARTIN GRUNEWALD

ANASTASIA MCALPINE

JOSH KROEKER MARK BORTON

TFG EDITORIAL TEAM

DEEPESH PATEL

ANASTASIJA KOVACEVIC

HOFFMAN

© Trade Finance Talks is owned and produced by TFG Publishing Ltd (t/a Trade Finance Global). Copyright © 2022. All Rights Reserved. No part of this publication may be reproduced in whole or part without permission from the publisher. The views expressed in Trade Finance Talks are those of the respective contributors and are not necessarily shared by Trade Finance Global.

Although Trade Finance Talks has made every effort to ensure the ac curacy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for the consequences that may arise from any opinions or advice given. This publication is not a substitute for any professional advice.

BEN ELLIS Global Head of Visa B2B Connect Visa

Barry Tooker Principal Transaction Banker

ANDRÉ CASTERMAN Founder and Managing Director Casterman Advisory

DEEPESH PATEL Editorial Director Trade Finance Global

1.1

Pay to play: overcoming challenges in the payments sector

Fire tests gold, adversity tests adaptability.

Trade finance finds itself at a crossroads; a vast and multifaceted sector, it is an industry that continues to participate in extremely archaic processes.

For many, it can feel as if the ecosystem is in a constant tugof-war between technological advancement and 19th-century practices.

Some may refute that trade finance, as the oldest domain of international finance, warrants its arcane methods; after all, many industry practices, such as the bill of exchange (BL), emerged in the Middle Ages.

But increasingly, large market players are finding that this is not enough of an excuse.

COVID-19 served as a catalyst for

many things, but, in part, it served as a wake-up call for the trade finance industry.

It narrowed people’s attention to the inefficiencies associated with shipping procedures, banking relationships, and sustainability measures.

This edition of Trade Finance Talks will explore these topics but also how, in an increasingly digital world, the payments industry has found itself evolving at a rapid pace.

In this new reality, where businesses are now expected to embrace 24/7 realtime payments and market innovations, those that fail to keep up may find themselves paying the price.

ANASTASIJA KOVACEVIC Junior Editor Trade Finance Global

Trade finance digitisation: troughs and triumphs

Cash is king, they say.

This may have been true a decade ago, but transactional cash use has fallen from over 50% of payments in 2010 to only 17% of all payments in 2020.

SOURCE: BANK OF ENGLAND

Digitisation has played a large part in increased payments accessibility; and this is not the only capacity in which it has helped progress.

The digital sector represents a wealth of opportunities. In 2019, the tech space contributed approximately £151 billion to the British economy alone.

Despite the world of opportunity presented, it can often be a long road until large market players, like banks, take any real interest in accommodating digitisation of processes.

This could stem from varying reasons, but an overarching reality seems to be the lack of high quality and reliable data

on a real-time or near-real time basis.

Fraud and payments: every action has an equal and opposite reaction

Data. An asset that could potentially solve many barriers to frictionless payments. In the same breath, conversations around data––and more poignantly, data sharing––can invite a few furrowed eyebrows.

The reality of the situation is that, though interpoperabitlity could serve as real solution for many businesses it also introduces an increased threat of fraud.

Fraud remains an everpresent looming shadow and,

unfortunately, continues to cause long-lasting issues for businesses. It is suggested that fraud tactics such as double financing are costing the industry as a collective up to £5 billion.

Inevitably, it is near-certain that this threat will always be a reality of the landscape, but the question remains: can we find a durable solution for mitigating this risk?

The ICC’s recent paper on fraud reduction shed some light on the situation. The paper included some recommendations on development of common message formats, data exchange protocols, and standardised data.

Additional notes circled around the need for regulators to take

note of the G20 roadmap to enhance cross-border payments.

Pay-ving the way: SMEs reaping the benefits of digitisation

Thanks to trade digitalisation, cross-border payments processes are now faster, more efficient, and less expensive. Not only has this improved transaction accessibility, but it has also bolstered emerging trading markets.

More specifically, it has allowed small- and medium-sized enterprises (SMEs) to better support their businesses.

Mpho Sadiki, head of realtime payments at BankservAfrica said, “If we can shift from a world where an SME waits for payments during the week––getting no real payments over the weekend––to a world where the payment happens instantly…they will be able to have cash flow available immediately.”

eBL adoption: all hands on deck

Since the creation of Model Law on Electronic Transferable Records (MLETR), only six states and seven jurisdictions have adopted its framework as law.

In October 2022, the UK became the next potential name to be added to the list, with the Bill beginning its journey through government.

According to Catherine LangAnderson, partner at Allen & Overy, the new law will create more comfort and legal certainty for banks around what they are able to do in a digital sense, further driving efficiency and potentially unlocking risk appetite in other areas.

Lang-Anderson is not alone in this sentiment.

ITFA Chairman Sean Edwards separately said, “The Bill will also break psychological barriers by emboldening market players to consider doing something they would never have before.”

Shipping, supply chains, and sustainability

Over 80% of the volume of international trade and goods are carried by sea.

Freight and forwarding is therefore an integral part of the trade finance eco-system. But shipping and logistics fall into a wider network––one heavily effected by macroeconomic fallout over the last few years: supply chains.

The increased acceptance of eBLs will no doubt aid significantly in many ways, but helping shipping become more a more sustainable industry is one of its bigger advantages.

ESG compliance: Hail Mary or greenwashing magnet?

In a field such as trade finance––one almost defined by borders––it is rare for the industry to face a unifying problem such as global warming.

There’s more carbon dioxide in our atmosphere than at any time in human history, and this global crisis will persist if not addressed.

The UN’s 17 Sustainable Development Goals (SDGs) adopted by all member states in 2015 seemingly set the stage for active change in the industry.

Seven years later, the Earth is 0.13 degrees Celsius hotter and no closer to net zero.

Unfortunately, trade finance is a very culpable aggravator in this context. Supply chains, for instance, account for more than 90% of CO2 emissions.

In response to the very relevant concerns about climate change was borne environmental, social and governance (ESG). ESG refers to a set of standards or criteria that measures a company’s actions and how they affect the environment.

Instead of people turning to leading government bodies to solve this larger societal issue, they have, en masse, looked to private companies for answers.

Accordingly, recent polling shows that a large majority of the public believe it is companies who should be responsible for paying for the growing cost of climate mitigation.

Nevertheless the ESG system has divided the trade finance industry; one side professes its importance, and the other warns against greenwashing.

SOURCE: REPRISK

Pierre Bollon, who serves on the European Economic and Social Committee (EESC) and is a general representative of AFG, the French Asset Management Association, said, “Companies are being asked by investors to produce more and more information on ESG as this becomes more mainstream, but

there is no standardisation of this information.

Data providers are now a key part of the financial chain and I do not see why this key part isn’t under scrutiny.”

The issue of compliance and how it interweaves with climate-

conscious practices continues to unravel in different ways. But one thing appears certain, enforcing standards could be trade finance’s saving grace. 

CARTER HOFFMAN Editorial Assistant Trade Finance Global

2.1

Visa: the highs and lows of B2B payments

To learn more about the cross-border B2B payments landscape, Trade Finance Global (TFG) interviewed Ben Ellis, global head of Visa B2B Connect.

Cross-border B2B payments landscape

It is important to note that a concise overview of cross-border B2B payments will not fully encapsulate the space and its multi-jurisdictional intricacies. In addition to the complexities of having multiple markets involved, business transactions naturally need to be able to convey additional data—such as which invoice is being paid—alongside the payment itself, something consumer payments do not need to consider.

According to Ellis, “It’s one of the more complicated business challenges.

“We did some research a short while back, and one of the things we discovered is about 70% of corporates have pain points tied to cross-border B2B payments.”

The research referenced was conducted by East & Partners on behalf of Visa Inc. in June 2019, looking at cross-border payments across 20 countries.

Many of these pain points Ellis mentions tie back to the unpredictability of the transaction.

Businesses often do not know where they are along the route, when they will arrive, or if there will be extra fees attached.

All these unknowns can make it difficult for the ultimate importer and exporter to confidently pass the full value of their offering along the supply chain.

Ellis added, “I think the industry is responding terrifically well.

“One of the things I think the industry is really good at is listening to clients—both financial institutions and their corporate clients—and working to innovate and to come up with ways to solve some of these pain points.”

One of these innovations is Visa B2B Connect.

Visa B2B Connect

When Visa began to examine some of these pain points, some of the aspects of a solution became clear.

Ellis said, “It takes good technology; it takes a good set of rules so that banks know what to expect when they engage; it takes an organisation that’s used to working with banks in a

BEN ELLIS Global Head of Visa B2B Connect Visa

very structured and regulated environment; it takes a company that can do this at scale.”

These elements led Visa to create a network called Visa B2B Connect—a multilateral network where banks can send B2B crossborder payment data to other recipients on the network.

By applying many of the same rules and infrastructure as its traditional business, Visa can help drive secure, predictable, and efficient cross-border payments around the world.

One of many: the issue of standardisation

Any conversation about trade or financial digitalisation would not be complete without a nod towards the challenge that standardisation—or a lack thereof—provides and some solutions for how to overcome it. Ellis said, “Standardisation is absolutely an issue, and one of the ways we address it is by building flexibility.”

For Visa, this means remaining open to the array of different messaging formats and standards that clients are currently using.

The world may be moving towards ISO 20022, but if a particular bank is not yet prepared to send a message in that format, there needs to be

another approach they can take in the meantime.

Ellis added, “What we try to do is to build optionality into how things connect, so the standards that clients are using—whether it’s the ISO standard or the MT (messaging types) standards that folks may already have in place—that we can do the translation and make sure that it all flows through.”

By avoiding rigidity in these processes, organisations like Visa can help foster that 20% growth rate that the industry hopes to achieve throughout the remainder of the decade.

To watch the full interview, go to tradefinanceglobal.com 

2.2

How ISO 20022, RTP, CBDCs, and other industry initiatives are changing the payments ecosystem

The payments ecosystem is made up of various participants interrelating throughout the process of a payment transaction.

This myriad of parties can be financial institutions, messaging and payment gateways, and third-party service and application providers, each playing unique and specific roles in a payment processing workflow and lifecycle.

New transaction banking initiatives are changing traditional payment processing paradigms. Innovative methods of payment and receipt, new currencies, and payment formats are altering payment, compliance, and liquidity management policies, practices, and procedures.

These new initiatives impact banks of all sizes, from the largest global banks to the smallest local credit union.

In order to keep pace, these banks’ payment ecosystem faces certain challenges and the need for change.

ISO 20022’s role in payments

The global adoption of ISO 20022 is changing the language of payments, and therefore the way payment messages are sent,

received, and mapped. This common standard enables more interoperability between the network participants dealing with cross-border and domestic payments and workflows. There can be as many as 200 internal bank systems affected by ISO 20022.

The new SWIFT MX message types can contain up to seven times the number of characters of the former MT message.

This new messaging standard incorporates more structured, robust, and comprehensive data. These innovative elements enhance speed and efficiency, improving cash recognition and account reconciliations.

The new SWIFT MX messages introduce a new field and party names, requiring the retraining of many payments, customer service, and compliance personnel.

A bank’s back office system(s) and applications were not designed to support ISO 20022––in some cases, even the ISO formats can be different––rather,

Barry Tooker

Principal Transaction Banker

they use a number of legacy systems and applications. All of these will have to be updated to support ISO 20022.

The recently announced delay in the global rollout of ISO 20022 until March of 2023 by SWIFT and most of the in-country payment market infrastructures only shortens the implementation gap. In countries like the United States, this is still an issue as The Clearing House will implement ISO 20022 on their CHIPS system later in 2023, and The Federal Reserve will not implement ISO 20022 on Fedwire until sometime in 2025.

In the United States, this requires a prolonged period of coexistence support for both the former SWIFT standard and the new ISO 20022 MX standard. This period will last for at least two years, whereby banks will have to support existing MT standards and the new MX standards and be able to map messages between them.

This will require considerable due diligence to ensure that data being truncated because of the larger MX formats can be properly translated and mapped, accurately accounting for any data trimming.

Real-time payments

The proliferation of realtime payments means that the traditional batch-based processes are no longer adequate to meet the immediate payments processing time mandates.

Real-time payments can be initiated and received 24/7, 365 days a year. This means that financial institutions need to provide access to the rails that can offer instant payments all year round, and their internal systems and applications must be available to process these payments.

The need for continuously available payment processing requires a rethinking of end-ofday cycles and introduces the need for stand-in processing for the times when host applications are down for end-of-day cycles or unavailable due to system outages or maintenance. Liquidity must be managed 24 hours a day to ensure the availability of funds for both customers and the bank’s real-time payments, alongside clearing and settlement systems.

Additional real-time payment services are being implemented, such as Request to Pay/Request

for Payment, and this will change the way payment requests are received, validated, and authorised.

CBDCs and cross-border payments

The number of Central Banks exploring Central Bank Digital Currencies (CBDCs) continues to grow. According to the Atlantic Council, there are 112 countries representing over 95 per cent of the global gross domestic product (GDP) exploring a CBDC.

CBDCs have the potential to streamline and simplify existing cross-border payment channels. Today, cross-border payments use a correspondent banking model. unds move through a series of banks based upon established relationships of the parties in payment and the payment’s final destination.

A payment made using a CBDC could be sent directly to another bank using a distributed ledger, negating the need to go through a correspondent bank network.

This reduction in parties a payment passes through could result in lower costs and a reduction in the overall timing of an end-to-end payment.

CBDCs have the potential to reduce the current high fee and foreign exchange (FX) charges and improve the tracking of a payment.

This reduction in the number of parties a payment passes through could result in lower payment costs and a reduction in the time it takes to complete an end-to-end payment.

Using a CBDC model for crossborder transactions could impact current banking relationships and related revenues. Payment method selection, alongside liquidity management policies and practices, could also be affected.

Open banking and APIs

Open banking allows customers to control their own financial data. Using application program interfaces (APIs) customers can now permit authorised thirdparty organisations to access their data at their respective financial institutions.

Using APIs, banks can authorise third-party access to financial information needed to develop new applications and services. This will also provide account

holders with greater financial transparency options.

This new approach is changing the way banks and their customers interact with one another, allowing the customer to have ownership rights and privileges over their transaction data instead of their banks.

Ultimately, this requires changes to the bank’s core systems by allowing authorised third-party access to previously walled-off applications.

How AI is changing the banking ecosystem

The use of data and artificial intelligence (AI) is impacting every component of the banking ecosystem.

Banks and credit unions are rethinking how to integrate information, analyse data and use data insights to improve decision-making.

While there are benefits such as reduced costs and enhanced customer experiences, the challenges of disparate and siloed data and formats must be overcome. New access methods and metrics must be created.

The future of payments

A financial institution’s payment ecosystem has evolved over many years. There is a need to continuously adapt and change for new technologies, new industry initiatives, mandates, and regulatory and compliance directives. The pace of these changes has only accelerated and will continue to do so.

This requires a constant review by all internal and external stakeholders responsible for ensuring a smooth and efficient payments workflow as well as an assessment of the impacts on the entire payments ecosystem. 

2.3

What a strong US dollar means for the world

In a world rattled by broad geopolitical tensions, shrinking liquidity, and record-high inflation rates, investors have turned to the US dollar.

With the traditional 60/40 portfolio currently on track to record its worst year since the 1970s, the dollar has been one of the few assets holding its ground as a diversifier.

The trade-weighted US dollar index rose to a 20-year high in the third quarter of this year and has appreciated against all but eight out of 50 currencies Western Union Business are tracking.

But unlike the 1980s, when the G5 nations decided to coordinate a weakening of the US dollar in the Plaza Accord, the US is now welcoming the appreciation of its currency.

A stronger currency does not only offset rising import prices, but it also helps tighten financial conditions, aiding the Fed in its fight against inflation. But that which has helped the Fed doesn’t necessarily bode well for the rest

of the world, which is struggling with an energy crisis and rapidly shrinking FX reserves.

How US currency affects the domestic trade landscape

It is important to note that a strong dollar has negative side effects for the United States as well, as it affects corporate profits.

S&P500 companies make about 40% of their sales outside the US, which might partially explain why stocks of domesticallyoriented companies have so far outperformed more global businesses this year. However, domestic problems pale in comparison to what USD strength is doing to the rest of the world.

For starters, the dollar is negatively correlated with world trade, which is mainly explained by the fact that around 40% of global commerce is priced in USD.

Based on the dollar’s performance and other leading indicators, world trade growth is expected to turn negative in the fourth quarter of this year.

Boris Kovacevic

FX & Macro Strategist

Western Union Business Solutions

The strength of the US currency has amplified already existing headwinds for the world economy. But while central banks have kept up the fight to protect their currencies from depreciation, a USD reversal is something only the Fed will be able to engineer.

The damage extends to emerging markets (EM) as well. Central banks have tried to defend their currencies against the US dollar by running down foreign currency holdings.

This year, the fight against depreciation has already drained their FX reserves by more than $400 billion. This has raised the possibility of currency crises in selected countries with a large share of dollar-denominated debt and is one reason international investors have fled emerging market stocks and bonds at the fastest pace since 2005.

Looking into the next year, investors are starting to wonder how much room the dollar has for the upside.

Despite some recent losses, the Greenback is still up 19% since May 2021.

However, following leading economic indicators and macroeconomic uncertainty indices, it becomes clear that a large part of the dollar’s uncertainty- and volatilitydriven strength has passed; the currency is already pricing in a majority of the expected global economic slowdown.

The peak uncertainty theme,

however, does not mandate a fall of the dollar, but simply changes the dynamics driving the Greenback.

The future of USD

Going forward, the dollar will need to draw its strength from other factors, such as the currently unaccounted-for weakness of the global economy. Alternate options include continuing to reprice US interest rates higher. or.

Given the vulnerabilities of other major currencies, it would be possible for the dollar to remain at elevated levels while not reaching new highs in 2023.

The global energy crisis is still impacting currencies like the euro, pound and yen in a negative way and monetary policy will continue to favour the dollar in 2023.

A turnaround of the US currency would be welcomed by financial markets but is primarily dependent on three critical conditions:

1. Geopolitical tensions and commodity prices would have to ease, helping the energyimporting countries’ currencies recover some ground.

2. The Fed would have to signal an end to its tightening cycle and show a willingness to cut rates next year if policy easing is needed to support economic activity.

3. A sustained fall in market volatility would facilitate capital rotation away from the US dollar into riskier currencies, yielding more interest.

While we see inflation and, therefore, volatility starting to peak in most countries, a return to the environment before the pandemic or even 2022 is unlikely to occur next year.

Even though periods of extreme uncertainty are short-lived, above-average volatility caused by a shortage of liquidity, can be sustained for some time.

Peaking inflation might limit the scope of central banks to raise interest rates any further next year but being less hawkish does not translate into being dovish. The threshold for central banks to start buying bonds again has clearly been raised in a highinflation environment. This sets a new regime.

The financial world is hoping to see a triple peak in inflation, interest rates and the US dollar. But will we hit the trifecta next year?

ANDRÉ CASTERMAN Founder and Managing Director Casterman Advisory

Continued innovations in crossborder payments

Cross-border payments have transformed over the last six years like never before.

Around a decade ago, new entrants prompted SWIFT to find a way to increase visibility by tracking global payments processed by correspondent banks. And so, SWIFTgpi was born.

More recently, the growing adoption of––and concerted industry migration to––ISO 20022 in the cross-border and highvalue payments space promises to be valuable. This, as well as the ISO norm, will improve data structures and allow richer data to be embedded in instructions and statements.

It is a long overdue move, as ISO 20022 launched two decades ago. This fact alone presents various operational challenges for banks, as older IT systems are not designed to handle data-rich formats––such as ISO 20022.

SWIFTgpi and ISO 20022 provide much-needed incremental

improvements to the traditional cross-border payments space but aren’t moving the needle far enough.

Thankfully, transformational innovations have emerged and are being adopted.

These advancements have been built on borderless 21st-century technological foundations and enable payments to be seamlessly embedded into commercial transactions, thereby reducing settlement risk.

New technologies such as distributed ledgers offer a way to bring such improvements to person-to-person remittances, micro-payments, and small- and medium-sized enterprises (SMEs) payments.

Various payment and securities processes are already moving on-chain to remove frictions, increase transparency on endto-end transactions, and combat fraud (e.g., public blockchains).

The openness of policymakers (e.g., UK, EU, UAE) to digital assets and tokenisation

The evolving payments landscape: how datasharing makes all the difference

2.4

will definitively

The evolution of cross-border payments is more exciting than ever. However, for banks, the priority is to use the payment data for compliance and differentiation. So, get your data in order.

act as a catalyst in institutional segments.

Moving on-chain will facilitate Delivery versus Payment (DvP) settlement of tokenised assets, whilst increasing transparency and immutability of data.

Hint #1: whether you like it or not, there is no escape to tokenisation and digital assets. It’s a natural evolution of the Internet.

Increased complexity for transaction banks

Incremental and transformational innovations demonstrate the continued appetite for the industry to achieve cheaper, faster, more transparent, and more accessible cross-border payments.

These industry-wide advancements show a drive to deliver on the vision outlined by the Financial Stability Board (FSB) in its G20 cross-border payments roadmap.

Whilst such moves offer attractive options to end customers, they also drastically increase the complexity for banks’ IT, operations and compliance teams.

This is the natural fallout of new channels, systems, and data

structures being introduced within their technology infrastructures.

Stephen Wojciechowicz, senior principal, product management at BNY Mellon, recently confirmed this, saying, “The challenge [with ISO 20022] is going to be that the underlying source data applications need to be able to communicate that.

For example, in our static data for address, there isn’t a separate data field for the street. So, we will have to be able to change things to accommodate that structured data format.”

Hint #2: payment standardisation will be centred around ISO 20022, and those semantics will be supported by a mix of closed and open communications technologies.

Getting your data in order is more important than ever

Long considered a purely technical function, archiving transaction data was previously only a concern for the bank’s IT people to take care of.

That was about 15 years ago. The need to access data archives was fairly limited and mostly linked to ad-hoc operational needs and client requests.

Since the 2008 global financial crisis, however, regulatory requirements revealed the importance of this very function, as accessing transaction archives suddenly got on the compliance officers’ priority list.

Subsequently, being able to demonstrate record keeping of transactions and to report promptly on payments––whether archived or in production––became top priorities.

Access to payment data is also important––in an automated way––for front-office operations teams (e.g., offering online access to transaction details for clients via portals) and for backoffice operations teams (e.g., to get real-time alerts on failed transactions).

Furthermore, business and compliance functions are combining payment data with AI-driven algorithms to gain deep and contextual insights never achieved before.

While having a single central database of all payment transaction data would be ideal for accessibility, experience has shown that this is unrealistic for financial institutions. This incompatibility stems from the many disparate data sources,

geographic locations, specialised internal systems and channels in use.

However, applying data management technologies to link, correlate, track, report, and alert on end-to-end flows helps financial institutions tackle the data accessibility challenge.

Hint #3: If you take away one piece of advice from this article, get your payment data in order. Now.

Payment data to comply and differentiate

Compliance and competition remain the two imperative objectives for financial institutions.

Whichever payment innovation becomes relevant for your financial institution, the granular data derived from payment flow is the actual ingredient to make it happen.

Hint #4: While many new payment options need more time to gain traction, investing in data technologies will be a safe investment for financial institutions.

The following table highlights the many use cases where payment data is either critical for operations and compliance, or gets elevated to a strategic level for competitive differentiation.

Leveraging data for competitive advantage requires a significant data management overhaul.

That includes identifying and assessing the value of existing data, designing a scalable data platform, and developing a longterm data strategy to help the organisation achieve impact at scale.

It also requires an up-front investment in data management technologies, as well as skilled teams.

Data technologies fill the gap

Keeping up with the pace of innovation in cross-border payments can be a challenge for most transaction banks, given the number of available new options and evolving client expectations.

Going forward, those financial institutions with the best data systems will develop a competitive advantage, given how transaction data can help with compliance and increased commercial differentiation. 

©Casterman Advisory 2022

EMERGING MARKETS

3.1

ESG

Environmental, social and governance (ESG) has been a hot topic for private and public credit insurers.

At the end of the day, ESG is just a rating system derived from corporate social responsibility (CSR) reporting. In practice, it is difficult to assess what changes it has brought.

Shouldn’t credit insurers shift their focus towards improving their contribution to the United Nations’ (UN) sustainable development goals (SDGs)? How can they contribute and how can digitalisation help them increase their impact?

The ESG rating challenge

There are many valuable ESG rating initiatives around the globe––from various players––and this is clearly a reason to be optimistic.

Yet we are no longer naive. There is no equivalent to International Financial Reporting Standards (IFRS) when it comes to ESG, and rating providers may be tempted to look kindly upon those who pay them.

We all know what the consequence of this is: greenwashing.

It would be easy to blame rating providers, but it is not so black and white. There are no standards governing the evaluation criteria or what should be evaluated.

As a result, and at best, corporate entities approach ESG as a compliance issue. At worst, it is used as a way to gain customers and investments without truly intending to have an impact.

ESG rating approaches may be based on company, product, or transaction assessments––all of which are valid and valuable.

However, they are rarely combined because such a comprehensive approach would be very complex. Unfortunately, it is probably the only way to avoid a company’s attempt to improve the process having adverse impacts elsewhere.

Developing standards for each dimension could certainly help everybody cope with this complexity.

Through its short, medium, and long-term credit insurance and surety offers, the industry has a broad vision, understanding, and

evaluation: how can we contribute to achieving the SDGs?

THOMAS FROSSARD Head of Innovation & Surety Products Tinubu Square.

MARC MEYER Senior Vice President and Subject Matter Expert Insurance

Tinubu Square

control of project finance and trade transactions in the world.

So, it could be more prominent in promoting virtuous companies and trades.

Incentivise good ratings

In addition to their involvement in renewables, social infrastructure and waste and water treatment projects, credit insurers have quite a unique view on supply chains via their short-term products.

They could lower premium rates for such projects and make sure that the ESG analysis and monitoring is as comprehensive as possible since they are involved in the whole lifecycle of these assets from pre-shipment to decommissioning as part of their product portfolio. By sharing data, they can provide a 360-degree view, which is key to success in this area.

More practically, it is through operational processes that this general green movement must be implemented. It will require the following:

Automation of processes and standardised use of project/ transaction assessment criteria (in addition to the usual risk assessment).

Automated monitoring of criteria used in the initial underwriting phase for each project. This will remain a foundational element during the whole life of the contract.

However, there is a cost related to ESG measures, and in order to consider discounting premiums for suitable projects, insurers must find ways to absorb them.

Digital data and standardisation can certainly help in achieving this, provided that:

They provide secure recording and tracking of all actions during the whole life of the covered/ insured project or transaction.

They render these complex new processes cost-effective.

Promote impact

Beyond a static picture, we must also assess the objectives that the insured set for themselves and the progress they make over time.

Thanks to their buyer-centric underwriting approach, credit insurers have the means to develop business intelligence on companies’ supply strategies.

They also have the potential to contribute to a proper assessment of the efforts a company makes to render its business more sustainable.

Progress could (and should) be the most important criterion rather than evaluating the nature of an activity. Given the current context, it is obvious that some are not green by nature but essential to communities, and it would be unfair to rate them solely on their carbon footprint.

As an industry and an ecosystem, we must also challenge the status quo.

It is certainly difficult to maintain the high level of collaboration between export credit agencies (ECAs) during troubled geopolitical times.

It is obviously more challenging to improve further collaboration with multilateral development banks

(MDBs). Yet if our common goal is to enable project materialisation and end-to-end monitoring, it is a must.

We need to go out of our comfort zone. Technology is available to allow information sharing but nothing will happen without business and legal alignment.

In conclusion, we all saw Alok Sharma crying in his concluding remarks of COP 26. It was a sad moment and it occurred before the Russia-Ukraine conflict and the energy crisis. From an SDG point of view, the situation has worsened.

However, as Bob Marley said, we should get-up, stand-up and not give up the fight. One thing we have too little explored is how to think out of the box. In order to help us do so, we should be more diverse and consider hiring more people who have experience outside of our industry.

Shadow boards have proven to be efficient in very traditional industries such as the luxury industry not because they were hidden, but because they assigned tasks that had not been solved by experts for decades to people with a fresh perspective on the matter. Trade finance and infrastructure finance gaps could certainly fall in this category.

ESG: ING gives the green light 3.2

The responsibility for sustainability falls on everyone, everywhere. It should unite us. We all need to work together, but how do we achieve such a big collective goal?

Following the Sibos session on ‘Accelerate Sustainability in Trade’, speaker Achraf Abourida, head of trade at ING Bank, discussed trade’s role in sustainability and its global importance in an exclusive interview with Trade Finance Global (TFG).

Sustainability has become a buzzword for the trade industry, but what does tangible change mean and how do we avoid greenwashing?

We don’t just want Lewis Caroll’s Alice in Wonderland vision of painting the roses ‘green’––to enact reform, we need to be open in our thinking, to innovate, to collaborate and to be ambitious. And we need to do it now.

Tying in sustainability with social responsibility––the ING way

The United Nations (UN) 17 Sustainable Development Goals (SDGs) set global targets for 2030, but how will they be met?

Achraf said, the answer lies in, “a sense of urgency.”

ING focuses on four of the UN’s SDGs: decent work and economic growth (8), reduced inequalities

(10), responsible consumption and production (12) and climate action (13).

This, as Achraf deems, is where sustainability ties in with social responsibility, reflective of ING’s two core pillars; clients (the people) and sustainability (the planet).

Achraf said, “One of the most important things for us, especially in trade, is responsible consumption and production.”

ING’s sustainability commitment is evidenced through their sustainability targets, supporting companies, both corporates and small- and mediumsized enterprises (SMEs), in different ecosystems and different industries transforming themselves to become more sustainable.

Amongst other commitments, ING has set a target to provide at least €1 billion of new sustainable financing to SMEs and midcorporates by 2025.

Achraf is clear that banks do not need to make a profit as the aim when providing incentives for companies is to become more sustainable, but they do

NATASHA ROSTON Head of People and Growth Trade Finance Global

need to make this change. It is this transformation where collaboration needs to be industry wide.

Achraf said, “Of course, a commercial business needs to make money, but what people don’t always see is that sustainability, like with any investment, is investing in tomorrow. This is both a financial, and a social investment.

“This is not because ING, or other banks feel obliged by the SDGs, but because they know it’s the way to make a true impact.

“It has to be done. In the same way that if you were investing in a fintech, knowing that you wouldn’t see a return for the first few years. Banks need to believe in sustainable initiatives and make it happen. Then, once achieved, everyone will have more.”

Incentivising green behaviour: the right approach?

Incentives. One approach is that when banks provide financial incentives for companies to put sustainability first, the industry could move forward to a greener future.

ING has created a framework whereby they can help clients obtain sustainability ratings based on certain data points. So a supplier would aim to improve its rating, or apply for one, in order to get benefits in their pricing on base, so that their financing costs go down.

Is supply chain finance the lowhanging fruit?

Achraf said, “Supply chain finance, for instance, is lowhanging fruit. We can reap the benefits sooner than other trade finance products that need more work to be done.

“A big buyer wants to create awareness within the supply chain which obviously links to financial benefits, as well as enhance the end-to-end supply chain from a sustainability perspective.”

On a positive note, sustainable supply chain finance already shows a substantial pickup, largely driven by industry leaders, which helps to show exactly what we can achieve.

Actions speak louder than words

Sustainable development is one of the biggest responsibilities that the banking industry has. However, community involvement is essential for its success.

People don’t just need to believe in the actions taken by banks, and the motives behind them––they need to trust them.

No Poverty

Affordable and Clean Energy

Climate Action Life Below Water Life on Land Peace, Justice and Strong Institutions

Partnerships for the Goals

Decent work and Economic growth

Reduced InEqualities

Sustainable Cities and Communities Responsible Consumption and Production

Industry, Innovation and infrastructure

Zero Hunger Good Health And Well-Being

Quality Education

Gender Equality Clean Water and Sanitation

However, as banks disappear from the high streets, they lose their presence and connection to local communities, leading to a feeling of separation and distance.

Achraf is adamant that banks need to restore faith from the public. They need to remind them that, like with any successful relationship, they are honest, they are clear, and that they work hand-in-hand.

When banks fund local community initiatives in their home markets, such as through sports teams, playgrounds, and youth clubs, they are earning their trust. They are showing their understanding of the symbiotic nature between the people’s perception and the banks’ practice.

Why is trust important for sustainability? We can’t move forwards if we’re not together.

Patience is a virtue

They say patience is a virtue. And none more so for banks than setting sustainability Key Performance Indicators (KPIs) for years to come, knowing that the full impact may not be felt until the next generation.

But for the world to truly change, we have to be prepared for slow progress. It is key to not be disheartened. As long as we’re still moving forward, this momentum will build.

For some, it’s not fast enough. Many don’t understand the reasoning behind why banks are still investing in fossil energy, for example.

The reality is that the industry will not be able to transform overnight, else the social coherence will be disturbed. There needs to be a plan.

Companies with CO2 emissions need support for a period of time in order to convert to either a climate neutral or diverted business model. For its part, the industry will be open and transparent.

A green light for sustainable trade.

SVEN OLAF SCHMIDT Regional Head Europe & Americas Trade Finance Operations Commerzbank

3.3

Commerzbank on standardisation: the key to sustainable trade finance

The world of trade is changing. Increasingly, the topic of environmental responsibility is taking centre stage, with discourse specifically circling around how the finance industry can implement sustainability measures more effectively.

At Sibos 2022, Trade Finance Global’s (TFG) Annie Kovacevic spoke with Sven Schmidt (SvS), regional head of trade finance operations in Europe and Americas at Commerzbank––a trade financier for the German Mittelstand (medium-sized companies).

Sven is also a Steer Co-member of the Working Group on Sustainable Trade Finance at the International Chamber of Commerce (ICC).

What does sustainability mean to you, Commerzbank, and the banking sector?

Commerzbank has also issued its own Environment, Social, Governance (ESG) framework, delineating what we consider to be sustainable and how we apply ESG principles to our business.

The framework clearly states all the key cornerstones of our sustainability strategy, making our sustainability concept transparent to all stakeholders.

KOVACEVIC Junior Editor Trade Finance Global

SvS: The sector as a whole is taking action. The International Chamber of Commerce (ICC) has published its sustainable trade finance framework, which will foster and incentivise sustainable trade globally.

Commerzbank supports the ICC’s work by participating in various working groups and joining the minimum viable product (MVP) to test the framework starting in November this year.

In particular, it governs which products are considered sustainable. Amongst others, it describes the criteria for sustainable lending and the reduction targets for CO2intensive sectors. Social criteria are also taken into account, and the criteria for exclusions are defined.

Sustainability metrics are now key performance indicators for our company, accelerating our sustainable transformation.

We have a very holistic approach to ESG. In practice, this means not only looking at individual transactions but rather looking at the whole supply chain––our

AG

ANASTASIJA

clients and our client’s clients––to see if they fulfil certain minimum standards.

For example, under the MVP now launched by the ICC, for a client in the textile industry, we will check whether they comply with the ICC’s and ITC’s approved standards regarding the production of goods, fair wages, no child labour, and so on.

How much has the conversation around ESG changed in the last few years?

SvS: The client conversations have become much more frequent and intensive.

When we started client conversations two years ago, I would say about 90% of our clients were interested and excited about ESG as a new topic to begin exploring. Increasingly, clients now want solutions and proposals regarding what we, as a bank, can do to assist them and manage their transactions. In many companies, this desire for change has reached the C-suite level, which is very

important because that is where the momentum to really drive change comes from.

Our role has shifted too––from offering an interest-based exploratory capacity to being an active participant in clients’ transformation journey.

In terms of standards and interoperability, how do you think the industry can come together and collaborate and overcome hesitancy to share data?

SvS: Among a variety of industry initiatives, the ICC also has an important role to play as a promoter of standardisation and a catalyst for change.

It is the organisation that sets many of the standards, for example, the Uniform Customs and Practice for Documentary Credit (UCP 600), which is the framework banks refer to for letter of credit transactions.

What the sector needs now is to accelerate its efforts––that’s why I really like that we are going out with an initial MVP now

rather than waiting until we have covered every sector and every eventuality.

This, of course, necessitates extensive collaboration between banks, corporates, and technology providers at every step of the way.

How will having standards, frameworks, and scoring systems incentivise traders to take the first step towards more sustainable trade?

SvS: It’s a very good first step to showcase that certifications and standards matter. It’s important for everyone in the ecosystem to be involved––from the smallest buyers and suppliers all the way up to the massive corporates and their banks.

Standardisation would ultimately pull everyone in the industry towards more sustainable practices. Market players will quickly see that if they don’t take ESG seriously, they will be left out of the market and have trouble selling their goods or providing their services.

What does the ideal world look like to you in terms of sustainability and trade helping to reach the UN’s Sustainable Development Goals (SDGs)?

SvS: In an ideal world, trade would serve as an accelerator, promoting and ultimately helping businesses reach the SDGs. This is not just a vision of the future, though; it is becoming a reality today.

I’m a big fan of making use of technology, and that’s why I really appreciate that the ICC also has a technology working group.

I’m optimistic that the solutions it develops will be workable. At Commerzbank, we are also developing a technological solution that will make clear strides towards sustainability to create awareness and start reducing carbon emissions in trade finance. 

TOD BURWELL President and Chief Executive Officer BAFT

3.4

The role of banks in developing more sustainable trade practices

Trade Finance Global (TFG) spoke to the president and CEO of BAFT at Sibos 2022 about the role that banking organisations can play in developing environment, social, governance (ESG) and sustainability best practices within global trade.

COVID-19 has changed a lot of things, for better and for worse.

On the one hand, the knock-on effects of the pandemic, including supply chain delays, have been a significant contributing factor to the economic downturn and difficult trading circumstances the world currently finds itself in.

lot of emerging energy around ESG and sustainability. “There were a couple of things that I’d say sort of went silent a little bit for a while, but it re-emerged. One of them is the implementation of the Basel Framework, with several jurisdictions now going through their implementation process.”

CARTER HOFFMAN Editorial Assistant Trade Finance Global

But on the other, many believe that it has also helped to accelerate several much-needed reforms within trade finance, including the introduction of digital systems to help streamline documentation and fraud monitoring processes, as well as the implementation of more sustainable business practices.

At Sibos 2022, TFG spoke to Tod Burwell, president and CEO of the BAFT (Bankers Association for Financing Trade), a global trade finance association headquartered in Washington DC, about the key issues within the industry.

Burwell said, “That still remains a top priority. There’s also been a

In his view, one of the challenges of introducing key reforms around ESG and digitisation within the finance industry is trying to deal with existing gaps in existing legal frameworks so that they better support the introduction of digital trade documentation.

ESG: sustainability about more than climate

In terms of the connection between digitisation and greener trade practices, Burwell feels that technology has a role to play in making ESG reporting and monitoring a lot easier.

However, as far as the role of banks is concerned, Burwell believes that the banking

community can help provide the ‘connective tissue’ from a standards point of view.

This is particularly true when it comes to the question of interoperability––a major prerequisite for the rollout of the digital agenda.

To achieve this, you have to introduce international standards––something that large financial organisations have a lot of experience with.

Burwell said, “And so I think a lot of the discussions are going to focus on: where are we in the standards process, with the adoption process of those standards and the like?”

And while they aren’t in a position to help trading companies source, produce, or transport goods sustainably, banks and trade finance organisations can potentially help with the financing of more sustainable supply chains, thereby incentivising

more importers and exporters to adopt sustainable practices.

However, he also feels it is important to gain clarity on what precisely sustainability means to trade organisations.

Burwell said, “The UN has their 17 sustainable development goals (SDGs). But then when you look at the policy community, everything is focused on climate and environment.

“So much of trade actually facilitates SDGs outside of climate change. And so one of the biggest issues for our members is how do you apply the concepts of sustainability across the spectrum of trade, measure it in a way that’s consistent with policy frameworks?”

Legal frameworks: a region-byregion affair

On the issue of legal frameworks, BAFT has teamed up with the legal reform advisory board of

the ICC to try and drive forward the adoption of the Model Law on Electronic Transferable Records (MLETR) region-by-region.

Burwell added, “There are about seven countries that have already adopted MLETR, but there are some major jurisdictions [are] on the cusp of making significant steps forward.

“The UK has an electronic documentation bill that’s under consideration right now.”

Indeed, the Electronic Trade Document Bill which is currently making its way through the UK Parliament has been designed to address a long-term bugbear within English law around the question of legal ownership of intangible items.

Up until now, this has made it hard to address the issue of control, without which it is difficult to develop a reliable document control and verification system. In the US, where BAFT is based,

recent amendments that were made to the Uniform Commercial Code at a national level still need to be approved by all 50 states before these will apply universally across all major US trade jurisdictions.

When it comes to things like cross-border trade and global payments, the situation is a bit more complex.

Burwell said, “When we look at cash management, particularly on the payment side, we’re trying to focus on the unevenness of regulations and how that’s impacting the disparate faster payment systems around the world: What are the rules, who’s allowed to participate, how is [know your customer] KYC––as well as banks versus nonbanks––being considered?”

Basel and closing the trade finance gap

When it comes to trade finance, BAFT is advocating for ways to encourage more financial inclusion so that the standing trade finance gap doesn’t continue to widen, especially given the current tough trading environment.

Here, Burwell feels it is also important to introduce some basic legislation around capital frameworks in accordance with the Basel Framework for international settlements. This directly impacts how much liquidity banks are able to provide to trade organisations, which in turn, determines their ability to help close trade finance gaps.

Overall, though, Burwell feels that things are headed in a very positive direction, and BAFT is doing all it can to facilitate this process through a mixture of policy advocacy, education and training, alongside global community building.

Burwell said, “You need to collaborate in order to solve those challenges, and they do it through us.” 

ANASTASIJA KOVACEVIC Junior Editor Trade Finance Global

3.5

Auf wiedersehen fossil fuels: Germany’s route towards LNG adoption

21 February 2022. The Russia-Ukraine conflict becomes a reality, and the lives of many are immediately impacted.

Though a humanitarian crisis, first and foremost, the situation between the two countries soon spills over to affect the global trading stage.

Fuels the globe to keep spinning

Oil and gas are amongst the highest-demanded commodities in the world.

Leading global producers include; the United States, Saudi Arabia, and Russia. These three countries produced approximately 40 million barrels of oil per day in 2020, with the total revenues for the oil and gas drilling sector coming to approximately $2.1 trillion in 2021.

With the world relying on these countries, who produce 43% of the world’s oil resources, it follows that if one of these countries were to be removed from the equation, access to gas would plummet. As is the case, with sanctions enacted, European member states especially had to find new sources of fuel quickly.

But it was Germany that felt this knock, perhaps more than others.

Russia accounted for 55% of Germany’s gas imports in 2021, a level that has since declined to 26% by the end of June 2022.

LNG port abundance, but supplies lacklustre

In a bid to diversify energy sources and become more ecofriendly, Germany has enacted a grand push toward natural gas. As the least pollutant fossil fuel source, natural gas will play an important role in the transition to a climate-neutral energy supply. Liquified natural gas (LNG) seems to be the way forward in this regard, and Germany has been quickly acquiring new LNG terminals.

By and large, Germany’s efforts have been successful. In May 2022, four floating storage and regasification units (FSRUs) were leased, capable of importing at least 5 billion cubic metres (bcm) of seaborne gas per year each. It is expected that the LNG hub at Wilhelmshaven will become the first to be functional and the second, Brunsbuettel, to be developed by Uniper and RWE AG, respectively.

In addition to these measures, Germany has also confirmed the chartering of a floating LNG ship for Wilhelmshaven. This is expected to be ready within the first quarter of 2023.

However, despite all the positive steps being taken to facilitate easier access to LNG, there still seems to be a large question mark looming; where will the LNG supplies be coming from?

The German economic ministry has made it clear that a memorandum of understanding exists between the energy companies RWE, Uniper, and EnBW for supplying two new floating LNG terminals beyond 2022. But the selection of suppliers, as well as the conclusion of contracts, will fall as the responsibilities of the companies themselves.

Though a promising avenue, it underlines the uncomfortable

reality that providers of resources are nowhere in sight––the only certified source being a single shipment of LNG to arrive in Germany from the UAE at the turn of the year.

And with Uniper making it known it will only discuss supply contracts once terminal projects are finished, it seems that, for the most part, the question mark will prevail.

Flip of the coin: challenges and advantages of LNG deals

Germany’s challenges regarding LNG continue, most recently facing disagreements over cut supplied of LNG supplies to India. The German state-backed company SEFE has reportedly failed to provide previously negotiated gas supplies to Indian-based company GAIL, due to disruptions since May 2022. The original 2012 deal arranged between SEFE and GAIL stipulated

that GAIL would purchase an average of 2.5 tonnes of LNG annually for 20 years.

Disagreements over the cut in LNG supplies to GAIL have escalated, with diplomats being called to resolve the issue.

India has reportedly suggested that SEFE source alternative supplies from its portfolio to meet contractual obligations whilst looking toward Russia for a solution to fill that gap.

Elsewhere, the picture being painted is slightly more positive.

On 3 November, Germany and Egypt signed a memorandum of understanding to cooperate in producing renewable hydrogen, alongside cultivating LNG trade between the two countries.

Vice Chancellor of Germany Robert Habeck said, “We support Egypt in speeding up the change from fossil to climate-friendly energy.

“In the short term, closer trading ties with Egyptian LNG help us to diversify [Germany’s] energy imports further and become independent of Russian gas.” Egypt, located above the mammoth Zohr gas field, is indeed developing clean energy resources of its own and has signed a number of agreements for green hydrogen development. Conversations between Germany and Britain have also arisen, specifically a solidarity pact for either country to assist the other in extreme natural gas shortages. The legal realities of Brexit mean that an emergency aid scheme between the two countries no longer exists, but there remains a willingness to cooperate in this manner.

The future for Germany and LNG

Given the nascent stages of Germany’s uptake of LNG, one cannot make too many solidified opinions or assumptions.

The large paces taken to secure LNG hubs, is, however, indicative of the scale and wider projected resource influx of the initiative. Teething problems that have developed in the meantime may provide practical contemporary hurdles, but there is lots of evidence to suggest that these will remain small bumps in the road on the path to a more robust LNG framework. 

CARTER HOFFMAN Editorial Assistant Trade Finance Global

3.6

Tragedy struck at 9:00 AM on Wednesday, 24 April 2013.

Rana Plaza, a building complex in Bangladesh housing five garment factories, collapsed, claiming the lives of 1127 workers and injuring a further 2000.

Investigators discovered that the building had been authorised for six stories, yet the owner had built another four stories on top with subpar materials.

Amid the rubble, crews found clothing from major western brands such as Walmart, The Children’s Place, and Mango. While these major brands did not own or operate the factories in the building, the ensuing backlash made it clear that the court of public opinion found them complicit in the catastrophe.

Major brands and multinational organisations are no longer able to hide behind the shield of a long and opaque supply chain in order to avoid environmental, social, and governance (ESG) concerns.

The imbalance of power in global supply chains

Traditionally, many global supply chains have been characterised by a stark imbalance of power.

Large multinational corporations at the top of the chain have been able to place grand demands on their smaller suppliers to deliver large orders under immense time pressure.

To meet these demands, tierone suppliers must often make equally grand demands on their own suppliers. Likewise, these tiertwo suppliers must procure their inputs from yet more suppliers, and so on, down the chain.

While events like the Rana Plaza disaster have imposed multinationals with an increased duty of care and accountability to their top-tier suppliers, the line becomes increasingly blurred the further down the chain you go.

Into the depth—deep-tier supply chain finance as a driver for ESG development

Deep-tier supply chain finance can be a powerful tool in the ESG toolkit––but implementing this innovative financing approach will require overcoming some key barriers.

To what extent, for instance, can electric carmakers—with their large, geographically dispersed, ‘long-tail’ supply chains—be held accountable for the perilous conditions of a small artisanal cobalt mine in the Congo?

The complex practical and ethical implications of such a scenario cannot be understated. One possible solution could be the very phenomenon that has put supply chains in this mindset: money.

The role of finance

The global financial system is constantly changing.

With access to financial support, businesses can ease the working capital constraints that often prevent them from making necessary investments in themselves and their operations.

Access to affordable financing can also help incentivise ESGaligned activities along the value chain.

If used extensively, this can help promote stability and resilience

in supply chains and bring about much-needed social change.

One example of this in practice is the Better Work Program—a collaboration between the United Nation’s International Labour Organization (ILO) and the International Finance Corporation (IFC) that seeks to improve working conditions in the garment industry.

The program covers 1700 factories in nine countries that employ more than 2.4 million workers.

In an impact assessment report highlighting the program’s findings from 2017 to 2022, it is clear that improving working conditions needs to be considered an investment that will improve firm performance and productivity rather than a burdensome cost.

Unfortunately, for the many small businesses around the world that struggle to access finance, making businessimproving investments often gets deprioritised behind simply keeping the lights on.

The plight of small businesses

In addition to this, despite playing a major role in most economies, particularly in developing countries, small and mediumsized businesses (SMEs) are often poorly served by existing financial processes.

According to an Asian Development Bank (ADB) brief, they often struggle to access support mechanisms, meaning they tend to suffer global and regional shocks more acutely than larger suppliers.

In instances where an SME does have the resources and know-how to navigate the often convoluted financing application process—something that discourages many from even pursuing the option in the first place—they are often rejected or must accept high financing costs.

In a nebulous self-fulfilling cycle, the greater exposure to risks that they experience causes traditional lenders to deem them as riskier investments, increasing their cost of capital.

This is often the case because SMEs tend to operate in the lower tiers of supply chains, where they are too far removed from the financial power of their ultimate up-chain end customer. A small Congolese mining operation can hardly leverage Volkswagen’s €500 billion balance sheet when applying for finance, even though the cobalt they mine may well be among the 3000 tonnes of the metal that the car company purchases each year for its electric vehicle batteries.

But what if they could?

Deep-tier supply chain finance

Multinational supply chains tend to consist of large “anchor” corporations with strong credit ratings and robust borrowing capacity coupled with many deeper-tier SME suppliers operating within their ecosystems.

Traditionally, only upper-tier suppliers have been able to benefit from a relationship with the anchor corporate. While there is no issue with such a relationship, these suppliers already tend to be quite financially strong and could likely acquire financing from any number of sources.

Deep-tier supply chain finance is a financial solution that seeks to leverage business relationships with this ‘corporate anchor’ deeper into the supply chain.

The aim is to unlock working capital to make financing accessible for suppliers throughout the ecosystem, not just for those in the top tier.

The idea is born out of reverse factoring, a financing technique where a supplier can sell their receivables and receive payment early—albeit at a discount. The discount rate applied in this technique is aligned with the credit risk of the buyer, which will generally have a more favourable risk profile than the supplier itself.

In the past, it has simply not been feasible to translate this into lower tiers of the supply chain; however, advancements in digital technologies are making this degree of transparency and data sharing possible.

To ESG and beyond

Deep-tier supply chain financing can provide a major financing boon to smaller suppliers deep within long-tail multinational supply chains, providing them with easier access to finance.

By putting this financing to use in a benevolent manner, SME executives down the chain will have the working capital needed to make investments into bolstering their processes and improving working conditions.

These paramount ESG improvements will reflect positively on the consumerfacing anchor corporates, renewing their social license to operate. But there are many more potential benefits that deep-tier supply chain finance can bring, most notably added supply chain resilience.

The COVID-19 pandemic showed the world how vulnerable hyperefficient supply chains could be during economic shock.

By creating systems and programs that allow their

deeper-tier suppliers to have easier access to finance, large corporations can help build resiliency in their supply chains by mitigating the risk of a highly specialised supplier going insolvent.

Such programs also provide the corporate anchor with increased visibility over the entire supply chain, giving it a host of data that it can analyse and leverage to make better business decisions.

Financiers also benefit from an outsized opportunity to expand their client base by becoming a strategic partner in the entire global value chain, expanding their reach and revenue in the process.

The benefits are numerous but do not come without a few roadblocks to overtake.

Challenges for deep-tier supply chain finance adoption

The ADB brief on deep-tier supply chain finance outlines several major inhibitors to adoption across the various stakeholder groups.

Fintechs creating the software that can be used to facilitate such programs must contend with a lack of market awareness, difficulty engaging buyers, and integration challenges.

Banks and financiers exploring the program must overcome unclear revenue incentives and integration challenges.

The anchor corporations are faced with potential resource constraints and a lack of government incentives.

Suppliers that could join these programs need to be comfortable disclosing their business information and working with technology in addition to overcoming their own resource constraints.

On top of this, all of the stakeholders must contend with an ambiguous legal structure and lack of clarity around the regulations and legal precedent for these models and their related technological functions.

Despite the challenges, there is a path forward.

Accelerating adoption

In its brief, the ADB has also established a clear set of actions that each deep-tier supply chain finance stakeholder must take to help overcome these challenges and accelerate its adoption.

Suppliers must encourage their anchor corporates to implement

programs of their own and engage with fintechs to improve their technology offerings by voicing their concerns.

Anchor corporates must engage with their suppliers to understand their demand for financing, and they must begin to run trials using existing fintech programs.

Banks and financiers must raise awareness around successful implementations and work with fintech providers to trial new solutions.

Fintechs must engage with a range of stakeholders to raise awareness and work on clarifying the legal basis of such programs, particularly in a cross-border context.

Governments and policymakers need to raise awareness of the programs, and set key performance indicators (KPIs) around SME lending volumes and ESG reporting. They must

additionally encourage the adoption of legislation enabling trade digitalisation and develop the legal infrastructure that will supply deep-tier financing programs.

Lastly, multilateral development banks must advocate for digital trade legislation, raise awareness, and extend targeted financing programs to include deep-tier options.

By following these calls to action, the industry can grow awareness and devise better technology solutions that will be able to reach a broader audience than ever before.

In due time, this nascent financing tool will be a key enabler of supply chain resiliency and a major proponent of the ESG agenda.

DIGITISATION

CARTER HOFFMAN Editorial Assistant Trade Finance Global

DEEPESH PATEL Editorial Director Trade Finance Global

4.1

One small bill for parliament, one giant leap for trade digitalisation

On 12 October, the UK officially introduced The Electronic Trade Documents Bill into parliament, the next step in a long road to shred the country’s legally imposed reliance on using paper for trade documents.

The new Bill, which has been anticipated since it was announced during the Queen’s Speech in May, is welcomed by businesses and industry leaders across the country, including the British Chamber of Commerce and the International Trade and Forfaiting Association (ITFA).

“We welcome the changes that the bill will bring about, but this is not just about pure legal change,” ITFA Chairman Sean Edwards said.

“The bill will also break psychological barriers by emboldening market players to consider doing something they would never have before. “More importantly, we now need to make a business out of the new opportunities.”

Age-old trade governed by 19thcentury legislation

Under current legislation, such as the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992, business-to-business documents like the bill of lading

and bill of exchange must exist on paper to be legally recognised.

“To date, under English law and many other legal systems, only tangible assets have been capable of being possessed,” Catherine Lang-Anderson, partner at Allen & Overy, said.

“The Electronic Trade Documents Act enshrines the idea that electronic trade documents such as bills of lading, warehouse receipts, and promissory notes are capable of being “possessed”. As a result, this unlocks powerful legal rights following from possession of those types of electronic documents.

“The Act represents a major step forward in the industry’s ongoing efforts to digitalise trade and ensure trade finance techniques are a match fit for the future.” Once passed, the bill will provide the legal basis for traders to transition to a digital-first trade document environment and will likely provoke other jurisdictions to follow suit.

“The UK Electronic Trade Documents Bill will put rocket boosters under the digitalisation of world trade,” Chris Southworth, secretary general of ICC United Kingdom, said.

“It will lay the path for 80% of all bills of lading worldwide to go digital, a dramatic increase from the current 1%.”

Gunnar Collin, head of trade finance sales at Enigio, added: “We see this as a game changer for the digitalisation of trade and we are very happy that our solution for digital original trade documents can help in making this a reality.

“Banks, corporates, logistic providers and others can soon benefit from all the advantages that paper documents have but without any of its shortcomings.”

One step of many

While legislative progress in the UK is a critical first step, since international trade is multijurisdictional by nature, this on its own is not enough and the full benefits will only be realised when other jurisdictions begin to follow suit.

“It is at moments like these that we need to get across to other governments when we make the case for them to also reform and modernise legal frameworks,” Chris Southworth said.

Catherine Lang-Anderson added:

“The next steps will be for other jurisdictions that haven’t already done so to enshrine similar principles in their laws, following on from the UNCITRAL Model Law on Electronic Transferable Records (MLETR) which was adopted in 2017.

“A particular trade transaction will only be capable of being fully digitalised when all relevant legal systems to the trade recognise digital trade documents.

“Until then, we expect progress to continue—including by parties using existing contractual frameworks and by taking advantage of the ability under the Act to convert trade documents from electronic to paper and back again depending on what is needed on a particular leg of a transaction.”

The UK is considered a key precedent-setting jurisdiction to pass this kind of legislation since many other legal systems around the world are based on the English model.

This coupled with the eagerness of businesses in the space to digitalise their offerings is likely to put pressure on lawmakers in other jurisdictions to follow suit.

Professor Sarah Green, Commercial and Common Law Commissioner, said, “we are pleased that our recommendations and draft legislation have now been introduced to Parliament through

this Bill. If enacted, these changes will bring the law into the 21st century, generating benefits on an international scale.”

In August, Lloyds bank announced that they completed the UK’s first digital promissory note purchase using Enigio’s trace:original technology and following these ITFA standards.

“ITFA’s digital negotiable instrument (DNI) initiative, electronic payment undertaking (ePU), and digital document (dDOC) specifications, already utilised by Lloyds, are key enablers to make this happen,” Sean Edwards said.

This effort illustrated how the digitisation of trade––through focusing on documents––has progressed practically. From a customs and border perspective, there are also benefits.

Marco Forgione, Director General, Institute of Export & International Trade, told TFG: “The bill would place electronic trading documents on the same legal footing as paper documents and enable businesses to move from paper-based to digital-based transactions.

“The IOE&IT is already helping deliver the government‘s 2025 UK Border Strategy with the ecosystem of trust pilots and supporting with industry engagement on the single trade window. This Bill is an essential part of creating a world leading border system and encouraging more trade.” Forgione said.

The introduction of this new Bill into the UK parliament illustrates how these efforts are progressing legislatively.

KOVACEVIC Junior Editor Trade Finance Global

4.2

Digitising trade: fraud, fintechs and the future

Fraud is not a victimless crime.

Perhaps it may seem so given the removed nature of fraudulent behaviour. But the reality is that, often, those most affected are smaller businesses and real people that rely on larger banks for cash flow.

The discourse over the last few years has morphed and shifted, but the foundational takeaway has always been a call to action in finding durable solutions to mitigate this risk.

Attending a talk at Sibos with Managing Director, US and Canada, Ben Arber and Gonzalo Perez Verdicchio, chapter lead API product management at SWIFT, Trade Finance Global (TFG) was able to learn more about the next steps for the market.

Market solutions to help mitigate fraud

There are many avenues to explore that will help dwindle the vast number of fraudulent attacks in the financial sector. A key emphasis during the talk was the need for multiple financial institutions (FIs) to band together and share information in a secure way. Decentralising data is an important hurdle to overcome, ultimately forwarding development in this area.

At the moment there are clear digital islands popping up

across the world, and this has hindered the sort of data-sharing that would, for example, help companies deal with clients that appear fraudulent, or deconstruct documents whose contents are ‘fake.’

Arber noted that there is a growing desire for banks to work together, expanding the registry and allowing for global and scalable solutions.

Arber spoke to TFG exclusively saying, “Digitising trade is the next vital step for mitigating risk such as fraud.”

Protection stimulates innovation

The new collaboration between SWIFT and Monetago was a key talking point.

Arber highlighted that the need for a globally secure authentification platform was very necessary for the fight against fraud. Unfortunately, enforcing this is more complex than voicing it.

Credit card payments in 2018 totalled $44.7 billion in the U.S. alone. With these sorts of numbers, it is easy to see how development in this space has been slow-moving.

ANASTASIJA

So, how can fraud be effectively managed?

Prevention. A movement towards solutions that help locate and flag a fraudulent transaction before it takes place is the biggest tool for the market right now.

This would, in turn, give lending institutions––and businesses in general––greater confidence to enter markets and distribute liquidity.

This is important to consider, given that larger corporates are increasingly withdrawing from markets that really need

support as a result of fraud risk in geographical areas. The implications of this are farreaching.

Often, these regions which are witnessing a mass exodus of banking support are those that really need the liquidity––areas that are rich with small- and medium-sized enterprises (SMEs).

Fragmentation

As a consumer, there are certain variables that might hinder frictionless trade; varying regulations is one of them. For many, it is the biggest obstacle.

Connecting to many services with their own set of rules can slow down the process, but having a standardised approach could solve this issue. A single channel would streamline operations, making it easier for customers on the application programming interface (API).

Overall, platforms that allow for optimised use, such as SWIFT, enable less time to market, higher security––meaning lower risk––and scale. 

JANAKIRAMAN Head

4.3

Blockchain, ESG, and data standards driving changes in the trade finance banking sector

2022,

CARTER HOFFMAN Editorial Assistant Trade Finance Global

It is clear that this new digital age will bring in new innovation for the market, but to what extent?

Trade Finance Global (TFG) spoke with Hari Janakiraman head of industry and innovation, transaction banking, from Australia and New Zealand Banking Group (ANZ) about the changing market conditions throughout the Asia-Pacific market and the advancements of digital technology in trade.

Changing markets

There have been some clear shifts in the Asia-Pacific market in a post-COVID world.

The pandemic-induced shutdowns and related disruptions have highlighted the risks that hyper-optimised yet non-diversified supply chains can have when a major challenges occur. The conflict in Ukraine is also prompting a reexamination of supply chains and logistics routes.

As a result, many firms are now looking to establish relationships with alternative suppliers to

mitigate against these shocks in the future.

There has also been a growing trend of manufacturers moving out of China into other countries like Vietnam, Thailand, the Philippines, and India––where Apple has announced that it will be moving the production of the new iPhone.

Another major shift in supply chain management has to do with the accessibility of inexpensive capital.

“The era of cheap cash is seemingly over,” Janakiraman said.

“Companies that had a lot of liquidity––where they had the luxury of managing their supply chain through their own cash, which was valid at that point in time––are seeing that this is not the way to keep managing supply chains because the cash has now become too costly.

“They need to come up with better ways to inject liquidity into their supply chain. That means more demand for supply chain finance.”

HARI

of Industry and Innovation, and Transaction Banking ANZ

Sibos

Amsterdam, raised some important conversations for the trade finance industry, not least the future of trade digitisation.

Technology and digitalisation

In terms of digital advancements in trade, there is still much discussion around blockchain technology, although the rhetoric has changed over the past few years.

“We are seeing that it is no longer being talked about as a blockchain solution,” Janakiraman said.

“Instead, we have come to a stage where we are talking about the end service or the end product, but not necessarily talking about what it is built on.

“It’s estimated that the compounded annual growth rate of blockchain in the supply chain, in terms of the underlying technologies, is 54% compounded annual growth.” This significant growth is happening because it helps enable a shift in governance in order for firms to meet their environment, social, governance (ESG) goals.

Blockchain also enables firms and banks to collect and monitor data across the entire supply chain in real-time.

“This means you can monitor your supplier performance. You can predict and identify something is going well or something is not going well,” Janakiraman said.

“Companies that are adopting these technologies have an edge over those that are still sitting on the fence in terms of what they can do.”

Data standards

When it comes to data collection and being able to analyse that data and use it to make informed decisions, there is still a significant amount of work to be done in the trade finance realm.

“You get that data, curate it in a way that makes sense to you, and then make a decision based on how much you can lend, when you should lend, and whether you will get your money back,” Janakiraman said.

“That is all trade finance is in the most simplistic sense.”

The challenge is that when you start collecting data, different companies can all have different data available, and it may be based on other methods of measuring and collecting.

This makes it very difficult to compare them side by side.

“It’s about putting that all together and who can get it right and make it easy for the customer,” Hari added.

Digital islands

Experts have been discussing the digital island problem in trade for many years now, but it’s possible that the concerns are less relevant in today’s market.

“I don’t think we need to sit and worry that we are going to have hundreds of different digital islands,” Hari said.

“We probably have certain big islands, and I think at this stage it’s not going to be an extremely hard thing to aggregate.”

Multiple initiatives, such as the Trade Information Network, of which ANZ is a member, exist to connect multiple data points.

“It’s about picking the platforms that we believe have real purpose and seeing how we can connect those platforms rather than worrying about how they are not connected,” Hari added.

4.4

The

MPHO SADIKI Head of Realtime Payments BankservAfrica

ANASTASIJA KOVACEVIC Junior Editor Trade Finance Global

African payments

landscape: COVID-19, interoperability, SMEs

Attending a BankservAfrica and SWIFT hosted a panel discussion at Sibos 2022, titled, ‘Forging Ahead To Africa’s Payments Future’, Trade Finance Global’s (TFG) Annie Kovacevic spoke with Mpho Sadiki, head of realtime payments at BankservAfrica, to learn more about what’s in store for the continent.

COVID-19 as a driver for African payments ecosystem

The payments sector has seen substantial development over the last few years. COVID-19, though having far-reaching ramifications, is responsible for positive advancements.

Sadiki said, “If you look back in the last two years digital, invisible, frictionless payments have taken up momentum globally in different shapes and forms.” Sadiki emphasised that contactless payments, or more generally, e-commerce growth in the form of ‘invisible’ payments, has really taken flight in the African retail space.

Pre-COVID, e-payments would have probably accounted for 1% or even less of total trade. Now, the number has increased to 7-8%.

This growth in adoption has extended to wholesale payments as well. In the past, there was no real demand for real-time payments. The process was slow, and there was little emphasis on enriching the data ecosystem. But now, interest has been piqued.

Sadiki said, “You’re starting to see, in high-value payments, the need for more third-level data––more enriched data––in the payment flows.”

Overall, there seems to be a conscious shift toward enhancing these systems through various lenses, whether that be an ACH perspective––starting to think about how to build the infrastructure and modernise it––to a platform-based ISO 20022 payments ecosystem.

The discourse around the African payments ecosystem is complex. This is to be expected given the intricacies of the industry and the diverse challenges faced by African businesses.

High-value payments and data sparsity

The notion of data sharing is often met with widespread reticence. For Sadiki, this is a result of two key issues.

On the one hand, there is a real worry from an anti-money laundering (AML) and know-yourcustomer (KYC) perspective; both counterparties need to know where they’re sending to and who they’re sending to.

On the other hand––one which usually bears more weight––is the fact that counterparties need to build upon trust and confidence between participants so that the required systems can really take form.

There are clear advantages to engaging in data sharing. Sadiki said, “Banks see the need for that enriched level of data. They see the need to know what they [customers] are paying for and where they paid for it.”

Therefore, it is about cultivating those partnerships to create a centralised player that is able to achieve that.

Sadiki added, “It’s a long journey and I don’t think it will be that easy to solve.”

SMEs and low-value payments

In South Africa and many other parts of the continent, smalland medium-sized enterprises (SMEs) are generally viewed as the bedrock of economies, driving employment and trade.

However, in the majority of cases, they are the ones to face the largest hurdles. The most significant pain point is the lowvalue, real-time payment aspect; an integral part of businesses operating on the ground 24 hours a day.

Sadiki said, “If we can shift from a world where an SME waits for payments during the week––getting no real payments over the weekend––to a world where the payment happens instantly…they will be able to have cash flow available immediately.”

Right now, one of the largest hindrances to a business’ cashflow is not knowing where their money is within the process. In this regard, implementing faster and more transparent payments will enable businesses to grow more efficiently.

Sadiki said, “A lot of trade today works on promise-to-pay.

“In some cases, delivery is held until the payment has been cleared, at which point delivery is then dispatched. And if I’m a micro-, small- and medium-sized enterprise (MSME) in a rural area, this means I then need to go to my bank and cash that digital transaction.”

These lengthy stages can severely impede the cash flow within a small business. However, digitising the ecosystem removes these hurdles, meaning

that MSMEs will not need to go to a bank to deposit any of the cash––something that is really underestimated in developing markets.

The future of African payments systems

Looking toward the future, it is easy to see a cognitive shift from cash-based payments to digital payments, facilitating the easier deployment of payment solutions.

You’re seeing more and more urbanisation in Africa which means more people are starting to consume technology services. This urbanisation will play a large role in simplifying channels through digitisation.

Cash remains a reality, but Sadiki added, “Industry players cannot ignore e-currencies.

“That’s a rallying call to the regulators: if you do nothing, the market will self-regulate.”

It may be the case that companies are waiting for the rollout of legal frameworks, but this hesitation could manifest to a point of disadvantage.

“The very essence of regulation is to advance. Seeking solutions to facilitate low-cost, inclusive access has already taken off. 

GUNNAR COLLIN Head of Sales, Trade Finance Enigio

4.5

Digitising Trade:

The solution is in plain sight

The arguments for digitalising trade processes are well known. Paper-based processes are inefficient, error-prone, and subject to frequent delays––particularly in times of disruption.

There’s also the environmental cost of paper to consider, which is increasingly important to today’s sustainability-focused companies.

A digital reinvention of trade could address all of these issues. But if you were tasked with digitalising global trade, how would you do it? That’s the question that people, entities, and banks have long been asking, resulting in numerous efforts to tackle the issue in myriad ways. As many have demonstrated, trade digitisation is highly challenging in practice because of the numerous touchpoints and parties involved in trade transactions.

Many such initiatives aim to gather a selection of players and bring them onto a single platform or closed system, with its own set of processes and rules.

It takes time to coordinate different parties, and widescale adoption of any specific platform may be difficult––if not impossible––to achieve. So, could this approach be missing the point?

Enigio believes the solution to trade digitalisation is in plain sight. There is already a single standard for exchanging information between ports, carriers, corporates, banks and customs––and that’s the paper document.

Harnessing the power of paper

Despite the well-known shortcomings of paper documents, the action of writing something on a piece of paper is very powerful.

When you create a paper document, what you’re really creating is a closed container which can hold a promise, or a set of information.

It can be sent, received, stored or amended by anyone at any time. And whoever is in possession of the piece of paper may be able to use it to claim ownership of the relevant goods.

So if you want to digitalise global trade, why wouldn’t you create a digital sheet of paper that fulfils exactly the same role as physical paper?

The good news is that regulators have already taken steps to enable this, recognising that digital documents offer a path for digitising global trade.

A key milestone was the creation of the Model Law on Electronic Transferable Records (MLETR) by the United Nations Commission on International Trade Law (UNCITRAL) in 2017, which sets out the idea that a digital record can be used in the place of a paper document, as long as it fulfils all the necessary legal requirements. Replicating paper in a form that is both digital and interoperable is an approach that offers significant benefits. Existing laws do not need to be changed, and all players can keep their existing systems, business practices, and methods of working with counterparties. Users do not need to sign up for a new service––nor do they need to surrender their data to an external platform, because the data remains in the document.

Digital paper and the benefits for corporates

Corporations, in particular, have much to gain from the digitalisation of paper documents. Today, for example, companies exporting goods need to gather various documents in order to prepare for a shipment, including bills of lading (BLs), invoices, certificates of origin and packing lists.

Obtaining these documents from external parties and internal systems can be time-consuming and cumbersome as the whole process continues to be heavily paper-based.

For example, only 1% of BLs are currently electronic. But despite

the inefficiencies, companies are understandably reluctant to change their existing processes, not least because these documents are associated with numerous other internal processes, from product planning to production.

The inefficiency that comes with paper documents also has implications for the transportation of goods.

As the last couple of years have demonstrated all too clearly, delays in the delivery of documents can hold up trade. It’s not unusual for ships to arrive in a port well before essential documents have been received––which means that the offloading of goods may need to be delayed until those documents arrive.

Digital documents can therefore increase the efficiency of trade in two different ways:

• Streamline internal processes. By replacing paper-based documents with digital equivalents, companies can increase the efficiency of their internal processes without needing to reengineer them.

• Send documents digitally. Companies can send trade documents to the relevant customer, port, carrier or bank in digital form, thereby avoiding the risk of transport delays. Rather than taking five or six days to reach their destination, digital documents can be transferred in a matter of seconds – meaning there’s no need for ships to wait for documents to arrive.

Digital documents in practice

This opportunity is not merely hypothetical. Enigio is one of a small number of providers that offer the ability to digitise original documents.

Enigio’s trace:original solution can be used to create digital original documents that are fully interoperable and can be shared with anyone.

Designed to comply with existing legislation and the MLETR, trace:original has all the qualities of paper and can be used for trade documents including BLs and bills of exchange.

In summary, many initiatives over the years have fallen short of tackling the industry’s reliance on paper.

And in practice, eliminating paper from the equation may not be the best approach to digitising global trade.

Rather, Enigio believes the way forward is to harness the benefits of paper with a 21stcentury equivalent that is accessible, interoperable, and efficient––all while addressing the environmental impact of physical paper. 

SHIPPING AND SUPPLY CHAINS

5.1

Blockchain in bridging trade finance with climate commitment of the shipping industry

Global shipping is one of the most challenging sectors to decarbonise.

The International Maritime Organization (IMO) has set out an ambitious goal to reduce the industry’s greenhouse gas emissions by 50% from 2008 levels by 2050, a target that will require the swift development of zero or low-emission fuels, new ship designs using cleaner technology, and climate-proof operations such as carbon efficiency optimisation initiatives.

For the global supply chain to meet this target we need all industry participants, from customers to financial institutions, to act.

Promoting environmental stewardship through finance

While the roll-out of green finance is still nascent, with no wellrecognised market standards, momentum is visibly growing. Take shipping finance as an example; last year, a group of leading banks signed up to environmental commitments known as the Poseidon Principles, which provides a framework for integrating climate considerations into lending decisions to promote international shipping’s decarbonisation.

Businesses looking to implement sustainable procurement practices across their supply chain are also driving the demand for green trade finance.

Concept product like the sustainable shipment letter of credit (LC) was launched in 2014 by the International Finance Corporation (IFC) and the Banking Environment Initiative (BEI) to expand the global trade of sustainably-sourced commodities.

The IFC also launched the Climate Smart Trade (CST) initiative to provide price incentives or longer tenors for projects that have clear climate change benefits. However, many issues remain to be solved to drive wider adoption and implementation of green trade finance.

The trade finance industry is mostly paper-based, which leaves documentation vulnerable to tampering or fraud.

Additionally, the global supply chain involves many participants, making climate credentials, like carbon emissions, hard to track and measure, let alone sharing the data to enable end-to-end

ALICIA LEE Solutions Specialist, Change Agent and Trusted Advisor GSBN

visibility and transparency to inform green finance decisions accurately.

Such visibility is also valuable to businesses, as it empowers them to take informed action to change the way they source, trade and distribute goods––for example, optimise their shipment routes and schedules or shift to a lower-carbon mode of logistics.

Digitalisation is the key to bridging finance with climate change commitments, to truly harnessing financial influence to drive the decarbonisation of global trade.

Enabling data transparency and collaboration through blockchain

In fact, the digitalisation of the global supply chain still has a long way to go.

Although the International Maritime Organization (IMO) has made it mandatory for all its member countries to exchange electronic key data according to the FAL Convention, a recent survey by the International Association of Ports and Harbours (IAPH) reveals that one main barrier to digitalisation was persuading multiple privatepublic stakeholders to collaborate and revamp established practices and cultures, thereby enabling the sharing and reusing of data.

GSBN is an independent nonprofit consortium that aims to enable and accelerate the digital transformation of the shipping industry.

GSBN sees the potential in facilitating collaboration and enabling better carbon emission tracking across the supply chain using blockchain.

Blockchain is a powerful tool that can significantly improve the transparency, accountability, and traceability of greenhouse gas emissions, and provides instant authentication and verification of real-time data.

International bodies such as the joint US-EU Trade and Technology Council have recognised technology’s potential and recently announced a partnership to improve the process of tracking carbon emissions using blockchain.

Vision for an impartial carbon footprint data platform for global trade

As a neutral technology consortium for the shipping industry, GSBN can source data from carriers, terminals, and other logistics service providers. This enables members to collect

key factors in carbon footprint calculation for transportation, including routing (place of receipt, place of destination, and transhipment port), trade lanes (shipper and consignee), transport companies (shipping line or trucker), commodities product type, transport mode (vessel or vehicle), vessel type in shipment, utilisation (overload or underload), and more.

With traceable and immutable source data from shipping lines and terminals, as well as truck data visibility inputs for carbon emission calculations, businesses can gain more transparency to improve their carbon footprint within the supply chain.

Financial institutions are facing growing pressure to better manage the carbon footprint of their portfolio from regulations to voluntary frameworks like the Poseidon Principles, which require signatories to calculate the climate alignment of their shipping portfolio relative to established decarbonisation trajectories.

Better visibility and transparency of carbon emission tracking is instrumental in helping financial institutions meet such expectations, and ultimately improve the accuracy of financial institutions’ assessment of whether their lending portfolios are in line or behind the climate goals set by the IMO.

Ultimately, this will drive meaningful actions toward the decarbonisation of the global supply chain. 

SAMUEL MATHEW Managing Director, Head of Doc & FI Trade Products Standard Chartered Bank

5.2

Double redundant— Standard Chartered discusses supply chain duplication and deep-tier financing

Over the last two years, supply chains have been discussed more widely than ever before.

People hardly put any thought into the long and arduous journey taken by produce on grocery store shelves.

At least not until the COVID-19 pandemic started to disrupt that seemingly reliable facet of modern society.

Supply chains are becoming redundant—and that’s a good thing

Kai Fehr Global Head of Trade & Working Capital, Managing Director Standard Chartered Bank

As store shelves lay bare and toilet paper was nowhere to be found, many people began to hear much more about the supply chains that power our lives in the background.

While the world has largely emerged from the grips of pandemic lockdowns, several other macroeconomic and geopolitical factors have taken the role of supply chain disruptors.

The landscape is currently very complex coming out of the COVID-19 pandemic. Factoring in additional challenges such as geopolitical tensions, inflation, and energy prices, it can be particularly difficult for some businesses to navigate.

The amalgamation of all these factors has led to large delays in the market for nearly everything. People building houses are struggling to get their hands on supplies and appliances to get the job done.

For many companies, overcoming these hurdles means building resilience in their supply chains.

CARTER HOFFMAN Assistant Editor Trade Finance Global

To learn more about the changing nature of global supply chains, Trade Finance Global (TFG) spoke with Standard Chartered Bank’s Kai Fehr, global head of trade and working capital, and Samuel Mathew, global head of flow and financial institution trade, at Sibos, held in Amsterdam this October.

Fehr said, “You must have contingencies so that you can be certain that departments within your supply chain are still able to provide in a number of scenarios.”

Geopolitical tension has the capacity to divide the world, with

the pandemic putting cities in lockdown. These are all events that can happen, and supply chains need to be ready to address them.

One of the main themes coming out of global supply chains today is a growing amount of friendshoring, which is when companies bring their supply chain closer to a friendly nation. This is becoming particularly prevalent in the energy and technology industries, given a lot of the geopolitical tensions that are disrupting these markets globally.

While friendshoring is becoming more popular, firms still struggle to escape China’s massive gravitational pull.

It is becoming more and more apparent with Standard Chartered clientele that the global market is important for them, but the Chinese market is critical.

With this in mind, businesses are increasingly building two

independent supply chains, one catering to the domestic Chinese market and the other using friendshoring processes throughout the rest of the supply chain.

While this phenomenon is occurring, it is unlikely to manifest itself in the short term.

This is because changing supply chains is a considerable process requiring supplier and environmental due diligence. This is expected in addition to the actual moving of products and setting up the manufacturing facilities.

Fehr added, “That is a multiyear project, not a multi-month project.

“Therefore, if we are reviewing this in a year’s time, I predict we will see some change, but the real permanent change will not be visible for another three to four years.”

Digitalisation to help deep-tier financing

Digitalisation is often widely hyped as a tool that will solve countless problems within the trade and supply chain finance spaces.

In some instances, however, this buzz comes about without a clear and tangible understanding of what is actually happening behind the scenes.

Often, technology is only providing visibility into the transactions at hand without actually being in a position to change the underlying reality. While visibility is a key first step, these solutions don’t solve many of the end-to-end problems in the supply chain.

On a different note—although still within the realm of digitalisation— is the idea of deep-tier financing, which has tremendous potential to help solve the trade finance gap.

Often in large multinational supply chains, the tier-one suppliers are generally already quite financially strong and could achieve financing from any number of sources.

Advancements in digital technologies, however, can allow the financial strength of the corporation to travel further down the chain.

Standard Chartered is able to use technology to tokenise trade assets and let the token travel deep into the supply chain. Fehr and Mathews noted how in one scenario, the bank had reached level eleven, while the normal depth is level three to four.

Fehr said, “I’m not talking about digitalisation as a theoretical idea—this is a reality for us.” This happens because the technology allows tokens to be fractionalised at each level of the chain and portions of the whole passed on to each supplier level in a manner that represents the physical reality of the supply chain.

By layering on pricing components, these tokens can allow the financial prowess of large multinationals to trickle down many tiers to a small local farmer who otherwise may struggle to get financing despite the fact that their products are ultimately sold to a financially stable firm.

By easing the barriers to small business financing, more of them will receive financing, reducing the trade finance gap in the process. 

HOLLY JADE O’LEARY Co-Founder and Director Alinea Customs

5.3

terminal charges

Incoterms® are the international terms which

transport and delivery of goods published by the International Chamber of Commerce (ICC).

They set out the important fundamentals of the Incoterms® rules, and the contracts surrounding a typical contract of sale for export/import.

The Incoterms® 2020 rules explain a set of the eleven most commonly used threeletter trade terms, e.g. cost, insurance, freight (CIF), delivered at place (DAP). The precise place of delivery should always accompany them.

Incoterms® case study

“I’m confused––why is this being billed to me?” an importer may enquire, presenting an arrival notice.

I regularly encounter clients approaching me to enquire why the cargo broker has sent them an arrival note requesting a release fee, usually in circumstances under the carriage and insurance paid to (CIP) or cost and freight (CFR) Incoterms®.

“But I thought that we paid you for customs clearance and the port charges were included in that price?”

The prior question is followed by an explanation that the cargo broker is a separate entity to the customs broker (although frequently the cargo broker will also customs clear the goods for a premium).

Despite the bill of lading (BL) clearly displaying CIF, freight prepaid, the client faces combined charges of around £1700 for cargo release and customs clearance––prior to any HM Revenue and Customs (HMRC) levies.

Upon review of a long list of surcharges against a less-thancontainer load (LCL) shipment with an invoice value of $1630 USD: When the freight prepaid shipment arrives at the deep seaport, they will receive an arrival note from the cargo broker stating the release fees, demurrage fees for full container load (FCL), and storage for LCL, if the balance is not transferred within five days.

This would typically be supplemented by a footer stating: “It should be noted that once

The most misunderstood Incoterms® in relation to

determine business-to-business practice in the

Invoice Subject Price per Unit Total Price

Destination terminal handling charges (THC)

8.9m³ 33.50 per m³ £298.15

Destination documentation fee 1 shipment £113.00

THC surcharge

Port congestion surcharge

Interim currency adjustment surcharge

Currency adjustment surcharge

8.9m³ £6.00 per m³ £53.40

8.9m³ £30.00 per m³ £133.50

8.9m³ £30.00 per m³ £267.00

8.9m³ £30.00 per m³ £62.30

China import service fee 8.9m³ £80.00per m³ £712.00

Total £1639.35

unpacked, the warehouse applies 5 days of free time (from and including the date of unpacking) before storage charges will apply. Storage charges for this shipment will be charged at a rate of £378.25 per day.”

Having had no previous interaction with the company holding the cargo, it can be alarming for traders new to importing.

To avoid this scenario, it may be advisable for the importing party to request a Free on Board (FOB), DAP/DPU, and a CIF/CFR price from the seller, prior to confirmation of the transaction.

DAP Incoterms®, identifying delivery to the trader’s premises, would reduce responsibility for the importer. Instead of arranging customs clearance, release, and terminal handling charges, importers only need to manage customs clearance and unloading from their premises. Alternatively, buyers may wish to research the market to find the most cost-effective deal that covers freight charges from the exporting shipping port to the

trader’s warehouse on FOB terms. Mitigating unexpected costs and administrations through misinterpreted Incoterms®

It would be advisable for both parties to conduct a cost-benefit analysis prior to confirmation of the transaction to determine the delivery charges, port charges, release fee, terminal handling charges, availability of trade quotas, licenses and certificates. This should be discussed in addition to customs duty, excise, and import VAT liability, identifying the use of the Postponed VAT Accounting (PVA) method if the importing company is UK VAT registered.

Many traders may participate in purchasing overseas goods which appear to be reasonably priced, only to encounter charges that, in certain cases, are as extensive as the goods purchased.

Lloyds Practical Shipping Guides: Introduction to Marine Cargo Management (Rowbotham, Mark, 2015) handbook identifies that shipping costs are on average 33% of the value

of the commercial invoice accompanying the consignment.

Incoterms® definitions Free on Board

This relates to sea shipments only and is the most misused Incoterm.

Technically, it should not be used for air freight, and it should only be applied to non-containerised cargo. However, industry practice means that it is frequently issued in container or air cargo circumstances, representing marginally less risk for the buyer. Under FOB the risk is officially transferred once the cargo is loaded on board the ship; however, with containerised cargo, the shipper is likely to hand over the cargo to the carrier at the vessel, where it will wait to be loaded.

Therefore free carrier (FCA), carriage paid to (CPT), or carriage and insurance paid to (CIP) presents less risk for the shipper.

FCA, CPT, or CIP

“Free Carrier”, “Carriage Paid To” and “Carriage and Insurance Paid to” are popular Incoterms® for container movements. FCA is likely to identify the shipper’s port terminal in the exporting country. If CPT or CIF identifies delivery to the container terminal in the destination country, rather than the warehouse location of the buyer, the buyer should be aware that the release fee, unloading of the container and charges for the

subsequent transfer of the cargo to the freight forwarder’s vehicle will be their responsibility. The release fee will be determined by the shipping company, and the port charges will be determined by the port.

The question from the customs broker or freight forwarder, when the importer is issued with an arrival notice from the cargo broker once the container has landed at the port will be, what are the Incoterms®?

It is advisable to be aware that all Incoterms® other than “Delivered at Place” (providing the place is external to the destination port) “Delivered at Place Unloaded”, and “Delivered Duty Paid” - DAP, DPU and DDP are likely to place the responsibility for terminal handling charges with the importer.

Delivered at Terminal (DAT) Incoterms® 2010 may also present an area for dispute concerning terminal handling charges. Under

this Incoterms® rule, delivery takes place when the goods have been unloaded from the arriving vessel.

Therefore, costs arising from the unloading operation will be payable by the seller, but if there are further charges such as the transfer to the truck, or warehousing, these may be payable by the buyer.

In addition to liaising with the seller, importers should also liaise with the cargo broker to ensure transparency. It would be advisable to request the disclosure of the carrier’s charges in respect of terminal operations and agree on a precise point of delivery in advance of arrival. Where the carrier’s terms and conditions do not reflect the Incoterms® rule, the buyer and seller should negotiate a commercial agreement to allocate these costs. 

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