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THANKS TO Adam Hearne Baldev Bhinder Raman Kaur Stan Cole Richard Wulff Rogier Van Lammeren Patrik Zekkar Olivier Saint-Raymond Edward Ireland David Thambiratnam Jim Regan Liliana Fratini Passi Karin Oszuszky Minister Nigel Huddleston Mosa Tshabalala Stan Cole Evan Ivanov
ADAM HEARNE CEO Carbon Chain
TFG EDITORIAL TEAM Deepesh Patel Brian Canup Carter Hoffman Tammy Ali Duygu Karakuzu Kirtana Mahendran
LILIANA FRATINI PASSI Managing Director CBI
LAYOUT DESIGN Nigel Teoh
PHOTOGRAPHS AND ILLUSTRATIONS Freepik Company S.L. Canva
ADDRESS 201 Haverstock Hill Second Floor London NW3 4QG
MINISTER NIGEL HUDDLESTON Minister of State Department for Business and Trade
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MOSA TSHABALALA
Head of FI Trade Sales (International), Risk Distribution and Syndications Absa Group
Contents
CONTENTS 1 1.1
2
Foreword
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Foreword: Balancing act: Navigating the highs and lows of global trade in 2023
Featured
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2.1
Looking to Beijing 2024: TFG’s 6 key takeaways from Sibos 2023
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2.2
Seizing the COP28 moment: Top strategies for trade finance’s path to net zero
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2.3
Navigating the green transition: UNCTAD’s 2023 Maritime Report
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2.4
Kuvera Resources v J.P. Morgan Chase: Certainty of payment vs risks of breaching sanctions under Letters of Credit
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2.5
Breaking: Trade finance default rates rise slightly, 2023 ICC Trade Finance Register
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2.6
14 key trade documents and data elements for cross-border trade: Inside the ICC’s KTDDE report
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2.7
3 trade credit insurance considerations for the rising $2.5tn trade finance gap
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2.8
FCI scores hat-trick in Marrakesh: A giant leap for factoring
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3
Peaks and Valleys: The Digital Road in 2023
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3.1
Sibos Collaboration Couch, Lloyds Banks and Enigio on Pushing Digital Trade
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3.2
A common credit insurance hub: The solution to streamline credit insurance?
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3.3
Three top tips for ISO 20022 usage: Steps to harmonise trade finance transactions
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3.4
Boosting profits and cutting emissions: How resource companies are embracing digital fuel management
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3.5
Open models: Transforming the future of payments
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3.6
Contour collapses: What does this mean for digital trade finance?
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3.7
The dark side of trade digitalisation: data inequality and the global economic divide
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Changing Dynamics in the Trade Finance World: A look to 2024
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4.1
An interview with the OPEC Fund for International Development
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4.2
Fireside Chat | A breakdown of distribution and an introduction TFG Distribution Finance
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4.3
Brexit and beyond: Minister Nigel Huddleston on UK's trade adaptations
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4.4
Africa spotlight, How can we grow risk distributions and syndications in trade finance?
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4.5
The case for financial inclusion of … banks
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4.6
Cash is king, and helping suppliers may be in buyers’ best interest
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4.7
Navigating the future of B2B commerce: A conversation with HSBC’s Vinay Mendonca
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5
Partner Events
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Trade Finance Talks
FOREWORD
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Foreword
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Trade Finance Talks
1.1
Foreword: Balancing act: Navigating the highs and lows of global trade in 2023 DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
When you zoom in and look at the international trade industry, there are no clear trend lines. There are only individual cases of success, and individual cases of failure. Collaboration: a theme across the board
According to the WTO, global trade is expected to rise 0.8% to $32.3 trillion in 2023.
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG)
But this number is an aggregate statistic. When one breaks down global trade in 2023, it is clear that it comprises a multitude of outcomes, from accelerated GDP growth in the United States and China, to stagnation in the UK and EU. This give and take is not only relevant to economic and trade statistics, but it is applicable to the wider industry environment. When you zoom in and look at the international trade industry, there are no clear trend lines. There are only individual cases of success, and individual cases of failure. Simply put, 2023 was a year of highs and lows.
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In September the TFG team attended Sibos in Toronto, with a theme of "Collaborative finance in a fragmented world," which perfectly encapsulates the current global scenario. In the payments industry, cross-border payments continue to rise, and financing is becoming increasingly embedded in every day life. While this is an exciting time for new innovations, 40% of businesses have reported delays of more than five days for sending or receiving crossborder payments. Developments and set backs often come hand in hand. The lingering impacts of COVID19, disruptions in global supply chains, geopolitical unrest, and multiple large-scale wars have all contributed to a rapidly changing trade environment. In response, the industry is increasingly uniting to develop innovative solutions to these emerging challenges.
Foreword
Challenges have emerged, but so have solutions One of the most pressing issues in trade finance is the widening gap in funding. Reports from the Asian Development Bank indicate a rise in the 2022 trade finance gap from $1.7 trillion to $2.5 trillion, underscoring the need for more effective strategies to bridge this divide. But there are some solutions that are emerging in the trade sector. Our industry is witnessing a transformation as traditional funding models evolve. “Higher for longer” interest rates and economic uncertainties are leading to a shift towards alternative sources of finance, moving beyond the traditional banking models. Both TFG Distribution Finance and the TFD Initiative are examples of the industries’ evolution in the face of challenges. TFG Distribution introduces new sources of structured capital into the market, aiming to increase the availability of liquidity and service the unmet demand for private credit. But beyond the trade, treasury, and payments industry, 2024 has the potential to be a volatile year, as there will be elections in over 30 countries. No matter what the outcome in these countries, there are bound to be significant changes in trade and geopolitical policies. Moreover, the industry is addressing complex crossborder payment challenges by
transitioning towards more streamlined and transparent systems. This shift, driven by collaborative efforts, is simplifying the intricacies of global payments, demonstrating the power of unity in overcoming obstacles. The urgency of reducing the carbon footprint of the trade industry is another pivotal issue that cannot be overlooked. The trade finance industry is taking significant strides in this area, from expanding carbon accounting initiatives to aligning strategies with ESG goals. These efforts are vital for ensuring a sustainable future for global trade.
Digital solutions: Will 2024 be the year it finally comes together? Lastly, the digital frontier remains a critical focus. 2023 showed promise in some ways, but the industry also experienced a few bumps on the way to a digital transformation. The UK enacted the Electronic Trade Documents Act, which is a monumental step towards this digital transformation,
which will be closely followed by policies in Germany, France, Spain and Italy, setting the stage for a comprehensive industry-wide shift, and the implementation of ISO 20022 is a potentially significant development in transforming messaging systems. But, the path towards progress is never a straight line. In just one year, digital trade platforms, Marco Polo and Contour both collapsed, signalling an end to two very promising experiments. While the challenges ahead are substantial, they are not insurmountable. We are already seeing private-public partnerships to standardise trade digitalisation, collective efforts to map trade documents, with the ICC’s KTDDE, and collaboration is increasing with the formation of the FIT Alliance. These are all key to navigating the turbulent waters and shaping the future of trade, treasury and payments. As always, TFG would like to thank our sponsors, who make this publication what it is, and help contribute to furthering the success of our industry.
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Featured
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2.1
Looking to Beijing 2024: TFG’s 6 key takeaways from Sibos 2023 DEEPESH PATEL
After some time to reflect, here are TFG’s top takeaways from the jam-packed conference.
Editorial Director Trade Finance Global (TFG)
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG)
As the echoes of this year's Sibos conference begin to fade, the transformative ideas and groundbreaking discussions that took place continue to reverberate throughout the industry. Trade Finance Global (TFG) was at the heart of these conversations, offering a unique and insightful perspective on the future of trade finance. After some time to reflect, here are our top takeaways from the jam-packed conference.
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1. The API revolution: A promising future, with work to be done When TFG attended the “Corporate to Bank APIs for Guarantees – Are we Future Ready?” panel with Samuel Mathew from Standard Chartered Bank, Baptiste Audren from Komgo, Juliette Kennel from Swift, Joon Kim from BNY Mellon, and Samuel Mathew, it became clear that APIs are the best way forward for the industry.
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But the question is, how and when do we implement the new language, and what are the next steps for industry standardisation? Standardisation is no longer a mere buzzword; it's an imperative for an industry that has long grappled with fragmentation and inefficiency. This is a revolution that's here to stay, but it’s not a finished product yet.
2. The industry has a lot that keeps them awake at night TFG's roundtable discussion with the BAFT Global Trade Industry Council was a reminder that technology alone won't solve the industry's challenges.
3. A borderless payments industry: More than a dream Visa's vision for next-gen crossborder payments, as covered by TFG, is a reality that is closer than many might think. It's a glimpse into a future where financial borders are less of a barrier and more like formalities. The idea of sending money across continents as easily as sending a text message is not just a pipe dream; it's a tangible future made possible by rapid technological advancements. This is a future that's within our grasp, and it's reshaping the way we think about global trade.
4. AI and collaboration: The new frontier Red Hat's approach to combining AI with federated learning introduces a new way of thinking about technology in trade finance. Rather than viewing AI as just another tool for automation, the focus is on its potential for collaboration with human operators. In this setup, AI systems can learn and adapt based on human interactions, creating a more dynamic and responsive environment. This goes beyond simply automating routine tasks; it opens the door for a more nuanced interaction between human expertise and machine capabilities.
From geopolitical tensions to the looming threat of fraud, these are the existential questions that are keeping industry leaders awake at night. These aren't just challenges; they're variables that will define the future trajectory of trade finance. It's a wake-up call for the industry, urging us to look beyond technology and consider the human elements that drive trade. But we all need a wake-up call sometimes, and it is not a negative thing. Sibos 2023 was a sign that the industry is already starting to come together to address these overarching challenges.
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The result is a more flexible and adaptive approach to problemsolving in trade finance, offering new avenues for innovation and efficiency.
5. The beyond the cloud The cloud is evolving from a mere storage solution into a platform for innovation and collaboration in trade finance. The discussion with Finastra and IBM experts highlighted how the cloud is becoming a foundational element in this sector. It's not just about moving existing systems to the cloud; it's about using its capabilities to enable real-time data sharing, enhance security, and facilitate agile development. This shift turns partnerships from tactical alliances into strategic imperatives. Financial institutions are finding that cloud-based collaboration allows for quicker responsiveness to market changes and faster innovation. Additionally, the cloud's data analytics capabilities are making it easier for institutions to align with the growing demands for sustainability in trade finance. In essence, the cloud is reshaping the way work gets done in trade finance, offering new avenues for collaboration, innovation, and sustainability.
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6. Digital-first: The new normal The collaboration between Lloyds Bank and Enigio, highlighted during Sibos, marks a significant step toward a digital-first approach in trade finance. With the Electronic Trade Documents Act now in effect, digital trade is becoming a standard practice rather than an optional feature. This collaboration is not just about adopting new technologies; it's about integrating digital processes into the core of trade operations. This move toward digitalisation is making transactions more efficient, reducing the need for physical documentation and streamlining workflows. It's also enhancing security by leveraging digital signatures and encryption, thereby reducing the risk of fraud. The shift to a digital-first approach is not just a trend but a practical response to the evolving demands of the trade finance industry, offering benefits in efficiency, security, and compliance. As we look back at our experience at Sibos, it's evident that the future of trade finance is not just unfolding organically; it's being actively shaped by these critical discussions and innovations. These top takeaways serve as a roadmap for navigating the complexities of a rapidly evolving industry.
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Featured
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2.2
Seizing the COP28 moment: Top strategies for trade finance’s path to net zero ADAM HEARNE CEO Carbon Chain
On the eve of COP28, there is no time to waste. Early action brings rewards, but this window of opportunity is narrowing.
Trade finance providers have a critical role to play in the lowcarbon transition. Through their lending decisions, they hold massive influence in some of the most carbon-intensive companies and supply chains, and they can use this leverage to push for much-needed progress on climate. The industry also has a role outside of the high-emitting sectors it finances - to provide support and investment for climate technologies, as well as new energy and commodity markets that will be critical for reaching our global climate goals.
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Currently, carbon regulations are hitting supply chains, and global temperature records are repeatedly being broken. At the COP28 climate conference later this month, commodities, the main perpetrator of the majority of the world’s emissions, will be under the spotlight. Now more than ever, trade finance providers must acknowledge their significant role in solving the climate crisis and take action to guide global trade towards low carbon targets.
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This COP marks the end of the first global stocktake, whereby progress against the terms of the Paris Agreement is assessed. It is already clear that the world is nowhere near where it needs to be, but there is hope that COP28 will provide an opportunity to accelerate climate action. This means pressure will be on countries to demonstrate progress and take urgent action to move the dial. We can expect more ambitious regulation on the cards, bolstered off the back of the recent launch of the world’s first carbon border tax in the EU as well as more collaboration on climate disclosure through the ISSB.
Phasing out fossil fuels will also be high on the agenda, as will climate finance.
higher than operational emissions for financial institutions. And you need to get granular - understanding the carbon emissions associated with each commodity trade financed is key.
These outcomes could have significant impacts on the shape of trade finance.
What are the next steps for net zero? So what should trade finance providers actually be doing to ‘take action’ at this time? The first step, as boring as it sounds, is carbon data and accounting. In order to have any impact, it is vital to work out the total carbon footprint associated with your financing practices, as these will be significantly
However, the difficulty and expense of measuring these emissions have forced many to delay the effort, especially for those with relatively new sustainability departments. It is hard enough to track the production, processing and transportation of these commodities, let alone the emissions associated with each step. It is even harder to do so one step removed from the source.
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However, whatever the challenge, whatever the excuse, this data needs to be collected, and shortcuts don’t work. We know that many companies that lack the supply chain data they need to properly calculate their emissions end up using broad-based estimates and assumptions. But this won’t do – not only does this open them up to accusations of greenwashing and potential regulatory penalties, but it also puts their whole business at risk. In a rapidly decarbonising world, you need to be able to compare performance between similar trades and traders and identify even the smallest changes in performance over time. Imprecise estimates can also hide carbon hotspots, masking the most significant risks. Increasingly, voluntary disclosure is transitioning to mandatory disclosure and with 23% of global emissions now covered by carbon pricing schemes, the costs and risks of carbon are increasing. More and more regulation is coming in – from the ISSB to the SEC reporting rules, to the EU’s Carbon Border Adjustment Mechanism, and much of this regulation is turning its attention to supply chain emissions. This means trade finance providers are coming into the spotlight, and their portfolios are under increasing scrutiny. However, there are some bright spots for companies that are struggling with carbon measurement and management.
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Big data, AI and machine learning are enabling companies to fill in the gaps in supply chain tracing speed up the process of tracking emissions over time and identify solutions. Using tech in this way is a no-brainer. Not only does it take the pressure off internal teams in responding to the plethora of external data requests they receive, but it also saves time versus working with consultancies – in our estimation, approximately 8 months’ time.
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Of course, getting the data and ensuring regulatory compliance on climate is just the first step. Once companies know where they stand and where the hotspots and risks are in their portfolio, they can use this knowledge to push for change and actually reduce emissions.
Sustainable loans: A bank’s way to leverage green finance One way we are seeing banks use their leverage here is through green finance schemes such as sustainability-linked loans.
Featured
Banks can offer interest rate discounts for lower carbon supply chains and put penalties in place for higher-emitting trades. For example, at CarbonChain, we have worked with Société Générale, to offer sustainabilitylinked loans to commodity trading partners, help to support them on the development of climate KPIs, provide emissions dashboards and allow them to monitor the climate impact of each financed trade, and track progress.
This innovative approach demonstrates how – enabled by tech and transparent data sharing - producers, suppliers, traders and banks can work together to tackle emissions, manage risks and future-proof their businesses. These types of sustainabilitylinked incentives could have a real impact. As traders start to compete for this green finance, they will need their suppliers to offer better and more competitive low-carbon solutions, driving progress
up and down the value chain and triggering system-wide change. And given green trade finance is still relatively young, there is a significant opportunity for early movers to get ahead of the game here and lead. On the eve of COP28, there is no time to waste. Early action brings rewards, but this window of opportunity is narrowing.
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2.3
Navigating the green transition: UNCTAD’s 2023 Maritime Report NICK SOUTAR
Writer Trade Finance Global (TFG)
To ensure a cost-effective and, critically, environmentally friendly future for the transportation industry, a difficult balance is faced between environmental sustainability, regulatory compliance, and economic considerations. Maritime shipping is at a turning point. The sector has seen an increase in its greenhouse gas emissions of approximately 20% over the past decade, with the majority of shipping activity undertaken by ageing fleets that are almost universally reliant on fossil fuels. To ensure a cost-effective and, critically, environmentally friendly future for the transportation industry, a difficult balance is faced between environmental sustainability, regulatory compliance, and economic considerations. Extensive and necessary investments in reducing the greenhouse gas emissions associated with operations in the sector are likely to raise the costs of maritime logistics. This presents concerns for global trade activity in general, as well as adding significant
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challenges to vulnerable shipping-reliant countries such as small island developing states (SIDS). Conversely, research has shown SIDS to be some of the most exposed nations to the effects of climate change, emphasising the imperative of a swift and just decarbonisation programme for the shipping sector. A key message emerging from the report is that the cost of inaction significantly outweighs those of necessary, but costly investments. This is a welcome insight that is often absent from discussions of decarbonisation. Stakeholders must proceed from this essential foundation and seek to deploy investment and innovation in a manner that mitigates the challenges faced by the most vulnerable actors whilst ensuring as little disruption as possible to one of the most critical sectors of the global economy.
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Importance of shipping for global trade The importance of shipping to the global economy has been underscored by recent developments. The supply chain shortages and port disruptions experienced as a result of COVID-19; the blockage of the Suez Canal by the Ever Given; as well as the effects on commodity markets – particularly grain and fertiliser – as a result of the war in Ukraine and adverse operating environments for shipping in the Black Sea, have exposed the resilience, centrality, and challenges associated with the shipping sector.
Shipping emissions are headed in the wrong direction Carbon dioxide emissions by main vessel types, tons, 2012-2023 Tankers
Container
Other
800M 600M 400M 200M
2012
2014
2016
2018
2020
2022
Note: The group “other” includes vehicles and roll-on/roll-off ships, passenger ships, offshore ships and service and miscellaneous ships Source: UNCTAD based on data provided by Marine Benchmark, June 2023
Despite this, UNCTAD expects maritime trade to increase by 2.4% in 2023 as activity rebounds, as well as by over 2% between 2024 and 2028. This is on the back of maritime trade volumes decreasing by 0.4% in 2022. Trade volumes nevertheless remain below pre-pandemic levels.
Dry bulk and general cargo
Bouncing back: Maritime trade is set to grow in 2023 and 2024 Seaborne trade growth, tons and ton-miles, percentage annual change, 2000-2024
10 8 6
Importance of shipping for global trade
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Developing and deploying widespread use of cleaner fuels across the industry will be critical to achieving current 2050 decarbonisation targets. However, insufficient progress has been made regarding the rollout of cost-effective and operationally efficient alternatives to fossil fuels.
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Other areas of focus beyond fuels include technological adaptation. The report explores the swifter adoption of digital technologies, as well as the
2 -2 -4 2000
2005
2010
2015
2020
Note: The data for 2023 are estimates and for 2024 are forecasts Source: UNCTAD secretariat, based on Clarksons Research, Shipping Intelligence Network timeseries (as of July 2023)
incorporation of AI, blockchain, and widespread digitalisation to increase the efficiency and sustainability of shipping operations and port processing procedures.
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World fleet, three main vessel types, monthly C02 emissions per ton-mile, January 2012-March 2023 16 15 14 13 12
Container
11 10
Tankers
9 8
Bulk and general cargo
7 6 2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: UNCTAD, based on Marine Benchmark
Decarbonisation challenges There are a few key barriers to the decarbonisation of shipping that concern the global fleet stock. Foremost is the aged nature of a large proportion of ships – the average age of operating ships in 2023 is over 20 years old. Furthermore, half of the operational ships are over 15 years old.
with close to 99% of maritime shipping continuing to operate on fossil fuels. This is where the ageing shipping stock may present an opportunity, as 21% of vessels on order are expected to operate on more sustainable alternatives such as hybrid technologies, liquified natural gas (LNG), and methanol. However, relative to the existing
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Additional uncertainty relates to technological developments and the use of alternative fuels, leading to hesitance.
World tonnage on order, million dead weight tons and percentage change, 2005-2023
This means many ships are too old to retrofit to improve emissions, whilst being too young to scrap. This presents a multi-billion dollar conundrum for the industry that is compounded by the lack, thus far, of an outright best method of transition to serve as an alternative to conventional fuels. Similar to the car and aviation industries, several alternative fuel sources seem promising, but adoption remains nascent,
fleet, the order book for new ships is small. This is because ship owners, shipyards, and financial institutions are holding out for more clarity regarding matters such as carbon pricing, as well as associated regulatory frameworks.
Deadweight tons Source: UNCTAD, based on Clarksons
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Percentage change
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Most flag states have seen their shipping emissions increase Carbon dioxide emissions (tonnes) in 2012 and 2022 for 33 main flags of registration
Country
2012
2022
1
Liberia
84,234,832
116,604,626
2
Panama
84,234,832
113,840,759
3
Panama Islands
45,270,368
88,611,254
4
China, Hong Kong SAR
46,350,802
63,030,146
5
Singapore
40,511,064
55,007,389
6
Malta
27,002,673
46,599,011
7
China
18,441,308
34,892,234
8
Bahamas
32,054,279
33,102,919
9
Japan
14,084,980
22,207515
10
Denmark
11,734,910
16,887,869
Additional 23 rows not shown. Note: Carbon dioxide emissions from vessels’ main and auxiliary engines, calculated based on bunker fuel from the Automatic Identification System. Dis: Danish Internaional Register of Shipping, Mar: International Shipping Register of Madeira, Nis: Norwegian International Ship Register, Fis:International French Register Source: UNCTAD, based on data provided by Marine Benchmark, June 2023
Moreover, as technologies mature and become more efficient and cost-effective, another difficult issue arises concerning responsibility for the transition. The top three flag states in terms of shipping emissions – Liberia, Panama, and the Marshall Islands – account for a third of maritime shipping’s carbon emissions, and are likely to be responsible for enforcing updated environmentally friendly operating standards. However, the onus for investing in alternative fuel technologies, bunkering facilities, as well as greener shipping, both in terms of construction and operation, rests with ship owners, ports, and energy producers.
This presents a challenging mix of often conflicting economic, environmental, and regulatory imperatives for the industry. According to the report, it would cost between $8 billion and $28 billion annually to decarbonise the maritime fleet by 2050. Moreover, the required investment in carbon-neutral fuels is estimated to be between $28 billion and $89 billion annually. The report also suggests that if fully achieved, decarbonisation of the industry could double annual fuel costs. These extensive cost projections will not be achievable through current funding strategies, while the higher shipping costs, as well as
associated diminished global trade activity, will disproportionately affect least developed countries (LDCs) and SIDS. The significance of Least Developed Countries (LDCs) and Small Island Developing States (SIDS) is highlighted due to their heightened vulnerability to climate change impacts. Additionally, these countries frequently depend on maritime transport and trade as key drivers of their economic growth. Without targeted action and investment, these countries will as a result face a double shock of climate disruptions as well as being affected by the increasing shipping costs.
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Most ship-owning countries have seen a rise in emissions Carbon dioxide emissions (tonnes) in 2012 and 2022 for 29 main countries of vessel ownership Country
2012
2022
1
China
43,493,613
102,317,721
2
Japan
99,628,524
101,254,900
3
Greece
69,330,862
95,968,419
4
United States
43,859,245
45,656,717
5
China, Hong Kong SAR
18,822,466
39,060,933
6
Germany
86.588,074
37,040,384
7
Singapore
19,806,355
32,522,147
8
Korea, Republic of
24,324,282
28,736,060
9
Denmark
23,473,417
28,007,662
10
Norway
25,748,700
26,496,768
Additional 23 rows not shown. Note: Carbon dioxide emissions from vessels’ main and auxiliary engines, calculated based on bunker fuel from the Automatic Identification System. Source: UNCTAD, based on data provided by Marine Benchmark, June 2023
Increasing operational efficiency of ports Continuing the theme of just transition in the shipping sector, the report notes the disparity in waiting times at ports in developed countries as a result of quicker clearance times and better infrastructure, with port performance primarily based on levels of automation. Other best practices show that ports that have implemented the WTO Trade Facilitation Agreement measures regarding electronic payments risk management, authorised economic operators, and border agency corporations, achieve better results in container port performance indices.
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Next steps To navigate these complex issues, UNCTAD recommends continual assessment of the viability and adoption of green/low-carbon shipping technologies, as well as identification of optimal energy transition pathways. This requires regulators to formalise a global decarbonisation framework, providing a level playing field to prevent industry fragmentation whilst attending to the needs of vulnerable countries. Further, the maritime industry must become more involved in funding research and development of low-carbon fuels, infrastructure, and
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technologies, in collaboration with other transportation sectors. This should also extend to financial and technical support for vulnerable/developing countries most affected by the industry’s transition costs. To assist disproportionately affected LDCs and SIDS, it is suggested to adopt economic measures such as emissions levies or contributions on fuel emissions, allocating the proceeds thereof to fund more climate-friendly shipping infrastructure and operations in these countries.
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Covid-19 increased wait times more in ports in developed countries Average waiting times of container ships at port in hours, montly, January 2016 - July 2023 Developed countries
Developing countries
10
5
0
2016
2017
2018
2019
2020
2021
2022
2023
Note: The waiting time is estimated based on the time between when a vessel first enters an anchorage associated with a port group (or a port where the vessel has not been seen in an anchorage shape). and when it first enters a berth within a port Source: UNCTAD, based on data provided by Clarksons Research, 2023
This should be supplemented by financial and technical support from wealthier nations who enjoy the downstream effects of global shipping. UNCTAD recommends a multifaceted approach, which includes the use of sustainable fuels, upgrading port infrastructure to be more environmentally friendly, and adopting digital processes to improve efficiency. Another novel suggestion is the formulation of green shipping corridors to provide exclusive routes for sustainably operating vessels. Read the full report here.
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2.4
BALDEV BHINDER Managing Director Blackstone & Gold
Kuvera Resources v J.P. Morgan Chase: Certainty of payment vs risks of breaching sanctions under Letters of Credit Certainty of payment continues to be a guiding touchstone and a bank seeking to withhold payment on account of sanctions would have to objectively show how the payment constitutes a breach of the applicable sanctions.
RAMAN KAUR
Associate Director Blackstone & Gold
The overreaching arc of sanctions regulations is threatening the certainty of payments guaranteed by the smooth functioning of letters of credit (LC) in international trade. This tension recently played out in the Singapore courts in a judgment handed down recently (Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28).
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The Singapore Court of Appeal overturned the first decision in Singapore concerning the enforcement of a sanctions clause. In November 2022, the High Court found that a sanctions clause had been validly incorporated into an LC confirmation, and it allowed the Singapore branch of JPMorgan Chase Bank, N.A. (the “Bank”) to decline payment to the beneficiary.
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The Court of Appeal upheld the findings on the incorporation of the sanctions clause, but considered that the clause did not justify the Bank’s failure to pay under the LC. The Court found that the Bank’s risk-based decision, preferring to be sued by the beneficiary than be found by OFAC to have breached sanctions, was not contractually justified.
Facts on Kuvera Resources v JPMorgan Chase Bank The Bank had confirmed an LC issued in favour of Kuvera Resources Pte Ltd (“Kuvera”). All of the Bank’s advice and the confirmation contained a sanctions clause which (among other things) effectively
precluded the Bank from paying if documents presented under the LC involved a vessel subject to US sanctions. Kuvera made a presentation under the confirmed LC concerning a cargo that was carried onboard the Omnia. During an internal sanctions screening, the vessel showed up in the Bank’s internal ‘Master List’ of entities and vessels determined to have a sanctions nexus. Whilst the Bank was unable to identify the beneficial owners of the Omnia, it relied on certain red flags concerning the vessel’s ownership. In particular, the vessel was previously called the Lady Mona, and its beneficial owners and technical operators had Syrian links.
After her name changed and she received a new registered owner, it became impossible to ascertain the beneficial owners of the vessel or her technical and ISM managers. OFAC also issued guidelines and advisories placing US persons on notice of deceptive shipping practices undertaken to evade US sanctions. These practices included changing the names and registered owners of vessels, and using layered ownership structures to mask the fact that the ultimate or beneficial ownership of the vessels rested with sanctioned entities. OFAC specifically identified changing vessel names as a common evasive practice in relation to vessels owned by
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Syrian entities. The Bank led uncontradicted expert evidence (Kuvera not having led any expert evidence) that OFAC would have found a breach of US-Syrian sanctions if the Bank made payment under the LC in respect of a cargo carried on the Omnia in the circumstances.
Are red flags enough? In the first instance, the High Court found that OFAC would have found that payment under the confirmed LC would amount to a breach of sanctions. It reached this conclusion on the basis of the Bank’s expert evidence, which highlighted (among other things) that the red flags in OFAC’s guidelines concerning masking ownership of vessels also applied to the Omnia. For the same reasons, the High Court was also independently satisfied that paying Kuvera would have amounted to a breach of sanctions. On appeal, the Court of Appeal held that the enquiry of whether a vessel is subject to any applicable restriction should be determined on an objective basis without any (potentially speculative and arbitrary) extrapolation of third-party input from entities such as OFAC. The court highlighted that while the court had to approach the question of the vessel’s ownership on a balance of probabilities (requiring a more than 50% chance of a Syrian connection), OFAC was not constrained by similar rules of evidence.
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The detection of red flags highlighted in OFAC’s advisories with respect to the ownership of the Omnia was found to be inconclusive circumstantial evidence, which created at best, an unresolved possibility that the Omnia may be caught under America’s Syrian sanctions. The court also found it relevant that the Bank had taken a decision on its own risk assessment, preferring to be sued by Kuvera than being found by OFAC to have
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breached sanctions, without having objectively assessed the likelihood of the vessel having Syrian connections. Such a decision could not be justified simply because a sanctions clause had been inserted into the confirmed LC. The Bank still had to prove a breach of the sanctions referred to in the sanctions clause. The vessel's new registered owner was a Barbados entity, and her technical and ISM manager was a UAE entity.
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technical and ISM manager was not available, it must follow that there is some masking or concealment of beneficial ownership. The suggestion that a registered owner may be a shell company was inconclusive.
It is clear that a subjective assessment by a bank through its own risk assessment is not sufficient (e.g., a decision justified by a preference to be sued by the beneficiary rather than being penalised by OFAC). Critically relying on OFAC’s guidance might not in itself be sufficient to establish that objective requirement to justify non-payment.
Legal analysis: The need for objective assessments Certainty of payment continues to be a guiding touchstone and a bank seeking to withhold payment on account of sanctions would have to objectively show how the payment constitutes a breach of the applicable sanctions.
A sanctions clause construed by reference to an objective and identifiable set of laws which apply to the bank would be more certain, but would still erode some of the commercial certainty that LCs offer.
The key question before the Court was whether the bank had shown that the Omnia, under her new registered ownership, remained under Syrian beneficial ownership. Regarding this, the Court found that the Bank had not displaced the prima facie inference of ownership arising from a registered non-Syrian owner. It was not sufficient to suggest that just because information on her beneficial owner or the beneficial owners of her
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Trade Finance Talks
2.5
Breaking: Trade finance default rates rise slightly, 2023 ICC Trade Finance Register DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
The 2023 ICC Trade Register Report offers a ‘large bank’ snapshot of the trade finance industry, highlighting the low-risk nature of trade finance transactions amidst a complex macroeconomic and geopolitical backdrop. The ICC’s Trade Finance Register has been released, reporting a small increase in default rates across documentary trade and open account products, whilst highlighting still, the low-risk nature of the asset class.
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG)
The International Chamber of Commerce (ICC) register, a collaborative project with Boston Consulting Group and Global Credit Data (GCD), stands as a benchmark for trade finance risk assessment, drawing on the expertise of leading global financial institutions. Established in 2009 to provide empirical data to the trade and export finance industry, the Register has evolved to cover a wider array of products and more detailed data, reflecting the sector’s credit risk profile and characteristics. The ICC Trade Register Report 2023, has aggregated the data of 22 member banks data covering documentary trade, open account, and supply
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chain finance. The data aggregates 47 million transactions and exposures exceeding $23 trillion, offering an estimated coverage of 23% of global traditional trade finance flows and 7% of all global trade flows, providing a substantial yet partial perspective of the global market.
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At its inception, the Register began with data contributions from nine international banks, which has since expanded to include a larger number of banks over the years, although the exact number has fluctuated annually. Rudolf Putz, Head Trade Facilitation Programme (TFP), EBRD told TFG, “We highly welcome this report, which will help us to convince our partner banks in Eastern Europe, the CIS and the Southern and Eastern Mediterranean to finance international trade with documentary credits. We will continue to organise trade finance training and advisory services which will help our partner banks to further improve customer service and to reduce the risk of misunderstandings and disputes.” Richard Wulff, Executive Director, ICISA, told TFG, “ Conditions across the wider
trade environment are certainly challenging with economic, political and security pressures being felt widely.
evolve, reflecting a heightened regulatory focus on the robustness of banks’ capital frameworks.
This makes the ICC’s trade finance registry report so useful as it clearly evidences how those global events impact trade and the sectors which support and facilitate it.
These developments make the empirical data provided by the ICC Trade Register even more crucial for banks to ensure compliance and optimise their capital allocation for trade finance.
Their findings are echoed in the trade credit insurance sector, where we see many of the trends identified in 2023, but also that the sector is more than strong enough to respond to these challenges.”
Regulatory context Recent regulatory changes have significant implications for trade finance, with Basel 3.1 introducing more stringent capital requirements that affect the treatment of trade exposures. The EU’s Capital Requirements Regulation (CRR) continues to
Andrew Wilson, Global Policy Director, ICC, told TFG, “Recent regulatory proposals in the EU and UK are a clear reminder of the imperative for the market to have robust data on the historical performance of trade assets. We remain committed to making the Trade Register the definitive reference point for financial regulators–and, specifically, one that can ensure the appropriate treatment of trade exposures under Basel III. To get there, we need the full support of the industry– including smaller banks–to deepen and broaden the existing data pool in the Register. The launch of this report is a call to action for more banks to step up in contributing data to this essential utility for the future of the trade finance market.” Wulff added, “The EU has put forward several important measures in recent months aimed at strengthening the competitiveness of businesses. I see the ongoing efforts to clarify how credit insurance is used by banks as a relatively simple step for the EU to take
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Trade Finance Talks
to further boost this aim. The partnership between banks and insurers is one that delivers billions of euros in funding to businesses across and is done so on the basis of two highly regulated and secure sectors. The proposals under Article 506 give the EU the opportunity to secure a competitive advantage at a time when difficult market conditions show the challenges the real economy is exposed to.” In the United States, the Financial Accounting Standards Board (FASB) has introduced new standards that require companies to disclose their obligations under reverse factoring, or payables finance programs. Incorporating recent regulatory changes, FASB has mandated new disclosure requirements for reverse factoring programs, also known as payables finance. These new standards, which aim to enhance transparency around these arrangements, require organisations to disclose their obligations under these programs, including the terms of the financing arrangements and the nature of the liabilities involved. The alignment of these regulatory measures with the data-driven insights from the ICC Trade Register underscores the global trend towards more data-centric risk assessment and management in trade finance.
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Analysis of default rates by product In 2022, the combined exposures of documentary trade, open account trade, and supply chain finance payables finance in the Trade Register amounted to approximately $2 trillion, representing about 23% of global traditional trade finance flows and 7% of all global trade flows. Specifically, documentary trade accounted for $550 billion (22% of trade finance and 2% of global trade), while open account trade and supply
chain finance payables finance accounted for $1.44 trillion (23% of trade finance and 5% of global trade). This year’s Trade Register data from 2022 indicates an increase in default rates across trade finance products compared to 2021, yet these rates are still lower than the 2020 figures, aligning with pre-pandemic trends and suggesting no significant rise in defaults postCOVID-19.
Export LC Export LCs saw default rates double in 2022, with a significant share of defaults linked to Russian bank exposures, indicating a consistent proportion of defaulting obligors, albeit of smaller value.
EXPOSURE WEIGHTED DEFAULT RATE (%) ACROSS IMPORT LC’S 0.2
0.15
0.1
0.5
0
2015
2016
Source: ICC TRADE REGISTER 2023
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2017
2018
2019
2020
2021
2022
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Export LCs Loans for import/export experienced a twofold increase in default rates in 2022, influenced by macroeconomic uncertainties, such as inflation and energy supply disruptions, and the reduction of government support.
EXPOSURE WEIGHTED DEFAULT RATE (%) ACROSS EXPORT LC’S
0.2
0.15
0.1
0.5
0
2015
2016
2017
2018
2019
2020
2021
2022
Source: ICC TRADE REGISTER 2023
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Supply chain finance
Loans for import/export Loans for import/export experienced a twofold increase in default rates in 2022, influenced by macroeconomic uncertainties, such as inflation and energy supply disruptions, and the reduction of government support.
EXPOSURE WEIGHTED DEFAULT RATE (%) ACROSS LOANS FOR IMPORT/EXPORT
In 2022, SCF payables finance maintained its position as the lowest-risk trade finance product on an exposureweighted basis, attributed to the high credit quality of buyers involved in SCF transactions.
0.4
0.3
0.2
0.1
0
2015
2016
2017
2018
2019
2020
2021
2022
Source: ICC TRADE REGISTER 2023
Performance guarantees Performance guarantees reported increased default rates in 2022 across all measures, yet remained below the levels seen at the onset of the pandemic and in the pre-pandemic year of 2019.
EXPOSURE WEIGHTED DEFAULT RATE (%) ACROSS PERFORMANCE GURANTEES 0.6
0.4 0.3 0.2 0.1
2015
2016
2017
2018
2019
Source: ICC TRADE REGISTER 2023
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Peter Mulroy, Secretary General of FCI, told TFG, “The trade register’s findings of the very low default rate of supply chain finance is proof that reverse factoring/payables finance is a low-risk service that tremendously benefits all parties including the anchor buyer, their suppliers and the financial intermediary. This is again further evidence that invoice finance in general and reverse factoring in particular, when conducted properly continues to show a low loss given default.” Despite the perception of SCF as a lower-risk product, the sector’s rapid growth and recent market events suggest that these rates merit close observation for potential risk escalation.
0.5
0
The ICC Trade Register’s sixyear data on supply chain finance (SCF) payables finance shows a medium-term risk profile, with a post-2020 decline in default rates, indicating resilience during the pandemic.
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2020
2021
2022
The report’s portrayal of default rates offers a perspective on the risk associated with different trade finance products from the viewpoint of larger banks.
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However, the absence of data from smaller banks may limit the report’s scope, potentially overlooking the varied risk landscapes these institutions navigate, especially in dealings with SMEs and emerging markets.
The Trade Register’s big data problem The report’s data, while robust, warrants caution. The underrepresentation of smaller banks and the potential variance in transaction nature between large and small institutions suggest that the findings may not fully capture the entire trade finance market. Currently, the ICC charges banks who have participated and sent their trade data to the register, up to $15k for accessing the full dataset (this would apply to the 22 member banks), and for those who do not wish to send their data, it costs $30k to purchase the analysis. But it’s probably not a commercial problem. The insurmountable challenge around getting smaller banks to compile data in a ‘trade register’ ready format will be difficult. Steven Beck, Head of Trade & Supply Chain Finance, Asian Development Bank (ADB), told TFG, “Looking back when ADB first convened commercial banks and ICC to create the Trade Finance Register – the first publication was called the ICC-ADB Trade Finance Default Register and was released in September 2010 – there’s little question it has been a useful tool to substantiate discussions
EXPOSURE WEIGHTED DEFAULT RATE (%) ACROSS SUPPLY CHAIN FINANCE 0.2
0.15
0.1
0.05
0
2015
2016
2017
2018
2019
2020
2021
2022
Source: ICC TRADE REGISTER 2023
with regulators, risk management units, and to encourage insurance and other financial institutions to get into trade finance and help close gaps. But the market agrees the Register needs to be taken to a new level to remain useful, one that delivers a lot more granularity.” Rudolf Putz said, “We will check our possibilities of contributing to similar future reports which include also statistics on default rates in smaller and high risk countries in Eastern Europe, the CIS and the Southern and Eastern Mediterranean.” An alternative business model could be to charge banks relative to their trade finance products turnover, and also to provide data collection support to allow for transaction data to be fed into the register, thus
making the results more concrete and representative. Moreover, the report’s methodology and data collection processes continue to evolve, focusing on enhancing sustainability assessments and incorporating more granular data points for future analyses. The 2023 ICC Trade Register Report offers a ‘large bank’ snapshot of the trade finance industry, highlighting the lowrisk nature of trade finance transactions amidst a complex macroeconomic and geopolitical backdrop. The report serves as a critical tool for industry stakeholders, though it also underscores the need for broader data inclusivity and methodological advancements to capture the full scope of global trade finance activities.
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Trade Finance Talks
2.6
14 key trade documents and data elements for cross-border trade: Inside the ICC’s KTDDE report DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
Even for those with lots of experience, the international trade industry is incredibly complex. Cross-border trade requires a deep knowledge of numerous regulations, or an intricate web of local relationships to help break down the legal requirements.
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG) Today, the ICC DSI released their 2023 Key Trade Documents and Data Elements (KTDDE) report. The report outlines 14 key trade documents, going into depth on the definitions, purpose, and legal frameworks. Even for those with lots of experience, the international trade industry is incredibly complex. Cross-border trade requires a deep knowledge of numerous regulations, or an intricate web of local relationships to help break down the legal requirements.
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While there have been some efforts to ease the process, there are still many aspects that need help and clarification. The ICC DSI recognised the importance of creating a comprehensive guide to help break down the nebulous terminology of the international trade world. In March 2023, they released the “Batch 1” report on 7 key trade documents, with the intent of building on further key terms over the next year and a half.
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Today, they released their “Batch 2” Report on 14 key trade documents. The ICC DSI said, “To ensure that our recommendations are, as far as possible, globally relevant and that they consider different challenges and circumstances faced by trade parties around the world, the working group was also designed to be crossregional and cross-sectoral.” All definitions and details are sourced from ICC DSI through the “Key Trade Documents and Data Elements” report. To see the full report and more detailed recommendations, please view the ICC DSI report here.
14 key trade documents 1. Air Cargo Manifest Air Cargo Manifests are an important document for the air forwarding industry for many reasons, including: Identifying cargo: The manifest provides a complete list of all items or goods loaded onto the aircraft. It facilitates clear identification, detailing descriptions, quantities, and types of goods. Regulatory compliance: This document is crucial for regulatory adherence, offering evidence that transported items comply with relevant laws, including safety and security regulations. It can also serve as a declaration of cargo content, value, and destination, aiding in customs compliance
Planning and management: Airline staff rely on the manifest for effective loading and unloading of goods. It guides them to the specific location of items and assists in planning for weight distribution and balance, ensuring safe aircraft operation.
involving three parties. Both PN and BE are independent payment undertakings (debt obligations) between parties, codified in various legal systems worldwide, and have a rich history of court interpretations.
Tracking and accountability: Cargo manifests contribute to supply chain tracking. If discrepancies or issues arise, they help pinpoint when and where problems occurred, facilitating accountability.
Cargo Insurance Documents provide evidence of insurance coverage, fulfilling multiple international trade and regulatory needs. Depending on the situation, it may be presented as:
Insurance and liability: In the unfortunate event of accidents, damage, or loss, the manifest serves as a record of the aircraft’s cargo. This record is vital for insurance claims and determining liability. 2. Air Waybill An airway bill is a contract of carriage between the shipper and airline, outlining both parties’ responsibilities. It also functions as a cargo receipt, provides essential customs information, enables tracking, and streamlines billing and accounting processes.
4. Cargo Insurance Document
Certificate of Insurance and Insurance Policy: typically issued at the shipper’s request, often to fulfil Letter of Credit requirements. Debit Note (of insurance): typically issued in specific countries upon the consignee’s request to comply with import customs requirements. 5. Customs Bond Customs Bonds are generally used as guarantee for exemptions of international trade duties, taxes and obligations set out under Custom rules and Regulations. 6. Export Cargo Shipping Instruction
3. Bill of Exchange and Promissory Note A Promissory Note (PN) is a written promise by the issuer to pay a specific sum to the payee on a specified date or on demand, while a Bill of Exchange (BE) is an order made by one party to pay a set sum to the designated payee,
Also known as Shipper’s Letter of Instruction (SLI), an SLI serves as instructions from the Exporter to the Freight Forwarder, providing the scope of services required as well as essential information for documentation and transportrelated guidance.
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7. Letter of Credit A letter of credit (LC) is a bankissued document that assures a seller of payment from a buyer under specific conditions, serving as a secure payment method for international trade, especially when trust is limited. LC ensures payment to the seller only after the goods meet agreed-upon conditions, reducing the risk of fraud and nonpayment, offering security to both parties in the transaction. 8. Payment Confirmation The main purpose of a Payment Confirmation is to provide evidence that a payment has been made and received. 9. Purchase Order An electronic purchase order document starts the transaction process, defining prices, quantities and delivery dates in accordance with prenegotiated contractual conditions, between a buyer and a seller. The buyer uses it to request goods, items or services from a supplier. 10. Rail Consignment (CIM) Note The CIM consignment note regulates international carriage of freight traffic by rail. The contract is finished when the railway undertaking accepts the shipment, and the dispatch station’s stamp (a date stamp) is placed on the consignment note. Signed and stamped by both sender and the carrier, the CIM consignment note is used in most European countries and in several countries that are party
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to the Convention concerning International Carriage by Rail (COTIF). Both the sender and the receiver (consignee) have the right to modify the carriage contract. 11. Road Consignment (CMR) Note The CMR consignment note is a significant document in the context of the UN Convention on the contract for the international carriage of goods by road (or CMR). Many European nations, along with many others, have already ratified this convention. This document is an important tool for companies, drivers, and recipients involved in the transportation process,
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containing essential details about the transported goods, as well as information about the parties responsible for transport and receipt. Although CMR notes were traditionally paper-based, there’s a growing push from businesses and government stakeholders to transition to an electronic format (e-CMR). 12. Sea Cargo Manifest A Sea Cargo Manifest summarises all cargo loaded on a ship, including descriptions, container numbers, shipper and consignee details, weight, measurements, packing information, and cargo specifics like UN Numbers,
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#
International Maritime Organization (IMO) Class for hazardous goods, temperature settings for refrigerated cargo, and dimensions for overdimensional cargo.
Code
Document Name
1
CoO
Non-preferential Certificate of Origin
2
INV
Comercial Invoice
3
WR
Warehouse Receipt
4
PL
Packing List
5
BoL
Bill of Lading
6
CD
Customs Declaration
7
CID
Cargo Insurance Document
8
PO
Purchase Order
9
CMR
Road Consignment Note
10
CIM
Rail Consignment Note
11
SDO
Ship’s Delivery Order
12
SLI
Shipper’s Letter of Instructions
13
SCM
Sea Cargo Manifest
14
SW
Sea Waybill
15
AW
Airway Bill
16
ACM
Air Cargo Manifest
17
CB
Customs Bond
18
LC
Letter of Credit
19
BoE
Bill of Exchange
20
PN
Promissory Note
21
PC
Payment Confirmation
Source: ICC DSI
13. Sea Waybill The Sea Waybill is similar to an ocean Bill of Lading, but it is non-negotiable. Its main purposes are to serve as evidence of the contract of carriage and to confirm the goods’ receipt.
As comprehensive as this list is, there is more coming our way in 2024. The ICC DSI will release their “Batch 3” report, outlining 16 more key trade documents. Check back in with us to get the latest news on the top trade documents and stories!
14. Ship’s Delivery Order A Ship’s Delivery Order is a release document issued by the carrier releasing the cargo to the consignee mentioned in the bill of lading.
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Trade Finance Talks
2.7
3 trade credit insurance considerations for the rising $2.5tn trade finance gap RICHARD WULFF
Executive Director International Credit Insurance & Surety Association (ICISA)
Apart from lowering the cost of trade, digitalisation reduces many of the barriers to entry that SMEs and startups in developing countries face. Despite the attention brought to the trade finance gap in recent years, it still continues to grow. A recent Asian Development Bank (ADB) report shows that the gap has now widened to $2.5 trillion. Despite best efforts, the status quo is clearly not addressing the gaps sufficiently. The wider industry needs to come up with new and creative solutions in response. No one option will succeed by itself, but it is becoming increasingly clear that trade
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credit insurance has an important role to play in helping to close the gap further. In the report, ADB rightly mentions that the lack of availability of (sufficient) collateral is a cause of rejection of trade finance applications. Figure 2 shows that in 28% of cases, insufficient collateral plays a role – whether directly or as a result of the risk perception of the financial institution in question. A further 9% of rejections are caused by cost/capital considerations.
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Figure 2: Reasons for Rejecting Trade Finance Applications in 2022 (% of bank responses) Failed to adequately validaye ESG or sustainability behaviors of suppliers or commercial partners
1%
ESG reporting quality was below regulatory standards
2%
Application was not profitable to process due to regulatory capital constraints
3%
Application raised serious know-your-customer concerns
6%
Application was not profitable enough to process
6%
Application was poorly presented and had insufficient information
6% 7%
Application lacked sufficient collateral Application was from an SME with no collateral/ high credit risk/other reason
10%
Application was from a country perceived to be risky, and bank did not have sufficient risk appetite
11%
Application was received after the Russian invasion of Uktraine
18% 30%
Other reasons ESG = environmental, social, and governance; SME = small and medium-sized enterprise Source: ADB. 2023 Trade Finance Gaps, Growth, and Jobs Survey-Banks.
The question remains, how does trade credit insurance help in three vital topics: collateral, risk appetite, and cost?
1. Collateral Credit insurance helps narrow the trade finance gap by providing security (the policy) based on its unrivalled ability to mitigate risk. ICISA’s trade credit (re)insurance members hold credit ratings of at least A- (S&P or equivalent). This credit rating takes the place of that of the buyers when a covered financial institution finances invoices. Banks are not equipped to assess large numbers of (sometimes very small) risks. On the other hand, this is the credit insurance community’s core competency. Insurers are aided by large internal databases of information
(supplemented with third-party information) on diverse buyers. Underwriting processes are flexible and efficient incorporating automated, semi-automated and (as an exception) manual processes to make decisions.
presence in Malaysia as well as Colombia. This familiarity also enables the credit insurers to have a greater appetite for risks. Cover may therefore be easier to find from trade credit insurance markets than financial institutions with less experience of these markets and risks.
2. Risk appetite Unfamiliarity with risks tends to lead to higher pricing. Credit insurance companies are familiar with the great majority of risks (whether corporate or country risk). This allows them to price more accurately and show a higher acceptance rate than a local/national bank. It stands to reason that a Malaysian bank is less familiar with Colombian corporates and/or country risk than an internationally active credit insurance company with a
Familiarity with, and confidence in the credit insurance policy as collateral is another important form of risk appetite. This form of collateral is ubiquitous in the OECD area and becoming ever more common in Latin America, Southern Africa and parts of Asia. The credit insurance community has become active in spreading the word in parts of the (developing) world, where trade credit insurance is not as well.
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You may note that in our upcoming Trade Credit Insurance week (online in the week of 2 October), there are items on the development of the product in Sub-Saharan Africa, and one on the further development of trade credit insurance in Asia, reflecting the demand for more information about – and in – these markets
3. Cost The high-investment grade nature of the insurers has a beneficial effect for the banks’ cost of capital, as well as the resulting price to be paid by the financed entity, thus narrowing the trade gap.
Notable reforms ICISA is a supporter of the Digital Standards Initiative of the International Chamber of Commerce (https://www.dsi.iccwbo.org/) through membership in the Industry Advisory Board. We firmly believe that setting international standards for digital/paperless trade will have a beneficial effect on trade volumes as well as transparency of the entire process. Apart from lowering the cost of trade, digitalisation reduces many of the barriers to entry that SMEs and startups in developing countries face. Importantly, it also enhances options for financial crime prevention, including more reliable information as part of Know Your Customer and other compliance procedures. Related to this, a key concern for many across the industry in addressing financing gaps
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is the reliability of the rule of law across the world. It is important that key institutions, such as courts, are reliable, predictable and free from corruption. This is not a simple issue to fix, but if we are serious about addressing the trade finance gap it is one of the most important, along with the availability and reliability of business information. Identifying and supporting civil society organisations across the world which are working on
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this topic may be a good starting point.
Top challenges I support ADB’s list of recommendations and would like to expand on the first and most important one: the creation of additional capacity. Firstly, giving appropriate recognition to trade credit insurance as a credit risk mitigation tool (providing collateral) would help to broaden awareness of the
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product and its benefits. This additional risk mitigation mechanism has been proven to increase the financing capacity in multiple jurisdictions. Secondly, it must be acknowledged that distribution mechanisms in countries needing the most economic development are poor. Even when banks are present in communities outside of the capital and major trading localities, they often lack the financial insight necessary to market and assess much-
needed financing. Rejection of a facility based on poor presentation of the credit application should be a call to action to educate the distribution network and applicants. This will ensure that applications are presented in a way which addresses the key questions any financier will have and can then form an opinion of.
solution, given the complexity of global trade. In particular, I believe more attention should be paid to the factoring community and the positive impact they can (and already do) have. Factors are traditionally better equipped to serve smaller, less sophisticated clients.
Finally, focusing on banks only solves part of the issue. And this cannot be a one-size-fits-all
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Trade Finance Talks
2.8
FCI scores hat-trick in Marrakesh: A giant leap for factoring DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
The concerted effort of global bodies and individuals, notably the FCI legal committee members and the UNIDROIT Working Group, has laid down the legal stepping stones for the factoring industry. FCI, the global representative body for the factoring and receivables finance industry, has achieved a significant milestone by securing three major agreements during its annual meeting in Marrakesh. These developments mark a substantial advancement for the global factoring industry, reinforcing FCI's role as a key player in shaping the future of trade finance. For years, factoring has transitioned from one element of invoice finance to another without a clear rulebook or operating manual for policymakers, legislatures, or central banks. Much like a child experiencing teething pains during rapid growth, the factoring industry's swift expansion to €3.6 trillion ($3.8 trillion) in 2022 reveals the urgent necessity for a solid legal and regulatory framework. This foundational structure is important for ensuring the growth of receivables as a legitimate asset class, facilitating more accessible
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financing options for real economic growth. At the FCI annual meeting held in Marrakesh on 30 October, the body announced three milestones that will accelerate the growth of factoring and receivables finance.
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What is factoring? Factoring relies on the legal concept of the assignment of third-party rights and their protection under the law. In a factoring arrangement, upon a contract between the factoring company and its client, the former pays an agreed percentage of approved debts or receivables as soon as they are assigned. With a factoring solution and based on a contract entered into by the factoring company and its client, the factoring company agrees to pay an agreed percentage of approved debts/ receivables as soon as the receivables are assigned or (in some jurisdictions) pledged to it by its client.
If credit protection is part of the factoring agreement, it is referred to as “non-recourse” factoring, while a factoring agreement where the credit risk on the debtor remains with the seller is called “with-recourse” factoring.
Economies looking to establish a robust legal structure for factoring face a range of options, from comprehensive secured transactions law reforms to product-specific legislation; the choice is largely domestic.
Over recent decades, receivables finance and particularly factoring have gained prominence as flexible tools for enhancing working capital, especially for small to medium-sized enterprises. Factoring plays a vital role in sustaining the flow of goods and services in supply chains, notably in cross-border transactions.
In most developed markets, legal and regulatory frameworks have been established to allow for the assignment of receivables and the protection of third-party rights.
Despite increasing calls for a unified regulatory framework, specific guidance remains absent.
The drafting of a contract for the assignment of receivables often relies on general provisions in contract law, resulting in frequent legal disputes over the creation, priority, and perfection of the assignment of receivables.
However, many emerging markets lack proper laws or regulatory schemes to govern factoring transactions.
Without a solid legal framework for factoring, legislative gaps are gradually addressed through a mix of legislative interventions and judicial interpretations. Hence, the pressing need for functional factoring legislation and regulations to support and advance factoring transactions has been recognised.
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1. Enter UNIDROIT Model Law UNIDROIT, the International Institute for the Unification of Private Law, is an independent intergovernmental organisation aimed at harmonising international private law across countries. UNIDROIT was established in 1926 as the auxiliary organ of the League of Nations, an intergovernmental organisation aiming to harmonize international private law across countries through uniform rules, international conventions, the production of model laws, sets of principles, guides and guidelines.
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The UNIDROIT, in 2019, embarked on creating the Factoring Model Law (FML) to provide an instrument for States wishing tointroduce a new factoring law or update existing laws. Initiated in 2018 by certain World Bank representatives, the FML aims especially at emerging markets considering introducing factoring. FML provides a comprehensive guide for countries looking to develop or refine their domestic factoring laws, thereby facilitating cross-border transactions and promoting legal certainty. Over the years, the FML has undergone revisions and updates to reflect the evolving needs and complexities of the factoring industry.
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It has been instrumental in shaping factoring laws in various jurisdictions, serving as a reference point for both legislators and practitioners. The launch of the FML was today released, led by Mr. Ignacio Tirado and Mr. William Brydie-Watson from the UNIDROIT.
2. Rulebook launched by IFC / World Bank Factoring Regulatory Guide At the meeting, the IFC/World Bank developed a Factoring Regulatory Guide to offer a coherent regulatory framework. The guide serves as a comprehensive resource aimed at addressing the regulatory void in the rapidly growing factoring industry.
Featured
It is structured into six key sections that cover a broad spectrum of considerations. Section I covers the increasing importance of factoring, especially for SMEs, in enhancing working capital and facilitating supply chain finance, Section II covers the main regulatory trends that necessitate a unified framework for factoring, Section III offers a set of fundamental considerations for policymakers embarking on the establishment of a comprehensive legal and regulatory framework specific to factoring, Section IV covers how factoring activities can be integrated into various governance models, Section V covers the prudential regulatory framework that ensures the financial stability of institutions engaged in factoring,
Section VI covers the conduct of business regulations applicable to factoring companies, including anti-money laundering measures and customer relations. The guide culminates in a series of key policy options and recommendations, aimed at law reformers and jurisdictions. It provides a roadmap for establishing a sound and proportionate regulatory framework for non-bank financial institutions involved in factoring.
This project expanded upon a unique comparative legal study by the European Federation for the Factoring and Commercial Finance industry (EUF), extending the coverage to include all countries where FCI has membership, thus encompassing data from 91 countries. The concerted effort of global bodies and individuals, notably the FCI legal committee members and the UNIDROIT Working Group, has laid down the legal stepping stones for the factoring industry. The 55th FCI annual meeting in Marrakech marks a significant stride towards a robust legal and regulatory framework, setting the stage for a new era in the global factoring industry.
3. Legal and regulatory study for factoring launched Lastly, in 2020, FCI initiated an extensive project to explore the legal and regulatory mechanics for factoring worldwide.
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Peaks and Valleys: The Digital Road in 2023
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3.1
Sibos Collaboration Couch, Lloyds Banks and Enigio on Pushing Digital Trade ROGIER VAN LAMMEREN Managing Director, Head of Trade & Working Capital Products Lloyds Bank
PATRIK ZEKKAR CEO Enigio
At Sibos Toronto, TFG’s Deepesh Patel spoke with Rogier van Lammeren, Managing Director, Head of Trade & Working Capital Products at Lloyds Bank, and Patrik Zekkar, CEO of Enigio. With approximately 80% of global trade documents governed by English law, the enactment of the Electronic Trade Documents Act (ETDA) marks a significant stride towards revolutionising international trade through digitalisation.
emerging technologies and adapt their operations to effectively thrive in this digital era.
The ETDA grants legal recognition to electronic trade documents under English law, including electronic bills of lading, which came into force on 20 September 2023.
This long-term partnership is set to propel Lloyds Bank into the digital frontier of trade finance documentation, promising clients faster, more cost-efficient, flexible, and secure solutions powered by blockchain technology.
The Act ushers in a new era of trade, one that is characterised by enhanced efficiency, inclusivity, and sustainability, ideally in sync with our digital age. Yet, the implementation of the ETDA is merely the initial step in the journey towards digital international trade as the transformation is anticipated to present a host of new challenges for businesses. Stakeholders across various industries will need to embrace
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In response to this monumental shift is a strategic collaboration between data technology firm, Enigio, and Lloyds Bank.
At Sibos Toronto, TFG’s Deepesh Patel spoke with Rogier van Lammeren, Managing Director, Head of Trade & Working Capital Products at Lloyds Bank, and Patrik Zekkar, CEO of Enigio. Together, they discussed the recent developments of their partnership, the gamechanging role of technology in trade, and the hurdles anticipated in transitioning to the digital space, particularly with the ETDA now fully in force.
Peaks and Valleys: The Digital Road in 2023
Fostering innovation through collaboration: The Lloyds Bank and Enigio partnership Lloyds Bank has taken a substantial milestone towards revolutionising the digital transformation of trade finance documentation. van Lammeren revealed the bank’s €3 million investment in Enigio, which aims to accelerate the pace of digitisation in the trade finance sector. van Lammeren said, “This morning we were really pleased to announce that Lloyds Bank has made an investment into Enigio.” This strategic alliance not only showcases Lloyds Banks’ commitment to driving technological innovation but also positions Enigio for further expansion.
Notably, the significance of this investment lies in its potential to provide businesses with a faster, more cost-effective, and highly secure method for digitising vital physical documents, such as promissory notes, bills of exchange, and bills of lading. Asserting the role collaboration plays in driving innovation, van Lammeren said, “It’s not just down to us. We need the rest of industry, all the banks, Swift, the freight companies, and everyone else to join our efforts to allow the digitalisation of trade globally.” This partnership builds on a longstanding teamwork established over four years, where Lloyds Bank and Enigio have worked together to enhance the digitalisation of trade.
Zekkar echoed the collaborative sentiment, and said, “We started a cooperation or partnership with Lloyds in 2019.There’s been a lot of testing development scope requirements in order to enhance the solution.” Zekkar also notes the importance of the trade community coming together, saying, “Trade is by nature collaboration, it’s interdependencies, and especially if we’re going to do a cross-industry change, this will be critical that we get moving. All of us.” Moreover, through the alliance, Lloyds Bank and Enigio are set to expand Enigio’s bespoke solution, trace:original. The solution removes the need to physically transfer paper documents within trade transactions.
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Transforming trade: The impact of the Electronic Trade Documents Act (ETDA) In a historic move towards digitalising trade documents, the ETDA received royal assent on 20 July 2023. This landmark legislation, which entered into force on 20 September 2023, will legally recognise the use of electronic trade documents, signifying a transformational moment for the global trade community. Prior to the ETDA, electronic trade documents lacked the same legal rights as their paper-based counterparts under English law. Speaking on the far-reaching impact of this legislative breakthrough, van Lammeren remarked, “The ICC United Kingdom has estimated that the Electronic Trade Documents Act will enable €25 billion of incremental SME export growth, but it will also reduce costs drastically.
But it’s really helped us to test how to digitalise trade and identify what the benefits are for all companies involved.” Building on van Lammeren’s insights, Zekkar pointed out the multifaceted opportunities the ETDA offers, extending beyond speed and cost savings. “The structured data layer is a data container carrying the golden source of data. And when the documents are born digital and kept digital, there are huge possibilities to leverage that data in processes, automation, and also in risk assessments,” he explained. Furthermore, van Lammeren stressed the importance of standards in the journey of digital transformation.
You can imagine taking the paper out, and putting it into a digital format will reduce trade costs by up to 80%.” Highlighting the pioneering efforts of Lloyds Bank and Enigio in the digital space, he added, “Together with Enigio, we launched the first digital version of a promissory note back in 2022, a real first for the industry. And we’ve done a number of these transactions since. They are digital trade transactions, pre-law change, so they exist outside of the new ETDA.
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Organisations like Swift play a vital part in standardising the trade infrastructure, uniting banks and participants in a collaborative industry shift. Through Swift, we’re leaning on all the banks and all the other Swift participants to join in the digitalisation of trade and interoperability efforts across all the industry platforms. We see Swift play a really important role in that,” he affirmed.
Addressing risks in the digitalisation of trade documents: A threefold perspective Embarking on a holistic digital transformation undoubtedly brings forth its own set of
Peaks and Valleys: The Digital Road in 2023
distinctive challenges. Zekkar shed light on a number of obstacles, outlining three key areas of concern in adopting the ETDA. Firstly, he recognised the absence of established legal precedents due to the novelty of the legislation. In light of this, he underscored the indispensable role of collaboration between technology providers and legal professionals not only to meet the functional requirements but also to define the ‘how’ of implementation. “That is where technology meets legal. The ‘how’ is tech and the interpretation must be done by lawyers,” he noted.
The second challenge, he pointed out, lies in ensuring interoperability between technical providers. Zekkar noted that without this critical element, the full potential of digitalisation would remain untapped, potentially resulting in fragmentation within the system. Zekkar stated, “There’s still fragmentation. We are working together with Lloyds and ICC United Kingdom to prove that we have a standard interoperability protocol developed which will soon be released together with another document platform provider.” Lastly, he highlighted the importance of awareness as a third significant consideration. He asserted, “It’s about awareness. Government institutions and public authorities have a huge responsibility. Still, the industry also has a responsibility to roll out awareness to the larger ecosystem that this is here, this is the benefit, this is how you do it.’’
Charting progress: From legislation to implementation in digital trade As the partnership between Lloyds Bank and Enigio continues to flourish, the question arises: how do both parties measure success?
For Lloyds Bank, van Lammeren put forth 3 key metrics that the bank would focus on. 1 The number of digital transactions after the implementation of the ETDA. 2 Client feedback on the process of these transactions. 3 Looking at prospective exporters, and providing them the same advantages as well-established traders. On the last point, van Lammeren said, “We really believe that these changes should stand to benefit prospective exporters as much as existing exporters.’’ For Enigio, on the other hand, Zekkar emphasised the importance of widespread adoption. The opportunity to bring all stakeholders in a trade transaction together, including carriers, freight forwarders, port authorities, banks, and exporters/importers, is immense. Besides, he referenced geographical adoption, leveraging the UK legislation, saying, “Adoption is important geographically too, I think we can leverage the UK legislation much more than I think people are aware of.’’ The transition towards a fully standardised, interoperable digital trade future is underway, and it is through such strategic partnerships that technology and trade can unite to drive it forward.
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3.2
A common credit insurance hub: The solution to streamline credit insurance? OLIVIER SAINT-RAYMOND Solutions Expert Tinubu
How could a common platform fluidify and modernise credit insurance operations and provide greater value to the industry?
Key but under-utilised One of the major challenges in credit insurance today is the industry’s ability to respond at the rapid speed that business now requires. Although credit insurance is recognised as a key mechanism to support worldwide trade and trade finance, it is often seen as a long and complex process that is minimally digitalised. This is a disappointing development, as many people
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would benefit from the use of credit insurance, regardless of the level of digitalisation. In fact, in a recent survey by the International Trade and Forfaiting Association (ITFA), 89% of respondents said that credit insurance is a major tool to support their trade finance operations. Credit insurance is not currently being fully utilised to support the ecological transition. The absence of clear standards and guidelines for ESG (Environmental, Social, and Governance) reporting
Peaks and Valleys: The Digital Road in 2023
hampers the advancement of automation and digitalisation in this area.
Credit insurance hub For credit insurance, the answer to the constantly increasing pace of business could lie in the standardisation and digitalisation of the industry, especially in the way people interact, e.g., through the development of a common exchange platform, or ‘credit insurance hub’. Today, we look at what such a hub could look like, how it could benefit the industry, and the critical factors for success. Currently, the credit insurance business is primarily conducted via email in a one-to-one model. Various stakeholders have to establish point-to-point specific communication channels and interactions because each insurer, bank, broker, or platform has their own specific behaviour and system.
A common exchange would streamline the process of sourcing the right solution for each client, with the ability to quickly connect to several insurers through one access point.
Insurer benefits
Broker benefits
With the potential for automatic matching according to criteria defined by each party, brokers could obtain the best coverage-to-price ratios and offer faster turnaround, enabling clients to act quickly as opportunities occur.
A common exchange would streamline the process of sourcing the right solution for each client, with the ability to quickly connect to several insurers through one access point.
This would improve competition between insurers, ultimately giving banks and the insured access to more options, and supporting the development of products that are adapted for each client.
With more liquidity and fluidity leading to an increase in overall volumes, all insurers would benefit. As the number of brokers using a common platform for a business-asusual practice grows, insurers will rely on it to handle a greater proportion of their business.
With the ability to connect all stakeholders – policyholders, brokers, insurers, banks, and investors – a common platform would centralise and automate various operations, including placing, quoting, negotiating, and binding credit insurance. In an electronic format, this could facilitate faster collaboration between all parties.
For insurers, a common exchange would provide a centralised distribution channel, giving them access to more brokers and clients.
With a simple integration directly into the insurer’s core system, they will be able to capture data in a standardised, structured way for better analysis and to scale their
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business without bottlenecks or delays. This allows them to ensure a closer match to their risk appetites. Further, using realtime data, insurers could use the platform to automatically adjust quotes according to their capacity. Streamlining operations between the various brokers and insurers would eventually benefit end-clients, offering greater visibility, better coverage solutions, and more reactivity – i.e., stronger support to their business through efficient and easy-to-use credit insurance. A common exchange platform could also encourage greater participation from banks and investors in factoring or invoice discounting, thanks to greater visibility over whether an invoice is covered or not. Currently, this is a critical stumbling block, and a deciding factor on whether to offer financing. With a platform that alleviates this issue, banks and investors would have a better way to de-risk their investment in invoices and receivables and greater certainty of the coverage provided by each insurer at a single-invoice level As the invoice financing ecosystem becomes more liquid, it will be increasingly attractive to investors and could extend to supply chain financing. Further, a hub could ease and support ESG reporting. Centralising projects under a standard format would simplify ESG assessment and allow external providers to deliver
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standardised ratings and analyses directly onto the platform. This could be done once and shared with all stakeholders.
General benefits For the industry overall, a common platform comes with the advantage of more willing participants, and the ability to reduce complexities and costs for all parties. The industry also stands to benefit from deeper insights thanks to a richer central source of anonymised data with consistent parameters and processes. Applying artificial intelligence to such a large source of standardised data could also give access to currently hidden information or trends, and possibly identify defaults or soon-to-default indications, or suspicion of fraud.
How can a hub be developed? There have already been some initiatives, such as the Lloyd’s PPL which is specific to the London market and mostly focuses on the placing, or the Receivables Insurance Association of Canada (RIAC) which was too small to fund a viable solution on its own. Both examples make a strong argument for a global approach. Currently, the cost of 1-1 connectivity exceeds the potential revenue and generates increasing technical complexity as experienced by some insurers or reinsurers that developed 1-1 API connections with their biggest customers.
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This approach rapidly proved to be costly and not sustainable for smaller clients. Developing a common exchange would need to attract significant participation with a broad range of solutions so the model can be economically viable and ensure adequate volumes for each stakeholder. Therefore, critical mass is key. Once this is reached – and by spreading the cost across all stakeholders – a small fee of just a few dollars per policy could fund the solution for the longer term. Another critical factor of success is through an “open network” approach.
Peaks and Valleys: The Digital Road in 2023
Prediction has always been a tough skill; betting your money on the first credit insurance hub and hoping it will become the primary choice is not in the industry’s DNA.
would defeat the initial purpose.
An open approach would support the emergence of the first initiative by giving early/founding members confidence in investing.
Larger private insurers may initially be reluctant to join a hub due to the risk of increased competition, whereas smaller insurers may see the opportunity to secure a firstmover advantage.
At the same time, it gives late joiners the liberty to join the initial hub or select independent initiatives that are interoperable with existing ones. Ultimately, the objective is to build a common marketplace and avoid fragmentation, which
Insurers must view the platform as a long-term investment, rather than a way to grow business quickly from the start.
Eventually, as more insurers, brokers, and insured join the hub, momentum will build and drive the entire industry to continuously improve through
product innovation and technology, securing a viable long-term future for modern credit insurance. What the industry needs is a first initiative with a good balance of global reach, significant players, and technology to initiate the move. Tinubu has been at the heart of this industry for more than 20 years with proven experience in digitalisation and has a strong willingness to support such common platform initiatives.
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3.3
Three top tips for ISO 20022 usage: Steps to harmonise trade finance transactions EDWARD IRELAND
Joint Head of Commercial Product Management, Financial Messaging Bottomline Technologies
Considering the advantages of ISO, it’s hard to believe that banks aren’t beating a digital path to the doors of any partner that would supply them with advice and execution of its adoption. The coverage of the Asian Development Bank's latest estimates of the global trade finance gap caught my attention. And, while I can't promise a quick solution for a $2.5 trillion difference between the trade financing needed versus the financing available, I would like to call your awareness to a very important paragraph in the ADB report. “Digitization of global trade can reduce the gap,” it states, “but it is held back by a lack of harmonized standards.” As previously stated, I understand a problem like this doesn’t get fixed overnight or through one improvement. My expertise is in financial technology and messaging, which is where it intersects with trade finance. It’s in this intersection that I can find at least part of the solution to this $2.5 trillion problem. I’m talking here about the ISO 20022 messaging format, which I will try to demystify here, as well as provide a few pointers/merits to adopting it.
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ISO 20022: Popular, but not understood Having recently returned from an international banking conference, I can tell you that the awareness of ISO 20022 is high, but understanding its potential impact is still a work in progress.
Peaks and Valleys: The Digital Road in 2023
In the context of trade finance, understanding that impact could mean the difference between a deal won or lost or the difference between a secure or a fraudulent transaction. The ISO 20022 format is a set of data and messaging that is integrated into an instant payment or any other cross-border transaction. It goes beyond just transferring funds. It carries along with it a narrative about why the transaction is happening, who’s involved, and under what terms and conditions. Before its advent, different countries and institutions had their own messaging formats, which led to confusion, inefficiencies, and errors. Cross-border payments can ill afford any of that baggage, and with ISO 20022, there's a unified, globally recognised standard and protocol that all institutions can follow.
What kind of data and narrative does this format contain? It starts with end-to-end identification and prevalidation of all parties in a transaction, as well as all intermediaries.
Considering the advantages of ISO, it’s hard to believe that banks aren’t beating a digital path to the doors of any partner that would supply them with advice and execution of its adoption.
It also specifies the payment rails (e.g., SEPA-Inst, Swift), and contains a detailed breakdown of invoices or bill-related data, such as invoice numbers, dates, and specific line items.
Many modern banking and financial technology solutions support ISO 20022 ‘out of the box’. Banks should consult with their software vendors to ensure their systems are compatible with or can be upgraded to support the standard. Swift has been a major proponent of ISO 20022 and is transitioning its messaging services to this standard.
Additionally, a feature specifically relevant to trade finance could include references to Letters of Credit, Bills of Lading, or other essential documents. If a transaction can't be processed, it contains details about the reason for return or rejection. This clearly provides harmony and transparency to what has been an opaque process.
But the reality is that ISO 20022 has been the subject of deadlines, mandates, and regulatory pressures. In fact, just this past 26 October, the scheduled 1 November deployment of SEPA payment schemes to the 2019 version of ISO 20022 was postponed by four months to March 2024 after the European Payments Council concluded that at least two countries within the SEPA network couldn't meet the deadline. In the UK, banks had to connect to ISO 20022 capability by March 2023 for Real Time Gross Settlement (RTGS) payments. They will need to send and receive ISO messages by November 2025, which matches the US deadline for ISO usage.
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ISO 20022: Popular, but not understood This discussion of deadlines leads me to the three levels of ISO 20022 usage, which will also provide some advice on how banks can step up their use of ISO before they are mandated to do so. When I mention that UK banks had to connect to ISO messaging, that translates to the first and most basic usage level.
1. The connected level At this “connected” level, there’s a technical connectivity part and a messaging connectivity element. The technical connectivity will require adaptations of core systems and payment gateways to accommodate ISO standards. IT teams will also need to adjust their architecture to change reconciliation protocols and sanctions screening. Then, there’s part two of the ISOconnected phase, messaging data. This step is more complicated because banks must change the information they send and receive. ISO requires an entirely new set of comprehensive information.
2. The market-ready level This is characterised by the completion of the upgraded infrastructure (phase one) to the point where it does not affect daily operations. Some gaps that may need addressing in this phase include introducing new network providers, new API options, new payment rails like instant payments, and overlay services like Request to Pay.
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Peaks and Valleys: The Digital Road in 2023
You can send and receive ISO messages at this point, which is a huge step up in the digital migration that’s so urgent for banks.
3. The ISO native level Here, all systems have the right architecture, the right data and the right format. Accessible elements for ISO native (outside of the obvious data volume and analytics) include real-time payments and real-time settlements, lower costs via better straight-through processing, improved cash positioning and real-time balance capabilities resulting in tighter monitoring and tracking of transactions, transparency to meet current and new regulations, and payments system stability improvements. Achieving ISO native status is a challenging but essential journey for trade finance. Sooner rather than later, I urge any professional in this space to reach out to your fintech partner to either get started in advancing to the next level. Accessing ISO 20022 messaging for trade finance banks combines technical implementation, partnerships, training, and ongoing engagement with the broader financial ecosystem. Given the benefits and the global shift towards this standard, it's an investment that's well worth making.
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3.4
Boosting profits and cutting emissions: How resource companies are embracing digital fuel management DAVID THAMBIRATNAM CEO Veridapt
The rate of digital adoption by resource companies is forecasted to remain on its upward trajectory as the financial and environmental benefits of automated fuel management continue to far outweigh installation and maintenance costs. Digital fuel management technology is making the mining industry less carbonintensive and more profitable amid a mass shift to renewables-generated energy.
JIM REGAN Journalist Veridapt
This “win-win” is achieved in part through digitally enhanced, thus vastly improved, supply chain accountability and reconciliation across all aspects of fuel use, typically the second highest cost centre after labour.
Digital data: Transforming fuel management and emissions tracking It should come as no surprise then that the data generated by digital fuel management systems deployed by BHP, Rio Tinto, Glencore, Syncrude Operated by Suncor and other sector majors committed to maximising fuel procurement dollars while minimising carbon
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footprints, is more precise and granular than ever before. A recent Organisation for Economic Cooperation and Development (OECD) report said, “Advances in digital technology have drastically changed the quality and quantity of data that mining companies can access.” The most successful outcomes, measured by internal and external audits, require deploying reliable hardware and software to mine sites to measure fuel consumption, reconcile storage inventories, and, importantly, accurately calculate and benchmark emissions. Digital fuel management systems use onboard sensors to automatically collect the data required for fuel reporting. This means, for example, that personnel no longer have to take the time to enter data
Peaks and Valleys: The Digital Road in 2023
manually. As a result, errors are mostly non-existent. The rate of digital adoption by resource companies is forecasted to remain on its upward trajectory as the financial and environmental benefits of automated fuel management continue to far outweigh installation and maintenance costs. “Good data leads to good decisions,” says David Thambiratnam, CEO of commodity management group, Veridapt, whose digital platform monitors, controls and authorises the use of over 30 billion litres of fuel annually, across 80+ large global mining, rail and terminal operations. Importantly, as ESG and greenhouse gas emission transparency take on greater importance and become embedded in corporate board decision-making over capital expenditure, Veridapt’s platform also provides real-time verification of GHG targets at the fuel management level through accurate measurement. Real-time digital technology effectively solves the actual problems faced by end-users, unlike periodic manual updates which often become outdated and irrelevant by the time they’re produced. Moreover, as industries such as mining and oil and gas strive to progress towards carbonneutral targets, the reliance on accurate digitally-generated real-time data will only become greater.
Reuters has reported that a lack of consistent data to measure emissions down the supply chain of mining companies and through to customers makes it difficult to monitor and meet targets for decarbonising the sector, citing industry executives and investors.
Digital data: Transforming fuel management and emissions tracking Meanwhile, the International Council on Mining and Metals, whose members include around 25 mining companies, recently published guidance on how mining companies can account for and report their Scope 3 emissions to try and answer the problem of patchy data to make companies report consistently. The International Energy Agency (IEA), in a new report, emphasises that “quality data, and access to it, is crucial to support clean energy strategies, measure progress and report associated emissions reductions.” According to Thambiratnam, by digitally tracking an entire fuel and lubricant chain from delivery to consumption, businesses are generating highly accurate emissions tracking data, alongside realtime reconciliation, greater productivity/cost savings and optimal safeguards against theft and fraud. Like all innovators, Veridapt simplifies the complex: Its hydrocarbon management system aggregates data from
field devices, such as tank level gauges, PLCs, flow meters, etc., and presents the data in a meaningful format for statuary reporting and internal analysis and improvement. The AdaptFMS solution provides simple visibility of fuel and lubricant usage down to each fuel-consuming asset and operating site or location. Advances in data analytics, artificial intelligence, and the Industrial Internet of Things (IoT) are helping to optimise complex processes, track down elusive sources of loss and inefficiency and respond more effectively to volatility, shocks, and disruptions. “The experience of the industry’s digital pioneers has shown that digital and analytics can make a meaningful difference… Digital methods are proving to be among the most powerful and cost-effective ways to reduce the industry’s carbon footprint, too,” McKinsey noted in a recent report. Energy transformation is also front and centre as more companies turn to biofuels and shift to renewables-generated electrification across their operations. Finally, mining companies would be best served by recognising the benefits of a single platform to monitor and manage their energy consumption guaranteeing onsite efficiencies and emissions reduction during and post their energy transition.
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3.5
Open models: Transforming the future of payments LILIANA FRATINI PASSI Managing Director CBI
Thanks to the expansion of the financial dataset available, which is no longer only related to payments, we are witnessing the evolution of open banking towards open finance, a model in which authorised thirdparty providers have access to information provided by banks, subject to prior customers’ consent. In recent years, the payments market has been going through a period of major transformation, first with the creation of the SEPA (Single Europe Payments Area) and then the entry into force of the PSD2 Directive, now under review. This has opened up new scenarios in the offering of increasingly innovative services and fostered the development of new paradigms, such as open banking. Open banking has paved the way, giving rise to an open ecosystem that enables the exchange of data and information among its member providers. Thanks to the expansion of the financial dataset available, which is no longer only related to payments, we are witnessing the evolution of open banking towards open finance, a model in which authorised third-party providers have access to
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information provided by banks, subject to prior customers’ consent. For example, when it comes to savings contracts, mortgages, pensions, insurance, loans, investments, equities and
Peaks and Valleys: The Digital Road in 2023
beyond, this new methodology allows Third-Party Providers (TPPs) to create customised and user-friendly financial products and services that align with consumer demands and preferences. Moreover, open finance serves as merely the subsequent phase in the progression towards a completely open ecosystem.
Regulatory landscape and new frameworks Regulators are also pushing in this direction. The European Commission has expanded the changes introduced by the PSD2 by launching new initiatives with the goal of enhancing services and business models based on data sharing, starting from the payments sector.
More specifically, the EU aims to improve customer experience and increase financial inclusion and transparency whilst strengthening interoperability and security. Following a series of public consultations and impact studies, on 28 June 2023, the Commission published its
proposal for a regulatory package to replace the PSD2 framework, comprising a new Payment Services Directive (PSD3) and a Regulation (PSR). The main objectives include reducing market fragmentation by strengthening and implementing rules in the member states; increasing the protection of Payment Service Users (PSUs) from the risk of fraud, and improving competitiveness in the payments landscape by reducing barriers for payment service providers and their competitive disadvantage to traditional banks. The PSR also highlights a separate legislative proposal called the Regulation on Instant Payments. This proposal was released by the Commission in October 2022. It mandates that Payment Service Providers (PSPs) must offer services for Instant Payments. This is in addition to the non-instant payment options that are already available to PSUs.
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Given the mandatory nature of the Sepa Credit Transfers (SCT), this means that SCT Instant will also become mandatory for PSPs in the SEPA area. This draft also defines that all instant credit transfers will need to be accompanied by a Confirmation of Payee (CoP) service offered by the payer’s PSPs to their users, both for domestic and cross-border payments in euro. Finally, the Financial Data Access Regulation (FIDA) aims to encourage the provision of more innovative financial products and services so as to stimulate competition in this sector. These regulatory proposals will be negotiated by the European institutions, and the timeline for their implementation is still distant, but the path seems to be set. It is clear that the new measures will strengthen competition in an increasingly “open” market. Therefore, to remain competitive, players will have to increase their focus on innovation.
Hand in hand with standardisation Additionally, the spread of open banking and open finance has also occurred simultaneously with the proliferation of open API standards globally. Standardisation activities are aimed at defining a common set of rules to facilitate the integration between market players, competition between incumbents and newcomers, and the application of security standards.
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Thus, API standardisation has a significant impact on how an “open” regime is received by the market, as well as its overall success. These standards have found application in market infrastructures aiming at facilitating integration between market operators. Due to the progress made by these initiatives, financial institutions (FIs) now have access to a set of guidelines that outline how to use and implement APIs in a way that meets current regulations.
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In this scenario, taking into account the ongoing legal framework, the overall market is already responding to new regulatory requirements to undertake or embrace new business opportunities. However, it is desirable to create single, centralised solutions, that aim to enhance interoperability and reachability at least across Europe, considering that the market is already moving with proprietary solutions. This is the case, for instance, of the COP services, already
Peaks and Valleys: The Digital Road in 2023
matches the account holder’s full name.The service allows peer-to-peer connection enabling real-time verification of updated data. The solution is based on a centralised and advanced algorithm and API interfaces which allows an easy integration of the functionalities. The solution is available to all the PSPs interested in utilising an advanced COP solution, is highly interoperable with other domestic schemes and is easily embeddable within the PSPs’ payment flows. Moreover, CBI is now expanding this service to the European level and beyond through the use of Swift’s Payment Prevalidation service. This collaboration will enable a broader verification network and a higher level of security for financial services users.
implemented on the market by several platforms. Drawing on its experience in Italy, CBI, a public limited consortium company and benefit corporation comprised by nearly all the Italian financial institutions, has been developing innovative services in digital payments, open banking, and open finance. Within this ecosystem, CBI has already introduced the “Name Check” Service to the market. This service enables real-time, online verification to ensure that an IBAN Code correctly
CBI is also developing additional solutions, such as VAT code verification, digital identity management, online onboarding, and compliance measures like KYC (Know Your Customer) and AML (AntiMoney Laundering). These are offered through platforms like CBI GO and the IBAN Check solution
Moving forward, it is important to have clear implementation guidelines that can guarantee interoperability between the different market solutions. Moreover, considering the new market scenario in which digitalisation plays a fundamental role, incumbents must create new ways of collaborating and partnering in an increasingly open market to create innovative products that improve user experience beyond mandatory services. A collaborative approach leads to multiple benefits: it improves investment efficiency, reduces costs by leveraging existing sector investments, and minimises fragmentation, which in turn saves time and lowers operational expenses. It also enhances interoperability and ensures more consistent and secure outcomes across verifications. Additionally, collaboration opens the door for new business opportunities by allowing companies to build on shared experiences and connections.
The latter allows verifying the correct correspondence between Tax Code/VAT Number and IBAN Code, and to date, has registered more than 15 million IBAN verifications. These verifications have supported banks and PSPs in anti-fraud activities, with an average growth rate of 110% between January and August 2023.
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3.6
Contour collapses: What does this mean for digital trade finance? DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
Contour joins a growing list of platforms that have failed to sustain themselves, including Marco Polo, we.trade and Tradelens. These platforms, despite their initial promise, have struggled to achieve the scale and interoperability needed for long-term viability.
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG) Digital trade finance platform Contour has announced its closure, citing insufficient funding from its bank shareholders. Operations will cease on November 30, leaving users a brief window to complete transactions and download essential data. This development was first reported by Global Trade Review (GTR). Contour was launched in 2020 by a group of leading banks, including ANZ, BNP Paribas, HSBC, and Standard Chartered,
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with the aim of digitising and streamlining the documentary trade process. The platform allowed banks and corporates to issue, manage, and process letters of credit (LCs) electronically. At its peak, Contour boasted a network of 21 banks and a range of partners across various sectors. Contour also had a number of integration and documentation partners, including Finastra, CargoX, Bolero and Surecomp.
Peaks and Valleys: The Digital Road in 2023
However, despite its advantages, Contour was unable to attract enough users to its platform. As a result, it was unable to generate enough revenue to cover its costs. Contour joins a growing list of platforms that have failed to sustain themselves, including Marco Polo, we.trade and Tradelens. These platforms, despite their initial promise, have struggled to achieve the scale and interoperability needed for long-term viability.
History of Contour Contour’s journey began in April 2018 with global banks testing next-generation technology for trade finance on R3’s Corda platform. The platform had several milestones. By February 2019, a global trial explored the benefits of enterprise distributed ledger technology (DLT) for Documentary Trade. The commercial launch of Contour’s Beta network occurred in January 2020, followed by its official launch into live production in October of the same year. The platform collaborated with Finastra to offer a new digital trade finance network, aiming to bring together banks and corporates globally. Other significant partnerships were with Tata Power, IBM TradeLens (prior to its collapse), and the Shenzhen FinTech Institute of the People’s Bank of China. The platform also partnered with the Global Legal Entity
Identifier Foundation (GLEIF) to enable Legal Entity Identifier (LEI) usage, aiming to create a more transparent trading environment. In addition to its various partnerships and milestones, Contour had embarked on a next phase focused on tokenising digital trade assets (listen to our podcast, with Contour). The concept was to allow corporates to originate an asset and either maintain it on their balance sheet or sell it to a bank. Banks could then package, securitise, and sell multiple transactions to investors in the secondary market. The first round of digital assets to be minted on Contour would likely have been unfunded bank risk or LC confirmations.
This ambitious phase aimed to bring decentralised finance (DeFi) technology to trade finance, connecting borrowers to new groups of lenders and potentially narrowing the trade finance gap. However, despite this forwardthinking approach, Contour could not sustain its operations, adding another layer of complexity to its story of innovation and struggle. The platform’s journey shows a consistent effort to innovate and collaborate. However, it also highlights the challenges of achieving scale and interoperability in a fragmented industry. Contour’s closure adds another chapter to the ongoing narrative of digital trade finance platforms struggling to find a sustainable path.
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HLF
EC3 Platform [Skuchain]
HLF
EC3 Platform [Skuchain]
PT
India Trade Connect
COR Numerous initiatives leveraging DLT to enhance supply chain transparency and ease access to financing
TradeFinex
HLF
we.trade
COR
Marco Polo [TradeIX]
HLF
TradeConnect
COR
Contour
HLF
TradeConnect
UTC Minehub
SUPPLY CHAIN FINANCE
HLF
UAE Trade Connect [Etislat]
TRADE FINANCE
KNOW YOUR CUSTOMER (KYC)
Trough of disillusionment The TFG/WTO periodic table of DLT projects, published in November 2020, once served as a comprehensive framework for evaluating the state of digital trade finance platforms. It categorised various initiatives based on their focus, partnerships, and technological underpinnings.
INSURANCE
SHIPPING & LOGISTICS / SUPPLY CHAIN
inflated expectations followed by a ‘trough of disillusionment,’ where they either fail or adapt to market realities. Contour appears to have entered this trough, unable to emerge on the other side towards a sustainable operational model.
Contour, like many other platforms, found a place on this table but could not sustain its position, eventually leading to its closure. This trajectory is well illustrated by the Gartner Hype Cycle, a model that describes the adoption and social application of specific technologies. According to this model, technologies often experience
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DLT DIGITISATION OF TRADE DOCUTMENTS
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OTHER INITIATIVES (INCLUDING MARKETPLACES)
Andre Casterman, Founder, Casterman Advisory, told TFG, “The documentary trade finance market is probably the hardest segment to transform digitally, which is why those courageous ones who dare to innovate in this segment ought to focus on addressing specific pain points and show much patience.
Peaks and Valleys: The Digital Road in 2023
Over the last 5 years, we have witnessed many banks adopting document checking and compliance monitoring technologies. Also, large corporates are increasingly adopting multi-banking trade platforms as they have done on the treasury side for around two decades. I expect much progress in the near term on this front thanks to several platforms, including Contour, offering relevant multibanking options for MNCs. But patience is key, have banks involved in consortia lost patience with themselves?” Interoperability was a central theme in Contour’s strategy, as revealed in a fireside chat. The platform aimed to serve as a bridge between various stakeholders in the trade finance ecosystem, from banks to corporates to digital documentation partners. While this focus on interoperability was one of its unique selling points, it also became a complex challenge. The platform discovered that achieving true interoperability, where systems can easily exchange and make use of information, is far from straightforward.
Regulatory landscape and new frameworks There are several factors that could have contributed to Contour’s failure, and these can be understood better in the context of broader industry trends and challenges. 1. Timing and market readiness One possibility is that Contour was simply too early for the market. The trade finance industry has been slow to adopt new technologies, and Contour’s ambitious agenda may have been ahead of its time, as also outlined by Dani Cotti, speaking to TFG in February 2023. Trade digitalisation is proving to be an evolutionary process rather than a revolutionary one. 2. Complexity and interoperability Contour faced the inherent challenges of digitising a complex and global industry. Creating a single platform that meets the needs of all stakeholders is a monumental task. This was highlighted in a fireside chat where Contour discussed the misconceptions of interoperability. While the platform aimed to bridge gaps in the trade ecosystem, it found that interoperability is not the panacea it’s often made out to be. 3. Business model and sustainability Contour’s business model relied on transaction fees to generate revenue. However, it may have been challenging to charge fees high enough to cover operational costs. Even with a concrete strategy, product, and value proposition, achieving profitability can be elusive.
Despite its efforts to bridge gaps in the trade ecosystem, Contour found that interoperability alone could not solve the industry’s deeply rooted issues.
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Dani Cotti, founding partner, T3i and CEO at Cotti Trade & Treasury said, “Well there is a main common denominator in all the trade failures over the past 2 years – blockchain and DLT. There are other common denominators that have played different roles in each of these demises, as outlined in this article 6 lessons from the trade tech industry. Bank consortiums have proven to be a dead-end as so far, they’ve failed to balance the different interests. The value propositions were too narrow and not compelling enough for corporates to change their current processes, systems, and set-ups. These current methods may not be ideal, but they manage the movement of goods and funds from one location to another, and they may not want to change this.”
“Whilst it is frustrating to see another digital trade initiative disappear, there is still significant cause for optimism. The recent UK Electronic Trade Documents Act will facilitate and support further ambitions whilst promoting an open environment.” However, Contour’s collapse does raise some important questions about the future of digital trade finance. Is there is enough room in the market for multiple platforms? It is also worth considering whether digital trade platforms can be successful without the backing of major banks.
What does Contour’s collapse mean for digital trade finance? Contour’s collapse is a setback for the digital trade finance industry, but it does not necessarily mean that the industry is doomed. There are a number of other digital trade platforms in operation, including essDOCS, eTradeConnect, and Trade Finance Distribution Initiative (TFDI). These platforms are all at different stages of development, but they are all making progress in digitising and streamlining the trade finance process. David Meynell, owner of TradeLC Advisory and Digital Rules Advisor to C4DTI told TFG,
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Evolution, not a revolution Contour’s collapse is a reminder that the digital trade finance industry is still in its early stages of development. However, the potential benefits of digital trade finance are significant, and there is a strong commitment to making digital trade finance a success. By addressing the challenges that the industry faces, and by focusing on building a more inclusive digital trade finance ecosystem, we can help to ensure that digital trade finance reaches its full potential and benefits all stakeholders, including SMEs.
Peaks and Valleys: The Digital Road in 2023
Improving the adoption of new technologies: The trade finance industry needs to become more open to adopting new technologies. This can be done by educating banks and corporates about the benefits of digital trade finance, and by providing financial incentives to adopt digital trade finance platforms. Making digital trade finance more inclusive: Digital trade finance platforms need to be designed to be accessible to all stakeholders, including SMEs. This can be done by
developing open source digital trade finance platforms, and by providing government-backed Improving the interoperability of digital trade finance platforms: Digital trade finance platforms need to be interoperable with each other. This would make it easier for banks and corporates to use multiple platforms, and it would also create a more seamless experience for users. Addressing concerns about data security and privacy: Digital trade finance
platforms need to implement robust security and privacy measures. This would help to build trust with banks and corporates, and it would make them more likely to adopt digital trade finance solutions. Casterman said: “As an industry, we now need to focus on leveraging the Electronic Trade Documents Act (ETDA) to contribute to closing the trade finance gap and involve those who can move the needle faster than banks, i.e., alternative lenders and institutional investors. They will contribute to supporting the real economy and find an attractive return on investment.” The closure of Contour serves as a cautionary tale for the trade finance industry. While technological innovation offers the promise of revolutionising the sector, the fundamental issues of a viable business model and secure funding mechanisms remain. As the industry moves forward in a landscape reshaped by the ETDA, the lessons gleaned from the failure of platforms like Contour will be invaluable. The industry finds itself at a crossroads, and the path it chooses will have long-lasting implications for the future of digital trade finance.
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3.7
The dark side of trade digitalisation: data inequality and the global economic divide CARTER HOFFMAN
Research Assistant Trade Finance Global (TFG)
As our world becomes increasingly digital, the digital divide has widespread implications, and the least developed countries (LDCs) are most likely to be negatively affected. As our world becomes increasingly digital, the digital divide has widespread implications, and the least developed countries (LDCs) are most likely to be negatively affected. In addition to the three levels of the digital divide commonly explored in the literature (i.e. the access gap, differences in digital skills, and differences in beneficial outcomes), data inequality should be included as a new level of the digital divide. Data inequality can
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further be classified into three divides: access to data, representation of the world as data, and control over data flow.
International trade and investment are vital for economic development International trade and investment are major drivers of global economic development. One study notes that international trade plays a key role in helping to attain several
Peaks and Valleys: The Digital Road in 2023
of the United Nation’s Sustainable Development Goals (SDGs), including SDG8: Decent Work and Economic Growth. The World Economic Forum also articulates that promoting trade, attracting private investment, and achieving export diversification are key drivers in helping the world’s least developed countries (LDCs) shed this status. To provide just one practical example of the potential benefits, we can turn to the landlocked former Soviet satellite state of Mongolia, which liberalised its trade policy in 1996. Between 1993 and 2019, Mongolia experienced a 22% gain in welfare from expanded import opportunities and a 35% boost in its human development index. The nation’s GDP per capita, widely accepted as a proxy for standard of living, also tripled from $1350 to $4385 over this same time frame.
While multiple factors surely had a role in this growth, it is clear that trade and investment played a key role in this development.
The Least Developed Countries (LDCs) are most impacted by data inequality The digital divide is most prevalent in the world’s LDCs, landlocked developing countries (LLDCs), and smallisland developing states (SIDS). In LDCs, only 20% of the population uses the Internet – compared to 90% in developed economies – and when they do, download speeds are usually slow, and prices are high. This divide between LDCs and the developed world is not getting smaller. The International Telecommunication Union observes that the gap between LDCs and the world in terms of digital differences has
increased from 27% in 2011 to 30% in 2022. Data collection on a society-wide level is also lacking for developing countries, which account for 99% of the estimated 48 million unregistered births globally, with South Asia and SubSaharan Africa alone accounting for 79%. As the digital economy continues to grow and evolve, the data-related divide between developed nations and LDC grows alongside it. Developing countries risk becoming mere providers of raw data, with their data and associated value capture being concentrated in a few global digital corporations, which are almost exclusively located in the world’s most developed economies. As long as developing countries lack ownership, equal access, and the autonomy to use their data, they will suffer severe economic and developmental disadvantages.
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Data access and control facilitate cross-border trade and investment When it comes to international trade and investment, data is a key driver. One study exhibits that crossborder data flows can promote international trade, with free data flow clauses in trade agreements promoting the growth of goods and services trade between signatory nations. This is partly because increased data flows from a nation reduce uncertainty at a firm level, decreasing the cost of market entry. These economic forces will guide investment and export opportunities away from nations that do not generate and promulgate data and towards nations that do. The study also notes that the cross-border data flow provisions in bilateral trade agreements are more beneficial to economies with better digital environments. This means nations with greater access to digital infrastructure and data facilities will likely attract more foreign investments than those without. Conversely, nations or regions without strong digital environments are poised to benefit less from data-sharing provisions since a lack of data infrastructure means they will have less access to and control of their own data flows. Further, any data provided will likely be skewed to represent the most digitally active – and thus already most affluent – members of the nation,
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excluding the most in-need subsections of the population from being represented in the data.
regions to develop the data infrastructure needed to attract development aid in the first place.
This “scandal of invisibility” can lead to situations where those on the extreme end of the data inequality scale are passed over for desperately needed foreign aid.
In all, whether it be in the form of limited organic investment and exports or reduced foreign aid, data-poor nations face challenges in the international economy.
Many countries with poor data are trapped in a reinforcing cycle of underdevelopment because funders and donor agencies prefer to work in areas with a data-demonstrated need and where they can measure the impact of interventions.
Without collaborative efforts, trade digitalisation can exacerbate economic inequality
Limited data leads to limited aid, which, in turn, inhibits the ability of those nations and
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International trade – a traditionally paper-based industry – is currently experiencing a significant push towards digitalisation.
Peaks and Valleys: The Digital Road in 2023
– passed its own electronic trade documents bill. Many experts anticipate that the UK’s role as a major trading economy and key precedentsetting jurisdiction will catalyse similar digital trade legislation in other jurisdictions. As with any industry that becomes progressively digitalised, increased trade digitalisation will lead to an exponential increase in the volume of trade data generated. Unfortunately, the low data capacity of LDCs means that, in relative terms, the data gains they experience will be lower than developed economies experience.
Countless digital trade solutions are being developed, with experts speculating that only outdated and digitally unfriendly legislation in many jurisdictions stands in the way of rapid growth. However, many G7 and emerging nations are now updating their laws and enacting legislation based on the United Nations Commission On International Trade Law’s (UNCITRAL) Model Law on Electronic Transferable Records (MLETR), which is designed to enable digital-first trade documents to be used in practice. Further, in July 2023, the UK – whose common law system forms the basis of the legal systems in around 80 countries
Since data availability lowers market entry costs and increases international trade and investment flows, widespread digitalisation will make international trade and investment relatively more risky and expensive in data-poor nations, incentivising economic actors towards more data-rich and, thus, less expensive environments. This asymmetric data environment can exacerbate the worsening global economic inequality if left to market forces alone. According to one literature review on the digital divide, “Without collaborative efforts to frame international trade agreements by the international trade bodies and other stakeholders, the data divide in digital trade will become the new face of inequality and creates barriers to reaching the agreed 2030 SDGs”.
The bottom line Growing data inequality will amplify global disparities and economic inequality as digitalisation continues to reshape the landscape of international trade. We began by underscoring the significance of international trade and investment as pivotal drivers of economic progress before looking at how data inequality disproportionately affects the world’s least developed nations. Next, we delved into the relationship between data accessibility and international trade and investment, emphasising the positive outcomes of the data’s existence and the adverse consequences of its absence. The discussion then explored recent digital advancements in international trade that are poised to bring about a transformative phase in crossborder commerce. We saw, however, that the prospect of expanded data inequality casts a foreboding shadow on trade digitalisation, with potential repercussions for global economic inequality. In essence, the ongoing digital transformation presents opportunities and challenges, with data inequality playing a pivotal role in shaping the trajectory of economic equality. As the digital revolution gains momentum, addressing data inequality remains central to fostering a more balanced and sustainable global economic environment.
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Changing Dynamics in the Trade Finance World: A look to 2024
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4.1
An interview with the OPEC Fund for International Development KARIN OSZUSZKY
Senior Investment Manager for Business Development OPEC Fund for International Development
The OPEC Fund works through both its Public Sector, and Private Sector Trade Finance Operations Departments to increase emerging markets’ access to finance, ensuring member countries and partner organisations can benefit from financing solutions. Trade facilitation and trade finance are critical and closely linked in ensuring broad-based economic development by encouraging the cross-border exchange of goods and services.
DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
In this episode of Trade Finance Talks, TFG’s Deepesh Patel was joined by Karin Oszuszky, Senior Investment Manager for Business Development at the OPEC Fund for International Development, during the European Bank for Reconstruction and Development’s (EBRD) Trade Facilitation Annual Conference in Vienna to discuss the OPEC Fund’s work in light of the latest trends and developments in trade finance and facilitation. Oszuszky is the trade finance specialist within the Private Sector Trade Finance Operations Department and is responsible for the origination of business from corporate customers, as well as commercial or financial institutions for the trade finance and private sectors.
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Changing Dynamics in the Trade Finance World: A look to 2024
Helicopter view: The OPEC Fund for International Development Risk management along geopolitical, macroeconomic, as well as default risks, stood out as a key theme throughout the conference, and the importance of the OPEC Fund’s work is well contextualised here. Founded in 1976 by member states as a south-south multilateral development finance institution, it operates based on a global mission working in low and middleincome countries outside of
Oszuszky said, “This year actually was a very successful year for the OPEC Fund because we placed our inaugural benchmark bond in the market.” The OPEC Fund operates through two main windows: the Public Sector; and the Private Sector and Trade Finance Operations Departments. The Public Sector workstream focuses on the provision of financing to governments for projects in essential areas such as health and infrastructure.
The Private Sector and Trade Finance windows serve as complementary instruments for the OPEC Fund, aiding in its central mission to advance the socioeconomic development of beneficiary countries through trade finance services and access to capital. In alignment with this, the Private Sector and Trade Finance Department concentrates on financing corporates, financial institutions, and project finance. The Trade Finance workstream specifically operates a diversified portfolio covering import–export transactions, structured commodity finance, as well as the financing of commercial banks to support international trade. The OPEC Fund also has unfunded trade finance risksharing programmes in place which are shared with commercial bank partners and international development finance institutions. Via trade finance, the OPEC Fund seeks to support private enterprises and governments through the facilitation of their import and export requirements, assisting in addressing inventory and working capital needs, as well as improving the cross-border trade prospects for partner countries. Oszuszky said, “It [the OPEC Fund] is very well diversified because we have a worldwide mandate, [and] we work in 125 countries.”
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Ensuring emerging markets’ access to finance According to the Asian Development Bank, the global trade finance gap expanded to $2.5 trillion in 2022. Poorer countries tend to suffer most from this gap, which is where the work of the OPEC Fund becomes essential for facilitating international trade to alleviate these challenges. The OPEC Fund works through both its Public Sector, and Private Sector Trade Finance Operations Departments to increase emerging markets’ access to finance, ensuring member countries and partner organisations can benefit from financing solutions.
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Under its Private Sector and Trade Financing windows, funding has been provided to over 350,000 Micro-, Small, and Medium-sized Enterprises (MSMEs). Additionally, the OPEC Fund promotes thematic financing streams. For example, postCOVID, it dedicated approximately $1 billion towards COVID-19 impact and recovery initiatives in developing countries. In response to the food crisis arising from the supply chain disruptions due to the conflict in Ukraine, it deployed $1 billion towards food security initiatives through its Food Security Action Plan.
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Additionally, in response to, “the core challenge of our times” Oszuszky said, “We adopted a Climate Action Change Plan in September 2022, under which we set ourselves objectives to dedicate 40% of our new financing for climate change [related projects].”
Managing risk through partnerships The OPEC Fund also works with other multilateral development institutions in risk-sharing partnerships. The EBRD was its first partner in this regard, with the two actively working together on risk-sharing projects since 2008, particularly in Central Asia and the Caucasus region.
Changing Dynamics in the Trade Finance World: A look to 2024
Oszuszky said, “We also have other risk-sharing programmes in place with other development finance institutions and commercial banks. So we are quite diversified.”
Technology and trade finance
By adopting digital technologies and implementing risk-sharing practices more widely, the international trade industry can make a tangible impact on development. Specifically, these steps can support initiatives that generate jobs, enhance production, and increase lending capacity.
In doing so, the efforts will empower sectors and regions that most urgently need access to such trade finance services, having a multiplier effect on sustainable socioeconomic development.
Following the trends of the trade finance community, technological development is still a major topic for many. For Oszuszky, the focus is on digitalisation, with an emphasis on putting evolution before revolution. The OPEC Fund has adopted a range of digital tools in this regard to help streamline risk management processes, as well as specialised structured products in trade finance that are tailored to customers’ and partners’ needs. In particular, it is looking towards an online customer portal where the customers can input financing requests, as well as additional details. According to Oszuszky, “We are also considering the utilisation of artificial intelligence (AI) and have test programmes running for more standardised tasks. In particular, we have a trial for AI and compliance, and the standard compliance KYC tasks.” These first steps will be used to inform its digitisation actions moving forward, focussing on streamlining operations through technology adoption.
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4.2
Fireside Chat | A breakdown of distribution and an introduction TFG Distribution Finance ANDRE CASTERMAN CEO TFD Initiative
Through the introduction of new sources of structured capital into the market, TFG Distribution Finance seeks to increase available liquidity and service the unmet demand for private credit from companies on TFG’s platform.
MARK ABRAMS
Managing Director, Global Head of Trade & Receivables Finance Trade Finance Global (TFG)
In July 2023, TFG Distribution Finance was launched to drive liquidity into the trade finance market, from institutional capital, banks, and credit funds, facilitated by TFG and its partners. In doing so, TFG Distribution Finance can be used to identify and address unmet demands in the trade finance market, working towards closing the $2.5 trillion trade finance gap –
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a significant barrier to international trade impacting mid-market companies and small to medium-sized businesses (SMEs) in particular. TFG Distribution Finance works with global banks as well as traditional institutional investors, non-bank lenders, and alternative credit funds to participate in the trade finance market.
Changing Dynamics in the Trade Finance World: A look to 2024
Through the introduction of new sources of structured capital into the market, TFG Distribution Finance seeks to increase available liquidity and service the unmet demand for private credit from companies on TFG’s platform. TFG has partnered with key stakeholders across the industry including Allianz Trade, Enigio, the International Trade Forfaiting Association’s (ITFA’s) DNI Initiative, and Sullivan. In this fireside chat, Andre Casterman, CEO, TFD Initiative and Chairperson of the ITFA Fintech Committee, and Mark Abrams, MD, Trade and Receivables Finance, Trade Finance Global, sat down to discuss distribution and its growing importance at TFG, embodied by the TFG Distribution initiative.
Originators and their importance
Distribution and its importance for trade finance
Originators play a vital role in the industry, as they provide liquidity to end customers or clients. In traditional trade, originators are often banks. However, in sub-investment grade markets, factoring companies can also serve as originators. Recently, new players have emerged in the lending market who aren't traditional banks. Often referred to as "fintechs," these entities don't actually sell technology. Instead, they focus on offering financial liquidity to SMEs. This has the effect of making supply chain finance more accessible to both mid-sized companies and SMEs.
Distribution plays a crucial role, especially for non-bank lenders who don't have substantial balance sheets to fall back on. These lenders often rely on third parties and partners to provide the necessary funding. As Casterman put it, this is essentially a case of "funders funding the funders." In the area of distribution, originators obtain funding from various sources such as institutional investors, asset managers, and banks. Credit insurers are also involved in this sector, and they typically assume the credit risk. Casterman said, “There is really strong collaboration in the distribution space, everyone can add value to transactions as they see fit”.
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Perspective of capital markets, investors, and funders on the asset class The additional element in this scenario is the involvement of capital markets and institutional investors. Casterman said, “I heard about distribution and capital markets in 2011. The banks were really keen to start working with institutional investors, as they were feeling the impact of Basel would hit them sooner or later” Now, we are on the verge of this becoming reality, as the Basel regulations will come into effect in 2025. The issue here relates to alignment on the pricing side. Banks are focused on investment grade corporates with a low yield on transactions, focussing on low-risk asset classes. Occasionally, this leads to a misalignment in pricing due to the anticipations of institutional investors. Consequently, the market's perspective has evolved from one centred on early adopters to one where institutional investors are showing interest in alternative lenders that focus on SMEs.
Evolution of TFG Distribution Finance Launched in the summer of 2023, TFG Distribution Finance represents the evolution of TFG's financing arm, focusing on onboarding additional liquidity providers and addressing the needs of different funders.
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This approach acknowledges that one size does not fit all in terms of funding requirements, highlighting the importance of collaboration among various market participants. Abrams said, “For the last nine years our sole aim on the financing side has been to onboard further liquidity providers. That could be banks, funds, alternative lenders; to work with them and map their risk criteria and do the same, on
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the SME, corporate, FI side, and just introduce both parties”. However, in the past two years, TFG has seen a change in the market from both the lending and borrowing side. Abrams said, “Large institutional funders may be interested in accessing the SME space, but for whatever reason will just not be equipped to originate and hold those assets. So, we saw a real need to step into this space
Changing Dynamics in the Trade Finance World: A look to 2024
TFG Distribution Finance aims to evolve and bring in more market participants. Abrams said, “We want to do more than a proof of concept. We want to build different asset books and bring more funders into the market”. Through education and information, TFG aims to broaden the understanding of asset books and enhance distribution.
Abrams said, “If you’re dealing with a small pool of actual institutional investors or banks, we’re never going to really close the gap. But by bringing in new funders, and educating and informing them, it will allow increased capacity to flow into the market”.
and actually service, hold, build books of assets, for those different funders”. Abrams believes that working with technology providers and new capital providers presents a dynamic strategy to expand the business and address the $2.5 trillion trade finance gap, focusing on SMEs and the midmarket.
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4.3
Brexit and beyond: Minister Nigel Huddleston on UK’s trade adaptations MINISTER NIGEL HUDDLESTON Minister of State Department for Business and Trade
To help understand how the UK government is staying ahead of these changes, Trade Finance Global’s (TFG) Brian Canup spoke with Minister Nigel Huddleston, Minister of State at the Department for Business and Trade
BRIAN CANUP
Assistant Editor Trade Finance Global (TFG)
A global pandemic, macroeconomic instability, geopolitical instability, and technological innovation are just a few of the factors impacting the rapid pace of change in international trade. To help understand how the UK government is staying ahead of these changes, Trade Finance Global’s (TFG) Brian Canup spoke with Minister Nigel Huddleston, Minister of State at the Department for Business and Trade
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Adapting trade policy to a changing world Recent changes in the global economy, from the pandemic to the war in Ukraine, have had a profound impact on UK trade policy and compelled the nation to adapt and become more resilient. One area of focus in the UK has been building more resilient supply chains by identifying key products that are essential for various industries and ensuring
Changing Dynamics in the Trade Finance World: A look to 2024
they are sourced from trusted partners. This strategic shift in procurement and trade discussions aims to mitigate future disruptions. Moreover, the UK’s decision to leave the European Union has reshaped its trade landscape. As an independent trading nation, the UK is now responsible for negotiating its own trade deals, and the government is actively seeking new areas of opportunity for trade expansion. This includes a strong focus on the Indo-Pacific region, which offers immense growth potential due to its booming population, rising wealth, and increased demand for British goods and services. The UK’s decision to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which encompasses countries across the Pacific region, reflects its commitment to tapping into these opportunities and is a vital platform for the UK to strengthen its trade relations with these economies. Furthermore, the UK is working on upgrading its digital agreements and enhancing the coverage of services in its trade agreements to align with the modern era. Given that the country’s economy is predominantly service-based, this shift is crucial to ensuring that trade agreements adequately support its unique economic structure.
Implementing the ETDA The Department of Business and Trade (DBT) is taking significant steps to ensure the successful implementation of the newly passed Electronic Trade Documents Act (ETDA). The ETDA brings electronic trade documentation the same legal status as traditional paper-based systems. This fundamental shift is essential to modernise trade practices for a world where many services are conducted online.
Minister Huddleston said, “The UK is showing leadership, and we’re proud leaders in the area of digital trade in the Electronic Trade Document Act.” It is the first G7 country to take this step in reducing trade costs, accelerating transactions and enhancing security. The initiative is estimated to contribute £1 billion to the UK economy over the next decade through cost savings alone.
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Beyond the ETDA, the UK also champions digital trade data in various trade agreements and negotiations. The UK-Singapore digital trade deal is a prime example of this commitment and is considered one of the most advanced agreements of its kind globally. The DBT is actively working to translate these acts into practical realities. Secretary of State Badenoch emphasises that it’s not enough to have the legal framework in place; it’s crucial to make it operational.
Trends and goals for 2024 The DBT has ambitious goals for free trade agreements in 2024, building upon the active year of 2023 when they signed the accession to the CPTPP. In addition to getting the CPTPP agreement through parliament, the department’s agenda for 2024 includes ongoing discussions with various countries and regions for free trade agreements. Notably, discussions are underway with India, with round 13 having just concluded. Similar discussions are taking place with the Gulf Cooperation States (GCC), Israel, South Korea, and Turkey. In these trade agreement discussions, several noteworthy trends and deliberate strategic directions are emerging. One significant trend is the emphasis on modernising trade agreements to align with the requirements of the contemporary economy. Many of the trade agreements
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inherited by the UK are ageing and outdated in their provisions. As digitalisation becomes increasingly pervasive, trade agreements must encompass these aspects to remain relevant. Simultaneously, services have gained prominence, reflecting the shift in economies towards serviceoriented sectors. This landscape has opened up new possibilities for trade agreements to address modern challenges, including investments and intellectual property, facets that are critical components of contemporary commerce.
Advice for UK businesses looking to start trade and export For UK businesses looking to start exporting for the first time in 2024, there is a wealth of support and resources, both online and offline, available to guide them through the process. With this support in mind, businesses should feel assured they are not alone in their export journey. Small and medium-sized enterprises (SMEs) can access a range of resources and experts under the DBT’s Export Support Services umbrella.
The department also has physical trade advisors available in various regions to provide personalised guidance, understand a business’s specific needs, and offer tailored advice on navigating the export process effectively. The key message is that there is a robust support system in place for businesses venturing into exporting. Minister Huddleston said, “There is case study after case study of businesses who have been reluctant, uncertain, or a bit afraid of exporting that, by looking at the export opportunities, have fundamentally changed their business model, their revenue, and have been able to seek opportunities around the world.” Therefore, it is strongly advised that businesses looking to start exporting for the first time in 2024 actively seek assistance and tap into the wealth of resources and expertise available. They should have confidence that they can navigate the export waters successfully with the support of the government and experienced mentors.
The Export Academy is another service that offers a variety of online and offline courses designed to equip newcomers with the knowledge and skills necessary for successful exporting.
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4.4
Africa spotlight, How can we grow risk distributions and syndications in trade finance? MOSA TSHABALALA
Head of FI Trade Sales (International), Risk Distribution and Syndications Absa Group
As the second-largest bank in Africa, Absa’s approach to risk distribution centres around its originate-to-distribute strategy, which involves originating numerous transactions on the continent and distributing some of those assets through various channels. At the ITFA annual conference in Abu Dhabi, Trade Finance Global (TFG) spoke with Mosa Tshabalala, Head of FI Trade Sales (International), Risk Distribution and Syndications at Absa Group, to explore the role of trade finance risk distribution in the African context.
DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
Risk distribution in secondary markets As the second-largest bank in Africa, Absa’s approach to risk distribution centres around its originate-to-distribute strategy, which involves originating numerous transactions on the continent and distributing some of those assets through various channels. One key channel involves engaging with other financial institutions through various agreements, such as master risk participation agreements (MRPAs), enabling them to buy or sell trade assets in partnership.
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Other channels include insurance, development financial institutions (DFI), and institutional investors, which are becoming increasingly important as a means of balance sheet optimisation in light of the evolving regulatory
Changing Dynamics in the Trade Finance World: A look to 2024
landscape being driven by changes like Basel 3.1. Tshabalala said, “Distribution plays a major role in creating further capacity for lending or providing finance [to help close the $2.5 trillion trade finance gap]. It’s extremely important that there is a market for distribution.” These distribution channels play a critical role by serving as a secondary market where trade finance assets, such as receivables or trade-related loans, can be bought and sold subsequent to their initial issuance. However, the coming implementation of Basel 3.1 (sometimes referred to as Basel 4) may bring some changes to this ecosystem.
Complexity of Basel 3.1 The planned introduction of Basel 3.1 has brought forth several complexities and challenges for financial institutions. One initial concern that has since been dealt with revolved around the effective maturity of trade finance assets. Traditionally, trade finance deals are relatively short-term transactions ranging from three to six months. However, Basel 3.1 called for the introduction of a requirement for two-and-a-half-year maturity. This prolonged maturity would have had significant implications for how these assets are managed, not only from a capital usage perspective but also in terms of regulatory compliance.
Tshabalala said, “If you have an effective maturity of two and a half years, it would have a major impact on how you treat the asset from a capital usage perspective. Thankfully, our regulator has now approved that we consider transactions for the tenors they are.” This adjustment acknowledges the unique nature of trade finance and aligns the regulations more closely with the realities of the industry. That’s just one challenge solved; others remain to be addressed before the July 2024 introduction of the new legislation. One of which is the stipulation regarding Loss Given Default (LGD) floors. Basel 3.1 prescribes a minimum LGD floor of 45%. This requirement can be concerning for financial institutions, as it affects how they calculate and manage capital related to these assets. There is also the issue of risk weight for DFIs. As financial institutions increasingly distribute assets through DFI programs, there is a notable change in the classification of these assets. Previously, DFIs were considered zero risk weight, but under Basel 3.1, they are assigned a floor of 45% LGD. This change in risk weight can impact the capacity that can be distributed via DFIs, potentially affecting the strategies of financial institutions in managing their trade finance portfolios.
Tshabalala added, “The adoption of Basel 3.1 remains a major issue in everybody’s mind heading into 2024.”
Closing the gap Despite the impending regulatory changes, the industry must still get by with its day-to-day objectives, such as narrowing the trade finance gap. The conversation around this gap, and particularly the financial inclusion of small and medium-sized enterprises (SMEs) carries a profound social responsibility element, with its lofty aims to uplift nations with lower per capita income levels. Tshabalala said, “To close the trade finance gap, it means that we need to have that greater capacity to distribute and share the risk.” The fact that there is a notable trend of institutional investors showing increased interest in the trade finance asset class will certainly help with this. These new actors introduce new dynamics and open opportunities while necessitating strategic adjustments. Financial institutions must skilfully navigate these changing conditions while ensuring they meet regulatory requirements and societal obligations.
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4.5
The case for financial inclusion of … banks STAN COLE
Advisor UNITE Global AS
Correspondent banking has played a central role in the global payments system for ages. Yet, the traditional correspondent model has been ailing for the past 20+ years.
In its most basic form, financial inclusion is defined as the availability and equality of opportunities to access affordable and timely financial services. Naturally, the debate around financial inclusion has primarily been focused on individuals and small businesses accessing useful and affordable financial products and services that meet their needs.
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Accordingly, we usually don’t think of banks first in the context of economic benefits arising from advancing financial inclusion. Nonetheless, an argument can be made that a bank’s ability to access affordable and timely crossborder transaction services equates to financial inclusion and vice versa. For individuals, access to a bank account is a first step toward broader financial
Changing Dynamics in the Trade Finance World: A look to 2024
inclusion. For banks, it is access to correspondent banking services via accounts in foreign currencies (a.k.a. ‘nostro’ accounts) at foreign banks that provide correspondent services in these currencies. Banks need nostro accounts to access financial products in foreign jurisdictions and facilitate the settlement of international trade and foreign exchange transactions. Under the incumbent correspondent banking model, a bank typically needs to maintain numerous nostro accounts with banks around the world to cover the currencies it needs to transact internationally on behalf of its customers.
De-risking: What happened and what are the impacts? Correspondent banking has played a central role in the global payments system for ages. Yet, the traditional correspondent model has been ailing for the past 20+ years. First in the aftermath of 9/11, 2001, and then from the fallout of the Global Financial Crisis(GFC) post-2008. That one-two punch has continually pushed costs up (regulatory, risk, legal, compliance, operating, etc.), making the business of correspondent banking borderline sustainable and difficult to scale for most banks, except for a handful of large global correspondents.
As a result, major banks across the world have been reassessing the costs of maintaining large correspondent portfolios and trimming down their existing nostro relationships with smaller banks, a phenomenon known as “de-risking”. Such downsizing of correspondent networks by major players has been disproportionately affecting banks in developing, higher-risk economies where the consequences of limited access to the global payments system invariably extend beyond the country’s banking sector. A typical headline driver for de-risking by major correspondents has been their
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need to mitigate risk exposure (incl. compliance, financial crime, and reputational) against a backdrop of intensifying regulatory pressures. Hence the prevalence of “pruning” correspondent portfolios primarily from the ‘riskier’ nostro account relationships. On a closer inspection, however, the underlying reasons for declining risk appetite and de-risking are first and foremost commercial, reflecting the reality of matching the benefit (revenue) versus the cost of retaining a respondent bank as a client. In banking ‘riskier’ means ‘costlier’. The cost of maintaining nostro relationships among global banks is estimated to run at c.$1.5 billion annually, and the average cost of maintaining just one nostro account by the book, including KYC onsite visits, can be about north of $20,000.
customers, the bank risks losing corporate clients to larger competitors and retail clients to fintechs. De-risking is a global phenomenon across the financial industry. Big banks cannot be somehow “decreed” by national or multilateral bodies to cease trimming correspondent client portfolios and closing commercially unprofitable accounts. An argument can be made that ‘de-risking’ essentially amounts to financial ‘exclusion’ and has an adverse economic impact on a country’s economy, particularly in the developing world. A terminated nostro relationship materially restricts a bank’s ability to transact internationally, limiting its ability to access dollar liquidity and
The economics of the existing correspondent model simply do not work in a new reality of rising costs and tightening regulatory and supervisory oversight. Banking is a commercial business, not a charity. Banks cannot keep client relationships where costs exceed revenue. Smaller banks that have been ‘lucky’ to survive waves of de-risking have had to absorb substantially higher account fees and keep higher balances to retain their nostro accounts. These higher costs, if absorbed, considerably reduce banks’ profitability. If passed to
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make cross-border payments for its customers, which restricts the ability of smaller businesses to participate in international trade, hindering economic development, slowing growth and incomes, and essentially undoing efforts to lift people out of poverty.
The future of de-risking When looking at the current state of correspondent banking, it is important to ask a few questions: Can the de-risking tide be reversed? Can smaller and mediumsized banks get back into international trade payments without the need and cost of opening and maintaining multiple correspondent nostro relationships?
Changing Dynamics in the Trade Finance World: A look to 2024
Can this be done without substantial investments and systems upgrades? Can smaller banks offer their customers real-time cross-border payments and settlements at a fraction of the current cost of international wires? Unfortunately, the current answer is no. Not today at least. Not under the incumbent correspondent banking model with its inherent high-cost structure of multiple bilateral, trust-based relationships (IOUs in commercial bank money), with intermediaries layered along the payments chain, and non-productive use of liquidity (trapped up in numerous nostro balances), among others.
What does the new correspondent banking model look like? Tweaking the legacy model is not going to change its economics and reverse the downward trajectory of the global correspondent network. To reduce de-risking, we need a transformative change, a new correspondent model. Not a rehash of what we now have. We need an alternative crossborder payment arrangement which radically changes the structure and cost of transferring value internationally. A solution that slashes costs by eliminating intermediaries and the need for multiple bilateral nostro relationships.
playing field solution, neutral to transaction volumes, balance sheet size, and location (with the exception of sanctioned countries, of course). The benefits of such a new, inclusive correspondent model for banks would trickle down the customers’ chain into the real economy of their host countries and, in turn, open yet more new trade and investment opportunities for the country’s smaller businesses and their banks. With increased international trade activity comes development, economic growth, and rising incomes – key prerequisites for advancing financial inclusion.
An inclusive model gives smaller banks direct access to real-time international payments via a common platform while paying the same low, transparent fees as large international banks. A level-
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4.6
Cash is king, and helping suppliers may be in buyers’ best interest EVAN IVANOV
Director of Global Trade Solutions BNP Paribas Americas
High-interest rates and elevated inflation are pressing suppliers to reduce their cashconversion cycles It’s not easy being a supplier these days. In an era of elevated interest rates and inflation, each passing day with cash tied up in sales or production could exert additional pressure on suppliers’ balance sheets and prompt them to maximise the cash portion of their working capital. Some buyers are taking note and coming to their aid.
Risk distribution in secondary markets Many suppliers were already cash-stretched before inflation began rearing its head in 2021 and before the U.S. Federal Reserve started hiking rates in early 2022. For them, it was difficult—if not prohibitive—to wait the full 60or 90-day terms of payment collection set with their buyers. Today’s environment, in which the value of cash erodes more rapidly, may only accentuate .
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that challenge and press them to liquidate trapped cash so that they can manage their working capital more efficiently Typically, the more liquidity they have on hand—the more they can fund growth, streamline processes, reduce costs, enhance service levels, pounce quickly on investment
Changing Dynamics in the Trade Finance World: A look to 2024
opportunities (or simply park their cash in an investment vehicle that offers yield to offset inflation), and ultimately improve profitability.
The rush to shorten cashconversion cycles We have discerned a rise in CFOs’ interest in supply-chain finance (SCF) programmes, in which a program provider (such as a bank) offers to buy a supplier’s receivables in exchange for immediate cash. The provider then collects payment from the buyer at a later date in accordance with the payment terms established between the buyer and the supplier. In this manner, suppliers reduce the amount of time they need to wait to collect payment—and gain quicker access to the money they are owed.
Supply-chain finance programmes seek to enable suppliers to shorten their cashconversion cycles (i.e., the time it takes to convert the products suppliers sell into cash). They may also benefit buyers by bolstering the financial and operational resilience of the supplier base they rely on, thus reducing the risk of supply disruptions that can undermine a buyer’s business. For this reason, in our view, it is in the self-interest of buyers to ensure a smoothly functioning supply chain by helping their supplier base. To no surprise, we see an uptick in CFOs on the buyer side eager to implement “buyer-led” programmes, which link a single buyer with multiple suppliers. Such programmes help automate transactions, track
invoice approval, and handle settlement processes between a buyer and its suppliers.
A shift in focus among buyers To be clear, buyers have always been interested in managing their own working capital efficiently. Yet historically, their objective in doing so was commonly to reduce costs through inventory management. For example, before the prevalent product shortages of 2021–2022, many buyers emphasised just-in-time (JIT) strategies—by which they reordered products only to replace the ones they’ve already sold—that sought to minimise inventory-holding costs. When shortages began plaguing supply chains in 2021, a great deal of them sought to temper their JIT approach and resorted to a more nuanced and balanced approach to inventory: They began stockpiling inventory with the realisation that the cost savings achieved through lean inventory would be outweighed by lost sales opportunities from unreplenished stock as a result of product scarcity or shipping delays.
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Nowadays, having been whipsawed within a brief few years by oscillating interest rates, inflation, and the complex and unpredictable nature of global trade, a significant number of buyers are turning their attention to broader objectives than just expense reduction, namely: fortifying their supply chains, and shoring up their suppliers’ finances.
A sense of urgency for cash in low-margin industries Shortening cash-conversion cycles is typically the allweather objective of any supplier—regardless of economic circumstances. Yet today’s environment of elevated interest rates could make a do-nothing approach particularly expensive, especially in industries and sectors where supplier margins are thin and supply disruptions can delay manufacturing. Labour-intensive industries involving a great deal of product assembly, such as autos, are especially vulnerable. There could be a number of ways to expedite cash conversion. One is “factoring,” which is a form of receivables purchase whereby producers of goods and services sell their receivables (represented by outstanding invoices) at a discount to a programme provider. Another is to pursue various inventory-management solutions that reduce the cost of holding inventory.
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We have noted a particular uptick in interest among buyers in establishing and expanding payables programmes, which potentially carry the benefits of: 1 Helping buyers provide indirect financial support to their supplier base; 2 Extending buyers’ payment terms in order to retain as much liquidity for as long as possible; and ultimately. 3 Reducing the dependence of suppliers’ cash flow on their buyers’ inventory turn (the time it takes for their buyers’ inventory to clear).
A sense of urgency for cash in low-margin industries Though inflation has started to ease and interest rates should start to trend downward over time, we believe that the financial and logistical turbulence over the past few years is cementing a more permanent role for supplychain finance strategies in companies’ toolboxes in order to build financial resilience across the chain, liberate capital tied up in balance sheets, and improve profitability.
According to our estimates, an extension of payment terms from 45 to 60 days may reduce a buyer’s ongoing cash needs for supplier payments by up to 33%, thereby freeing up cash for other needs. (Note that supplychain finance programmes are usually priced well within a company’s weighted average cost of capital—or WACC—and usually within the price range of a typical revolving line of credit given the uncommitted, shortterm nature of these programmes.) Conversely, we estimate that, for every $1 million in annual buyer expenditures on a given supplier with a typical payment tenor of 45 days, each one-day reduction in payment tenor could improve the supplier’s cash flow by up to approximately $3,000 before the financing costs entailed in a typical supply-chain finance programme.
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4.7
Navigating the future of B2B commerce: A conversation with HSBC’s Vinay Mendonca VINAY MENDONCA
Chief Growth Officer, Global Trade and Receivables Finance HSBC
Vinay Mendonca, Chief Growth Officer, Global Trade and Receivables Finance at HSBC, sat down with Deepesh Patel at Sibos Toronto to discuss these shifts and how they are influencing trade finance.
DEEPESH PATEL
Editorial Director Trade Finance Global (TFG)
In a rapidly evolving business environment, B2B commerce is undergoing significant transformations. Companies are increasingly leveraging platforms and e-commerce solutions to expand their distribution networks and diversify their supplier base.
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Vinay Mendonca, Chief Growth Officer, Global Trade and Receivables Finance at HSBC, sat down with Deepesh Patel at Sibos Toronto to discuss these shifts and how they are influencing trade finance. This piece explores seven key takeaways on how HSBC is evolving to meet the changing needs of tomorrow’s corporate customers.
Changing Dynamics in the Trade Finance World: A look to 2024
1. Shift from JIT to JIC The pandemic has exposed the vulnerabilities of the just-intime (JIT) supply chain model, which minimises inventory to reduce costs but is susceptible to disruptions. A study by Gartner found that 75% of organisations plan to increase their investment in supply chain resilience in the next two years. HSBC is helping clients as they are transitioning towards a justin-case (JIC) model that prioritises supply chain resilience. Mendonca said, “Inventory finance is a solution where it helps them optimise the best of JIT and JIC. This shift is not merely a reaction to recent disruptions but a proactive strategy to build more resilient global trade systems.”
2. Diverse suppliers, diverse risks
3. Embedded finance solutions
Globalisation has led to increasingly complex supply chains, bringing both opportunities and risks.
HSBC is not just a financier but a strategic partner that embeds its solutions into clients’ business models.
HSBC is helping its clients navigate this complexity by offering solutions like preshipment finance.
A recent survey by Deloitte found that 71% of CFOs believe that embedded finance will have a significant impact on their industry in the next three years.
“We’re making sure again, through products like preshipment finance, that our clients can improve the resiliency of their supply chains,” said Mendonca. These solutions provide liquidity to suppliers early in the working capital stage, enabling them to initiate the procurement and manufacturing processes and plan for contingencies.
Mendonca said, “It’s more than just a financing solution and liquidity. It’s actually about being ingrained in the core business of our customers to enhance their products”. By offering solutions like receivable finance, HSBC helps its clients not only secure liquidity faster but also make their products more attractive to buyers by offering extended payment terms and enabling more sales.
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4. Data-driven decision making In an era where data is king, HSBC is leveraging analytics to offer more targeted solutions to its clients. According to Forbes, 90% of executives believe that data analytics is essential for making informed business decisions. Mendonca said, “Underpinning all of those is the digitisation of trade that’s taking place,” The bank uses data analytics and digital decisioning scorecards to understand market trends, customer behaviour, supplier performance and other risk factors, thereby providing more effective and customised trade finance solutions.
5. APIs and the movement of data The seamless movement of data is crucial in today’s interconnected world. With 83% of organisations believing that APIs are essential for their digital transformation strategies, HSBC is focusing on APIs to ensure that data flows smoothly between different systems, which is particularly relevant to trade finance. This approach allows for realtime decision-making and offers clients a more streamlined and efficient experience.
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6. Increased investment in partnerships One of the most notable aspects of HSBC’s evolving strategy is its investment in fintech partnerships. HSBC has invested $35 million in Tradeshift, a global network for supply chain management and has announced the formation of a Joint Venture with Tradeshift. The investment is part of a funding round expected to raise at least $70 million. The JV aims to deploy a range of payment and fintech services embedded into trade and e-commerce platforms like Tradeshift. The partnership signifies HSBC’s commitment to digital transformation and its focus on unclogging the flow of working capital across supply chains.
6. Increased investment in partnerships HSBC has also launched a digital receivables finance capability co-created with Trade Ledger. This initiative enhances its service offerings by providing clients with more streamlined and efficient onboarding and decisoning solutions for managing their receivables.
Ardent Partners found that 72% of businesses believe that accounts receivable automation is essential for their cash flow management strategies. The partnership with Trade Ledger signifies HSBC’s commitment to digital transformation and its willingness to collaborate with fintech companies to offer innovative solutions.
Resilient, data-driven, customer-centric HSBC’s evolving trade finance strategy reflects a broader shift in the industry towards more resilient, data-driven, and customer-centric solutions. By focusing on supply chain resilience, data analytics, and strategic partnerships, HSBC is positioning itself to meet the challenges and opportunities of the new global trade landscape.
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