The ICC may be the organisation that ultimately sets the standards but it is not something that they can do alone.
Estimated reading time: 7 minutes
If you mention the International Chamber of Commerce (ICC) to any practitioner––from a bank or a corporate––involved in trade finance most, if not all, would associate the organisation with issuance of rules.
Certainly, this is true with the ICC having been in the business of ‘issuing rules’ since 1933, when the first version of Uniform Customs and Practice for Documentary Credits (UCP) came out.
This event was monumental, as it introduced order and certainty to those involved in documentary credits and, whilst subsequent versions of the UCP were issued to keep up with developments in the market, it also provided a launching pad for further rules such as the Uniform Rules for Collections (URC) introduced in 1979.
However, as the market has evolved and the drive for digitisation has increased, so too has the ICC needed to ensure that it keeps up with this trajectory.
This is evidenced with the introduction of the ill-fated Uniform Rules for Bank Payment Obligations (URBPO) in 2013, the latest electronic documentary credits (e-UCP) and the supplement for collections (e-URC) being launched in mid-2019. Finally, late 2021 saw the introduction of a completely new set of rules, the Uniform Rules for Digital Trade Transactions (URDTT).
With long-standing, globally recognised rules in place supporting 21st-century instruments like the bank payment obligation (BPO), strong rules covering the e-versions of the main trading instruments of documentary credits and collections, new rules for digital trade transactions, and the ICC digital standards initiative (DSI) well-established, what does the landscape currently look like for digital trade under these?
Whilst there are documentary credits issued today that are subject to eUCP, this does not translate to the transaction itself being digital in nature––far from it––as eUCP supports the presentation of electronic records to form a conforming presentation (for example, PDFs) either in isolation or in conjunction with physical paper records.
So, not a digital trade transaction at all where the transaction is undertaken end-to-end using data as opposed to documents.
In most cases, whilst a documentary credit may be under eUCP, the presentation itself is either fully paper-driven or ‘mixed’.
Some of the documents may start as electronic records but the actual presentation ends up being completed in paper format therefore removing the potential benefits offered by wholly electronic record presentations.
In short, the adoption of these new modern rules has struggled to gain mass-market adoption.
Solutions to current challenges
To help rectify these hurdles, the ICC Banking Commission has constructed two working groups to help unlock the critical path barriers hindering implementation.
The first is the Commercialization Working Group, led by Merlin Dowse, executive director, global head of Core Trade Innovation and Digital Solutions at JP Morgan, which focuses on understanding some of the obstacles to integration and manners in which to resolve them.
The second working group––led by Samuel Mathew, managing director, global head of documentary and financial institution trade at Standard Chartered Bank––focuses on application programming interface (API) standards to help improve the efficiency of bank technology departments.
This comes in addition to corporate and trade platform players connecting and sharing data with each other to enable trade transactions.
The reasons for this lack of traction in moving away from paper presentations are quite simple and revolve around the following.
Currently, most markets have legislation that has not kept up with digital developments.
Consequently, there is uncertainty surrounding the legal standing of physically unsigned digital documents and whether they hold the same weight as documents with ‘wet ink’ signatures.
When one considers fully digital solutions where data––rather than documents––are being evaluated, then there is a definite mismatch of legislation.
Supply chains not being fully connected
Ideally, every counterparty in an end-to-end supply chain would have the same driver and willingness to move away from inefficient and costly paper.
Unfortunately, this is not always the case, resulting in fully electronic transactions (or even digital) failing after the first hurdle.
Consequently, the downstream counterpart is not enabled, so the transaction ends up reverting to paper or remaining a paper-based trade entirely.
In reality, change has mostly been driven by various parties trying to improve their own working capital positions separately, meaning that there has been a misalignment of benefit realisation.
Ultimately, connectivity will rely on measurable value being shared throughout these supply chains.
Limited customer demand leads to banks not wanting to be early adopters for aforementioned reasons.
Unless a customer expresses a strong desire or need to get rid of paper, then most banks on balance will choose the ‘reactive’ path.
This is not a criticism but rather an economic reality. Unless there is a strong business case, a risk event, or a large customer threatening to take their business elsewhere, a bank may decide not to use their development and innovation funding in this manner.
Digital islands or a lack of interoperability
This is especially prevalent in the electronic bills of lading (eBLs) space where shipping companies and customers may use different providers of eBL issuance services.
These providers will each have their own rulebook resulting in fragmented practices that can end up disabling rather than enabling.
Last but not least, even when a solution is technically feasible, the parties in the chain may find that it is not necessarily cheaper, faster, or better than the current status quo. After all, if the digital solution does not improve efficiency in terms of cost and risk, then why change?
However, there is light at the end of the tunnel.
The issue surrounding the legal standing of electronic records is now being tackled in several key geographies through implementation of the United Nations’ (UN’s) Model Law on Electronic Transferable Records (MLETR).
Singapore and Bahrain have already adopted MLETR, with the UK progressing towards the same goal under G7 support. Elsewhere, the US has recently implemented some amendments to their Uniform Commercial Code (UCC) that moves it closer to the MLETR.
A foundational enabler titled ICC Standards Toolkit for Cross-Border Paperless Trade has been issued by the ICC DSI. This comprehensive guide outlines actionable ways the market can move towards greater adoption in a consistent and cost-effective manner.
These facets come together to help move the market towards greater acceptance and adoption of electronic records. The next step: fully data-driven digital trade.
The future of digital documents
Whilst this macro-level approach has value, the Banking Commission’s Commercialization Working Group is crucial to understanding how these rules will affect operating models.
The group is also integral for comprehending the incentive required for change, leading to the funding allocation needed for these measures to be adopted and maintained sustainably.
This is where the URDTT will come to the fore. These rules are designed for the digital-only trade environment, with a goal of harmonisation towards MLETR.
No paper––now there’s a thought!
Dowse said, “Digital transformation, whether by a corporate or a financial institution is a journey where each one of us travels at a different pace.
“To this effect, the Commercialization Working Group’s…collaboration with the ICC Digital Standards Initiative [has] shifted our focus more on the ‘how’ instead of the ‘why.’”
Mathew said, “Most digital solutions out there underestimate counter-party risks, digital title/control of cargoes, and the role and ability (read capital) of lenders to take credit risk of importers. Therefore [they] are solving only a part of the puzzle.
“It’s not just about the data, but also the ability to have constructive control of title and take risks based on the digital assets. Very often solutions solve just part of the trade flow and only cater to one (or a few) parties in the chain.”
Mathew added, “Countries adopting legal frameworks such as MLETR will definitely help, but the industry also needs a resolution for technology standards and interoperability issues.
“Even with a digital title/asset, the onus of proving singularity/uniqueness rests on the parties contesting it in a court of law.”
Ultimately though, standards and rules will mean nothing unless the entire trade ecosystem works together––this means banks, buyers, sellers, governments, regulators, shipping companies, and more; there has to active participation.
Banks must be prepared to get involved in lobbying for change, as well as spending hard-fought innovation budget.
Supply-chain participants need to look end-to-end and not just stop at the first tier, but consider how the rest of the chain can be strengthened to operate more efficiently.
Governments need to recognise and embrace the need for legal and structural reform for trade which not only improves the way business functions but also mitigates risk in the system and the ICC needs to continue to play the role that its always played – “make business work for everyone, every day, everywhere”.
There’s no more standing on the sidelines!