Embracing Growing Opportunities for Credit Insurance and PRI in Uncertain Times

The Power of Electronic Trade Documentation and Messaging

The UK’s Lloyds Bank in April 2024 completed its first transaction using an electronic Bill of Lading (eBL) on the WaveBL trade documentation platform, in a cross-border deal that featured entirely digital exchanges of documentation to support a British company in a trade deal with an Indian supplier.

The implications are game-changing. The operational impact of the deal revealed enormous cost and time-reduction implications, which the industry would not be able to ignore as the various platforms take off and mature. According to Lloyds Bank, eBL reduced transaction completion times from 15 days to just over 24 hours, which in turn reduced working capital costs and, together with the use of a digital promissory note (dPN), made the trade deal entirely paper-free. The WaveBL network boasts members in 136 countries and includes four of the world’s ten largest container shipping carriers.

The three other major developments in the electronic trade documentation architecture are:

1. The Electronic Trade Documents Act (ETDA) 2023 in the UK receiving Royal Assent from King Charles III last July, legally effective on 20 September 2023, to make Global Britain’s trade with partners all over the world seamless, efficient, and sustainable.
2. The enhancement of the Model Law on Electronic Transferable Records (MLETR).
3. The WTO’s initiative in including work on trade-related aspects of e-commerce as part of the organization’s Joint Statement Initiative (JSI) on E-commerce in future WTO negotiations.

There is no doubt that a major boost can come from the UK’s ETDA with the British Government’s initial estimate that the UK economy is set to receive a GBP1.14 billion boost over the next decade. With less chance of sensitive paper documents being lost, and stronger safeguards using technology, digitalizing trade documents are set to give businesses that trade internationally greater security.

With English law being the very foundation of international trade, including several Islamic finance contracts such as the Commodity and Syndicated Murabaha and Sukuk issuance, it has important implications for the global Islamic finance industry. The UK is widely seen as a leader in digital trade and this new act will make it easier for businesses to trade efficiently with each other, cutting costs and growing the UK economy by billions over time.

According to the WTO, the UK’s EDTA removes requirements for the majority of paper trade documentation. Varying degrees of progress are also being made towards implementation in the remaining G7 countries, with each taking unique approaches to amend and introduce legislation.

Another important development is the successful testing of an interoperability solution capable of enabling the widespread use of electronic documents that are critical to digitise trade by Swift, in collaboration with BNY Mellon, Deutsche Bank and four electronic Bills of Lading (eBL) platforms.

According to Shirish Wadivkar Global Head, Wholesale Payments and Trade Strategy at Swift, “standards set with the industry – combined with global interoperability facilitated by Swift – can enable eBL providers and digital trade platforms to seamlessly interact with banks, corporates, and the wider trade ecosystem. Such industry-wide collaboration is essential to achieve a ‘zero paper trade’ future.”

The Lack of Technical of Interoperability Between Platforms

According to Swift, there is much to gain by digitising global trade, from reducing costs and improving transparency to mitigating fraud and addressing the USD2.5 trillion trade finance gap. Paper-based Bills of Lading – associated with lengthy delays and inefficient processes – offer a significant opportunity for improvement.

Compared to their paper equivalent, eBLs reduce the risk of document loss and fraud, speed up the transfer of documents and shrink the carbon footprint associated with paper processes. McKinsey predicts that adopting eBL could save the industry USD6.5 billion a year and enable USD40 billion in global trade by 2030. However, while the need for eBL adoption is generally recognised, the data according to the FTI Alliance, shows that in 2022, only 2.1% of bills and lading and waybills in the container trade were electronic.

The good news is that some 80 institutions have signed up to FIT Alliance’s ‘Declaration of the Electronic Bill of Lading’ which commits international trade stakeholders to drive digitalisation within their industries, starting with eBL. With a significant proportion of global trade conducted using English law documents, an important milestone was the passing of the UK ETDA, which grants electronic trade documents the same legal significance as the paper equivalent and gives eBL created under different systems legal equivalency for the first time.

The current lack of technical interoperability between existing eBL platforms, says Swift, presents a significant obstacle to wholesale adoption. The nine eBL providers authorised by the International Group of Protection and Indemnity Clubs (IGP&I), for instance, each have their own rules and customer bases, meaning that customers of one eBL system can’t take part in transactions handled by another eBL system. Instead, financial institutions, corporates, and others involved in each trade transaction, need to connect to multiple systems – an approach which is both inefficient and costly. Such ‘digital islands’ are not sustainable.

“Interoperability is needed between different eBL platforms so that users can interact with each other using a single identity. Given our long history of enabling global interoperability – and recent initiatives such as our solution to interlink central bank digital currencies (CBDCs) – we believe Swift can play an important part in addressing the eBL challenge,” maintains Swift’s Shirish Wadivkar.

Swift in fact started working with FIT Alliance partners and eBL platform providers in 2022 to develop an API-based eBL interoperability model. Under this approach, firms could leverage a single connection to Swift to interact with trade transactions carried out using multiple different eBL platforms. In 2023 the partners ran a Proof of Concept (PoC) to test how an interoperability solution could work in practice, collaborating with eBL platforms edoxOnline and CargoX in the first phase to test the use of a single ubiquitous API contract to open a secure channel with Swift, and expanding the PoC to include two additional eBL platform providers – TradeGo and WaveBL – as well as BNY Mellon and Deutsche Bank. Using the same API layer, participants were able to successfully reproduce the end-to-end flow transfer process of an eBL in a simulated trade transaction.

The Beguiling Lure of Generative AI in Trade

Perhaps the biggest potential change in the near-to-medium term may come in digital underwriting and digitalization in commercial insurance lines using targeted Generative AI, according to Swiss Re. But for trade cohorts, it is important in the current climate of AI hype not to over-think nor over-talk the significance of AI to facilitate an orderly transformation to this very disruptive and yet inevitable technology.

“Along with the use of big data,” says Swiss Re, “AI is expected to be eventually used widely in risk assessment and underwriting. Given the level of confidence needed to deploy new technologies in underwriting, fully digitalized/automated AI, and Machine Learning (ML) enabled systems are still not accurate enough for use at scale. This also means that algorithms cannot be relied on to fully replace traditional risk assessment, except in simpler lines of business such as motor. This said, digitalization can complement existing processes, including classifying and segmenting risk as finely as possible for more accurate risk pricing.”

Increasingly, commercial insurers are making use of digital technology in portfolio steering and risk selection. The benefits are important. “By leveraging third-party digital data overlaid with their own information,” stresses Swiss Re, “they can derive insights on potential risk accumulation, such as that caused by a concentration of high-value properties exposed to specific hazards. For example, the utility sectors’ liability exposure is increasing due to infrastructure that can spark fires. Utilities may operate in wildfire prone regions (such as network operators, tree cutters). Using third-party digital data on, for instance, locating sources of ignition such as power lines and rail tracks, insurers have a deeper view as to areas of potential fire risk accumulation.”

The WTO Informal Working Group on Micro-and-Small-and Medium-sized-Enterprises (MSMEs) initiative involves 89 (as of July 2023) member states, accounting for over 90% of global trade. These negotiations span a broad range of critical topics such as online consumer protection, electronic signatures and authentication, electronic contracts, transparency, paperless trading, open internet access, and data flows and data localization. The Group continues to discuss challenges for MSME access to digital trade, including cyber readiness, standardizing trade digitalization, and single windows (or access points) to access trade information.

In this respect, the recent launch by the World Bank Group’s private sector funding arm, the International Finance Corporation (IFC), of the USD4 billion MSME Finance Platform to aid financial service providers in delivering funds to small businesses in emerging markets through banks, non-bank financial institutions, microfinance institutions, and innovative digital lenders, with a particular focus on those owned by women and those in the agriculture and climate sectors, assumes much greater importance. The Platform, according to Makhtar Diop, Managing Director of IFC, will also use various forms of credit enhancement to mobilise private capital, including an innovative Catalytic First Loss Guarantee, aiming to attract an additional USD4 billion in financing from eligible financial service providers to expand lending to these businesses.

Digitalization of trade could be a great equalizer and facilitator by providing new opportunities for those economies that have so far been left behind by allowing them to overcome some of the most important barriers to trade that they face, such as transportation costs and institutional disadvantages.

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