Digitalisation has long been regarded as the next step forward for trade finance, but the widespread adoption of technological solutions to move from paper to data has so far proven elusive. Angela Koll, Senior Business Expert for Trade and Supply Chain Finance at Commerzbank, explains why the Marco Polo Payment Commitment may well represent a departure from this trend, and a bold move towards a more efficient, transparent future for trade.

As a complex, manual and heavily paper-based industry, trade finance stands to benefit significantly from digitalisation. Recent years have seen strong efforts to explore the application of new technologies to create solutions that add value to clients.

Addressing the needs of importers and exporters – by using technology to enable greater speed and transparency while generating cost savings – is at the core of these efforts. In a client-centric bank like Commerzbank, progress often originates with the customer and their evolving needs. This is true across the sector – the moment clients start demanding new solutions, it becomes a priority on which banks must deliver.

The motivation to make processes quicker, easier and more transparent has fuelled the uptake of open account settlement, which allows goods to be shipped before payment is due. Buyers around the world have become keenly aware of its benefits, with open account settlement now used for approximately 85% of global trade. But the lack of securing payments by a financial institution leaves suppliers exposed to risks of non-payment and working capital challenges.

Developing a solution that combines speed and security has been an enduring priority for banks. Some had already attempted to apply the risk mitigation benefits of traditional documentary trade finance instruments, such as letters of credit, with the efficiency of open account trade. The Bank Payment Obligation (BPO) was one such solution, touted as an innovative practice with global potential. But the BPO failed to make its mark on the sector – indeed the market was not ready for it and uptake was limited.

Blockchain provides a breakthrough

Speed, convenience and transparency are all benefits closely associated with distributed ledger technology (DLT), which lends itself uniquely to the development of trade finance solutions. The Marco Polo Payment Commitment provides an irrevocable payment commitment from the buyer’s bank to the supplier. It builds upon the idea behind the BPO to offer a more cutting edge, comprehensive trade finance solution – and one which has so far been better received by the market.

Drawing on the capability of DLT to handle trade data, the Marco Polo Initiative brings together Marco Polo Network – a fintech formerly known as TradeIX – with a coalition of leading banks. The Marco Polo Payment Commitment employs Corda blockchain technology, which offers the further possibility of connecting to corporates’ Enterprise Resource Planning (ERP) systems and to other networks, giving the solution added flexibility.

After all parties have been onboarded, due diligence completed, and a program established between the parties, the buyer begins uploading the purchase order data of the trade transaction into the Marco Polo platform. The supplier needs to approve the data to set the conditions for later data matching.

At this point the buyer’s bank provides a conditional irrevocable payment commitment in favour of the supplier, which is communicated via the Marco Polo network. After shipment of goods, the supplier uploads the invoice and logistics data to be matched against the agreed purchase order data. An automatic data-matching process then takes place which, if successful, triggers the conditional payment commitment to be converted to an effective, irrevocable abstract payment commitment, obliging the buyer’s bank to make a payment in favour of the supplier at maturity date.

Aside from streamlining legacy trade finance processes and mitigating risk for suppliers, the Marco Polo Payment Commitment also creates options for financing, granting access to increased liquidity, and in turn helping to optimise working capital and cash management. In this respect, Marco Polo’s blockchain technology contributes to the overall integrity of the wider supply chain.

Encouraging progress being made

The Marco Polo Payment Commitment has recently achieved several crucial milestones on the road to widespread adoption. After running several pilot transactions, Commerzbank collaborated with Türkiye İş Bankası A.Ş and Landesbank Baden-Württemberg (LBBW) in May 2021 to become one of the first banks to execute live commercial transactions using the network – supporting the export of laminated glass interlayers from Germany to Turkey.

More followed, as the Payment Commitment supported transactions involving the purchase of special couplings used in the manufacturing of pumps and valves. In October, Commerzbank processed other live transactions involving the export of yarn from Germany to Turkey.

These mark important early milestones in the life cycle of this solution, demonstrating the viability of digital, end-to-end settlement using electronic, decentralised and simultaneous data exchange with different participants. It is an encouraging sign of the role of DLT in the future of trade finance.

Coordination with, and support from, regulatory bodies is also essential to ensuring the Payment Commitment is rolled out successfully, with individual jurisdictions having different requirements – including with respect to data, for example. With this in mind, the solution has been developed to incorporate various data fields, allowing flexibility regarding the data that can be input to meet differing regulatory and compliance requirements of various participants on the network.

And support has also been forthcoming from leading industry bodies. On October 1st, the International Chamber of Commerce (ICC) launched its Uniform Rules for Digital Trade Transactions (URDTT), a set of new “technology agnostic” rules that can be applied across all digital transactions. This supports the Marco Polo Network’s own efforts to promulgate a rulebook that provides a legal framework for processing data exchange and matching electronic records to create a payment obligation.

Close collaboration needed to create a greener trade finance sector

The ability to receive and exchange a wide range of data also holds great promise with respect to advancing the sustainability agenda. With an increasing need in the industry for businesses to demonstrate their green credentials – indeed, banks are placing ever-more focus on supporting clients’ sustainability journeys – the importance of data cannot be overstated. Equipped with greater transparency and more opportunities to gain data – afforded by sophisticated platforms and initiatives such as the Marco Polo Payment Commitment – it will be far easier for businesses to evidence and prove their sustainability efforts. As part of this, providing enhanced traceability of goods and services will play a key role in helping to support and facilitate sustainable trade.

The gradual process to make trade finance less reliant on paper documents is also an important – if modest – contribution to the overall sustainability of the sector. While this process is reliant on effective standard-setting – industry-wide standards are necessary to connect different networks and streamline processes – some progress is already being made. The ICC’s Digital Standards Initiative (DSI), launched in 2020, aims to set standards to support and facilitate trade finance digitalisation.

At present, the Marco Polo Payment Commitment does not eliminate the need for paper entirely. Physical documents are still used within the trade transaction itself, exchanged directly between the supplier and the buyer. The software does, however, have built-in capabilities that indicate the natural next step. The ultimate aim of the Payment Commitment is to connect the handling and matching of trade data with eDocs – enabling the use of electronic bills of lading and transfer of ownership. The network could also conceivably apply data from GPS tracking systems, adding to the richness of data available to users and market participants, for example by triggering payments automatically upon the arrival of goods at determined locations, and providing full transparency of the shipment for trade partners and banks.

The digitalisation of trade finance is an ambitious goal, one that requires the input of a wide array of stakeholders: banks, exporters, clients, logistics specialists, regulators, technology providers and a host of other market participants must co-ordinate their efforts in order to build a more efficient, more transparent sector for all. To get the ball rolling, it will be the major participants such as corporates and banks which play the largest role. But in time, the onboarding of additional third parties will be crucial.

The Marco Polo Payment Commitment is an important step in the right direction. Ultimately, it will be up to financial institutions to apply the benefits of cutting-edge technologies to better address the needs of their clients, and make the most of the tools at their disposal by encouraging uptake of the next generation of trade solutions.