In my previous blog on cross border trade finance, I had hinted at writing a more detailed article on the changes and the disruption (for the better) we can expect with digitization of cross border transactions. Here is that follow-up article.
Again, for disclosure: I’ve used ChatGPT as a co-pilot for writing this out.

The world of cross-border trade has historically relied on paper-based processes and wet signatures, resulting in inefficiencies, delays, possibility of fraud and increased costs. However, the advent of digital technologies is poised to revolutionize the way international trade is conducted. From Letters of Credit to Bill of Lading and E-Registries, these digital advancements offer numerous benefits, including enhanced security, streamlined processes, and increased transparency. This article explores how digital technologies are transforming cross-border trade and the specific impact on critical trade documents. It also draws parallel to how a few of India’s core technology frameworks (ranging from Account Aggregator, the UID model of “Y-N” validation and possibly the growth of GSTN’s multipoint reconciliation) can all be leveraged to provide a faster and more reliable infrastructure for these trades. The digitization of traditional industries like ports and shipping will also provide for transparency and accelerate this adoption.

There is another important reason to pay attention to cross-border settlements and the currency: The predominance of the USD is based on this foundation as a reserve / settlement currency. Given the play of China and the BRICS nations to break this dominance, it will be good to understand the core implications on trade itself.

The Digital Transformation of Letters of Credit: Letters of Credit (LCs) have long been a fundamental instrument in global trade, providing a guarantee of payment to exporters and assuring importers of the fulfillment of contractual obligations. Digital technologies are bringing significant improvements to the LC process, including:
    a) Streamlined Documentation: Digitizing LCs enables the seamless exchange of electronic documents, eliminating the need for physical paper-based transactions. This streamlines the entire process, reducing paperwork errors and accelerating transaction speed.
    b) Enhanced Security and Authentication: Digital LCs incorporate robust security measures, such as encryption and digital signatures, ensuring the integrity and authenticity of the documents. This reduces the risk of fraud and unauthorized alterations.
    c) Real-time Tracking and Notifications: Digital LC platforms offer real-time tracking and notifications, allowing all parties involved to monitor the progress of the transaction, thereby minimizing delays and improving transparency.

Revolutionizing Bill of Lading with Digital Technologies: Bill of Lading (B/L) serves as a receipt, contract of carriage, and title of goods in international trade. The integration of digital technologies brings several advancements to the B/L process:
    a) Electronic Bill of Lading (eB/L): The introduction of eB/L replaces traditional paper-based B/L, reducing the reliance on physical documentation and enabling secure digital transmission. This results in faster and more efficient handling of goods at ports, minimizing delays and increasing overall trade efficiency.
    b) Blockchain Technology: Blockchain, a distributed ledger system, holds immense potential for transforming the B/L process. It offers enhanced security, immutability, and transparency, ensuring that all parties have access to the same tamper-proof information, reducing disputes and improving trust.
    c) Smart Contracts and Automation: By incorporating smart contracts into the B/L process, transactions can be executed automatically based on predefined conditions. This eliminates the need for manual intervention, reduces processing time, and enhances efficiency.

E-Registries (for Invoices, LCs, B/Ls etc) and the need for a single source of truth: Several technology implementers tout “blockchain” as the panacea for possible fraud (citing the irrefutable nature of DLT transaction). This is not true. While blockchain can ensure that the transaction once-initiated, cannot be morphed without leaving a trail, the fraud at-times is even before the origination of the transaction ie. the invoice that is being put on blockchain itself may be fake.

    a) Managing fraudulent base documents: The Greensill debacle that started with Liberty’s “concocted” invoices that was never signed off / was refuted by the counterparties goes to show that there needs to be a mechanism to look up a global “invoices” and ‘BL” registry and cross-reference the shipper, shipment, and freight details. The best way to do this would be to establish global registries that can be “looked” up given a few parameters. This will also allow for supply chain funding companies to create an enforceable lien on the goods.

    b) Circular trades and loans: As the initial data on India’s own GST filings show, circular trade to inflate the volume and value while presenting the same inventory for multi-stage funding is a big cause for concern. Given that there have been instances of a single cargo being financed multiple times (I’ve heard of the number 4X in a particular case), the concept of a REGISTRY that spans across geographies is not just a “good to have” but a need.

Additional Impacts of Digital Technologies on Cross-Border Trade: Beyond Letters of Credit and Bill of Lading, digital technologies have far-reaching implications for cross-border trade:

    a) Trade Financing and Supply Chain Finance: Digital platforms enable faster and more efficient trade financing, allowing businesses to access capital more readily. Supply chain finance solutions leverage digital technologies to optimize working capital, reduce risks, and enhance cash flow throughout the supply chain.

    b) Customs and Regulatory Compliance: Digitalization simplifies customs and regulatory processes, allowing for the automated exchange of information between traders and customs authorities. This reduces administrative burdens, enhances compliance, and expedites customs clearance.

    c) Data Analytics and Insights: The use of digital technologies generates vast amounts of data, which can be analyzed to gain valuable insights into market trends, consumer behavior, and supply chain performance. This data-driven approach empowers businesses to make informed decisions and optimize their cross-border trade strategies.

Conclusion:

The digital revolution is reshaping cross-border trade, transforming traditional processes and documentation such as Letters of Credit and Bill of Lading. From streamlining paperwork and enhancing security to enabling real-time tracking and automation, digital technologies offer immense benefits to the global trading ecosystem. As businesses (ranging from ports, shipping industry and private players) embrace these innovations, they can expect increased efficiency, reduced costs, enhanced transparency, and increased trust. However, automation of the transaction themselves will not solve the problem and governments, financial institutions and trade bodies must push for GLOBAL reference REGISTRIES to really address this in a holistic manner.