The slow extinction of paper based tools for trade finance

There’s been a lot of talk about the documents to support global trade and the underlying finance driven by these documents.  Letters of credit are obviously one payment instrument that has lived on for centuries.  See You want a Letter of credit, Really?

But over the last decade, we have seen enormous efforts, mainly driven by the Society for Worldwide Interbank Financial Telecommunication (Swift), to move away from paper to electronic solutions.   SWIFT's main function is to pass secure messages to banks so billions of dollars can move each day.  They are in essence an utility owned by the Banks to help them with global money movement.

Adapting the technology used across the life of a trade – beyond the standard internet-based systems – to more direct and collaborative platforms that can bring it all together and accommodate different stakeholders has been an elusive goal.  Progress has not been revolutionary, but glacial in the Darwinian fashion.  SWIFT has developed many initiatives over the years with cute acronyms, sinking hundreds of millions of dollars trying to develop standards that ultimately are accepted by the corporate world to conduct trade.  These included initiatives such as

The history and current status of the above requires a book.

The chief challenge is that trade involves so many counterparties, including Governments, buyers, suppliers, banks, shipping firms, insurance companies, and traders, which all have their own systems and produce their own paper.  It is an understatement to say that developing solutions to integrate to these various parties own systems to focus on integrating systems is incredibly challenging.

But there has been one clear success story for large global corporates, and it has been found in the most unlikely of places.  SWIFT has introduced a new way for corporates to communicate with their banks electronically – regardless of their size. Traditionally, smaller companies had to communicate documents by fax or courier because they didn’t have the capacity to build their own electronic systems.  This new solution is a a standard message type called MT798, a digital envelope which corporates can use to share financial instruments such as letters of credit and safekeeping receipts with their banks.

Corporates are sending information through the Swift network without using bank platforms.  This is having a profound impact on how corporates will interface with their banks and other value added providers in the future – SAPs Financial Services Network for one.

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