August 29, 2023

"The most important Bill you have never heard of" - Lord Holmes of Richmond

On 20th July, The Electronic Trade Document Act was passed in the UK. It allows any electronic trade documents that can function like paper to be treated like paper.

So why is the trade finance industry so excited by the adoption of the UNCITRAL Modern Law on Electronic Transferable Records in the UK and soon globally? Quite simply because it will have a massive impact on international trade, making it easier and cheaper for companies to buy and sell internationally and help bridge funding gaps for SMEs. The Law Commission has said that "The International Chamber of Commerce has estimated that digitalising trade documents could generate £25 billion in new economic growth by 2024 and free up £224 billion in efficiency savings".

The adoption of the digitisation of negotiable instruments and, hence, the creation of electronic payment undertakings (ePUs) to replace paper bills of exchange and letters of credit, etc., will have significant impacts on supply chain finance generally and improve the lot of SMEs:

  1. Faster and More Efficient Transactions: Digital negotiable instruments enable faster creation, processing, and transmission of documents within the supply chain. This speed can lead to quicker approval and financing of transactions, reducing the time it takes for suppliers to receive payment and improving overall cash flow. Transferring a paper-based trade document can take seven days, whereas processing a document electronically can be as quick as 20 seconds.
  2. Real-Time Visibility and Tracking: Digitisation allows for real-time tracking and monitoring of transactions and documents throughout the supply chain. This increased visibility can help finance providers assess risk more accurately and make quicker financing decisions.
  3. Enhanced Security and Fraud Prevention: Digital negotiable instruments can incorporate advanced security features, such as encryption and digital signatures, to prevent fraud and unauthorised access. This can increase the confidence of finance providers and make supply chain finance more secure and available to an increased range of businesses.
  4. Improved Accuracy and Reduced Errors: Automated digital processes reduce the likelihood of errors that can occur with manual data entry and paper-based documents. Accurate and consistent data can lead to better risk assessment and more favourable financing terms, a key benefit for making funding available to SMEs.
  5. Increased Access to Finance: Digitization can make it easier for suppliers, especially smaller ones, to access supply chain finance. Digital records and streamlined processes can provide a more complete and transparent picture of a supplier's financial health, making it easier for them to qualify for financing.
  6. Streamlined Onboarding and Due Diligence: Digital negotiable instruments can facilitate easier onboarding and due diligence processes for new suppliers. This can accelerate the integration of new suppliers into the supply chain finance program.
  7. Reduced Administrative Costs: Paper-based processes often involve significant administrative overhead, such as manual document handling and processing. Digitisation can reduce these costs for both suppliers and finance providers. Most respondents to a Law Commission consultation expect savings of at least 5 per cent on transaction costs.
  8. Cross-Border Trade Facilitation: Digital negotiable instruments can simplify cross-border transactions by eliminating the need for physical document transfer and reducing delays at customs. This can enhance the efficiency of supply chain finance in global trade scenarios.
  9. Integration with Technology Platforms: Digital negotiable instruments can be integrated with existing supply chain management and financing technology platforms. This integration can provide a seamless end-to-end solution for managing transactions and financing within the supply chain.
  10. Environmental Impact: The Law Commission identified significant direct and indirect environmental benefits from the shift to electronic trade documents. They said that one (clear and obvious) direct benefit was the reduction of the estimated 28.5 billion paper trade documents currently used each year.

But while digitisation offers many benefits, there may be challenges associated with technological adoption, interoperability between different systems, and potential resistance to change among stakeholders.

It's important to note that the impact of digitisation on supply chain finance will depend on factors such as the level of technology adoption, regulatory environment, industry practices, and the willingness of participants to embrace digital processes. As the digitisation trend continues to evolve, businesses and finance providers in the supply chain ecosystem should stay informed about emerging technologies and adapt their strategies accordingly.

Those involved in invoice finance, particularly reverse factoring, need to keep abreast of this area and how it could become a substitute for traditional invoice finance with its ease of onboarding, reduced risk and lower administration costs.

At Finativ, we have the experience and resource to help you develop the best strategy to become an early adopter and take advantage of the opportunities offered by digitising negotiable instruments while guiding you through the regulatory processes and selecting and implementing the right technology partner.

We can also be your eyes and ears in monitoring any potential threat to traditional invoice finance that ePUs might pose.

Jeff Longhurst Finativ

Jeff Longhurst

Jeff has accumulated over 40 years of experience in the invoice finance and asset-based lending industries, with CEO/managing director positions in clearing bank subsidiaries, specialist asset-based lenders and independent invoice finance providers.

Jeff is a former chairman and CEO of the Asset Based Finance Association (UK trade association for invoice finance) as well as a member of the Executive Committee of the EU Federation for Factoring and Commercial Finance.

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