Despite the fact that the digitalisation of trade has long been regarded as essential for enhancing global supply chains and facilitating much needed access to trade finance, progress has been limited due to entrenched rules and regulations that govern the industry. As a result, while widespread digitalisation has taken place in other sectors across financial services, trade finance has continued to rely on manual, paper-based processes that are inefficient, insecure, costly and error-prone.  

Until now. With a growing number of countries adopting new, electronic document legislation, that draws on the UN’s Model Law for Electronic Transferable Records (MLETR) – an international legal framework that aims to enable the use of electronic transferable records both domestically and across borders– the long-awaited digital transformation of trade has arrived. And with it, comes a host of benefits for businesses, including improved access to finance, atomic transaction settlement, reduced operating costs and enhanced transactional visibility. 

Digitalised Trade And Supply Chain Finance: A Fusion Of Old And New 

The passing of the UK’s 2023 Electronic Trade Documents Act (ETDA), which legally recognises certain trade finance documents in digital form, presaged a new era for trade finance, particularly as up to 80% of trade transactions are governed by English law. Since then, legal developments are taking shape elsewhere, such as Mexico’s recent amendment on negotiable instruments, the introduction of France’s digital trade documents law, and with Germany and Japan set to follow suit, the door to the global adoption of digital trade is well and truly open.  

As the digital trade landscape takes shape, it is the marrying of old and new that is central to unlocking enhancements. Negotiable trade documents like bills of exchange and promissory notes are familiar instruments that have provided secure, enforceable payment methods to facilitate long-distance transactions for over a century.  But in today’s world, where the speed of physical supply chains has been transformed in recent decades, using these paper-based documents as short-term financing instruments is no longer feasible – they are simply too slow to generate the value they once did.  

Yet crucially, in digitalising these documents, which essentially act as an assurance of payment, they can reclaim their relevance as an essential part of a modern trade finance toolkit. In fact, digital negotiable instruments (DNIs) – such as digital promissory notes (DPN) and digital bills of exchange (DBoE) – are enabling supply chain finance (SCF) to become so effective and efficient, that the speed of the financial supply chain, once the laggard in trade transactions, now far exceeds the speed of physical supply chains.   

Stepping Into The New World Of Global Trade 

So how do DNIs work in reality and, importantly, how can they benefit corporates and suppliers? Below, we outline five key ways in which these revitalised instruments are transforming working capital and bottom lines for businesses across supply chains: 

• Greater cash flow and liquidity: 

DNIs enable businesses to actively improve working capital and earnings within their existing supply chain frameworks, gain independence from restrictive, non-fungible financing frameworks, and access a broader range of funding partners using standardised payment and financing instruments. Funding can be released immediately and cascaded along the chain same-day, democratising access to finance and eradicating lengthy payment delays for suppliers. And, as DNIs are used as the basis of lending rather than invoices, 100% of the transaction value can be financed.

Meanwhile, businesses can benefit from early payment discounts from suppliers, and receive enhanced services from their banks, including the financing of extended payment terms, giving them greater control of their working capital due to the flexible lending enabled by DNI-based solutions. 

• Fast, streamlined transactions: 

The automated, real-time capabilities of DNIs allow agreements to be completed in minutes rather than the typical 10-12 days of current paper-based processes, delivering fast and efficient funding along entire supply chains and transforming overall operational efficiencies.

• Non-disruptive, integrable solutions: 

Adopting DNIs is simple and straightforward, with no disruption to existing supplier arrangements. They can be easily integrated into businesses’ ERP systems, as well as global trade platforms and SCF programmes, ensuring full interoperability of these solutions within existing operations. For corporates that do not use ERP systems, invoice data can be uploaded using CSV files. 

• Highly secure, fraud-proof transactions: 

DNIs generated by Arqit’s TradeSecure™ solution are digitally sealed and an immutable record of the DNI is kept on a digital ledger, providing any holder of the DNI with total assurance that it is genuine and unique.  DNIs are encrypted to the highest level of quantum security, making them tamper proof and providing an unchangeable audit trail that enhances the management of credit, regulatory, transaction and reputational risks. 

• Lower costs and sustainability: 

Removing manual, intensive paper-based process though digitalisation can save businesses up to 80% in end-to-end transactions costs. And, with the elimination of paper documentation – currently, documenting a single shipment can require up to 50 sheets of paper – this contributes towards businesses’ ESG targets. 

With more MLETR-based legislation due to be adopted globally, trade and SCF is becoming underpinned by digitalisation. Now is the time for forward looking businesses and lenders to start to reap the plentiful benefits of the new era of digital trade using DNIs.

About Author: 

Dominic Broom is SVP Working Capital Technology at Arqit, a leading fintech and technology company whose TradeSecure solution enables the creation, safekeeping and secure transfer of DNIs that can be easily deployed into any trade financing platform. He has 30 years’ experience in global trade and trade finance, including roles at Chase, Standard Chartered, ABN AMRO and BNY Mellon, where he was EMEA Head of Transaction Banking. He specialises in helping businesses optimise their treasury activities and is a board member of the Institute of Export and International Trade and served on the International Chamber of Commerce’s Banking ExCo.