Finance

The Marco Polo Payment Commitment moves trade finance closer to its digital future

Digitization has long been considered the next step forward in trade finance, but the widespread adoption of technological solutions to move from paper to data has so far proven elusive.. Angela Cole, chief business expert in commerce and supply chain finance at Commerzbank, explains why the Marco Polo Payment Commitment could represent a departure from this trend, and a bold step toward a more efficient and transparent future of commerce.

As a complex and manual industry that relies heavily on paper, trade finance is expected to benefit greatly from digitization. Recent years have seen strong efforts to explore the application of new technologies to create solutions that add value to customers.

Meeting the needs of importers and exporters – using technology to enable greater speed and transparency while saving costs – is at the heart of these efforts. In a customer-focused bank like Commerzbank, progress often arises with customers and their evolving needs. This is true across the sector – the moment customers start to demand new solutions, it becomes a priority that banks must provide.

The drive to make operations faster, easier and more transparent has fueled the uptake of open account settlement, allowing merchandise to be shipped before payment is due. Buyers around the world are now well aware of its benefits, with open account settlement now used for about 85% of global trade. But the lack of payment security by a financial institution leaves suppliers exposed to non-payment risks and working capital challenges.

Developing a solution that combines speed and security has always been a priority for banks. Some have already attempted to apply the risk mitigation benefits of traditional documentary trade finance instruments, such as letters of credit, with the efficiency of open trade. Bank Payment Commitment (BPO) was one such solution, which has been described as an innovative practice with global potential. But BPO failed to make its mark on the sector – in fact the market was not ready for this and uptake was limited.

Blockchain provides hack

Speed, convenience, and transparency are all benefits closely associated with distributed ledger technology (DLT), which uniquely lends itself to the development of trade finance solutions. Marco Polo Payment Commitment provides an irrevocable payment obligation from the Buyer’s Bank to the Supplier. It builds on the idea behind BPO to offer a more advanced and comprehensive trade finance solution – one that has been better accepted by the market to date.

Drawing on DLT’s ability to handle trade data, the Marco Polo Initiative brings together the Marco Polo Network – a financial technology company formerly known as TradeIX – with an alliance of leading banks. Marco Polo Payment Commitment uses Corda blockchain technology, which provides additional ability to connect to enterprise ERP systems and other networks, giving the solution additional flexibility.

After all parties have joined, due diligence has been completed, and a program has been established between the two parties, the buyer begins uploading the purchase requisition data of the business transaction to the Marco Polo platform. The resource needs to approve the data to set data matching conditions later.

At this point, the buyer’s bank makes an irrevocable conditional payment obligation in favor of the supplier, which is transmitted through the Marco Polo network. After the goods are shipped, the supplier uploads the invoice and logistics data to match it with the agreed purchase order data. Then an automatic data matching process takes place which, if successful, results in the conditional payment obligation to be converted into an effective and irrevocable mere payment obligation, obligating the buyer’s bank to make a payment in favor of the supplier on the due date.

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

Encouraging progress

Marco Polo’s recent repayment commitment has made several crucial milestones on the path to widespread adoption. After conducting several trial 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 implement direct network trade transactions – supporting the export of laminated glass from Germany to Turkey.

More followed, as a payment obligation backed transactions involving the purchase of special couplings used to make pumps and valves. In October, Commerzbank processed another direct transaction involving the export of leads from Germany to Turkey.

These are important early signs in the lifecycle of this solution, demonstrating the feasibility of end-to-end digital settlement using electronic, decentralized and synchronous data exchange with different participants. It’s an encouraging sign of DLT’s role in the future of trade finance.

Coordination and support with regulators is also essential to ensure that the payment obligation is successfully implemented, with different requirements for individual jurisdictions – including in relation to data, for example. With this in mind, the solution was developed to integrate different data fields, allowing flexibility as to what data can be entered to meet the different regulatory and requirements of different network participants.

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

Close collaboration is needed to create a greener trade finance sector

Being able to receive and share a wide range of data also bodes well for advancing the sustainability agenda. With the growing need in the industry for companies to demonstrate their green credentials – in fact, banks are increasingly focusing on supporting customers’ sustainability journeys – the importance of data cannot be overstated. Equipped with greater transparency and more opportunities for data – provided by cutting-edge platforms and initiatives such as the Marco Polo Payment Commitment – it will be easier for companies to demonstrate and demonstrate sustainability efforts. As part of this, providing enhanced traceability for goods and services will play a key role in helping to support and facilitate sustainable trade.

The gradual process of making trade finance less dependent on paper documents is also an important – albeit modest – contribution to the overall sustainability of the sector. While this process relies on effective standardization – industry-wide standards are necessary to connect different networks and streamline operations – some progress has already been made. The International Chamber of Commerce’s Digital Standards Initiative (DSI), launched in 2020, aims to set standards to support and facilitate the digitization of trade finance.

Currently, Marco Polo’s payment commitment doesn’t completely eliminate the need for paper. The physical documents are still used within the same business transaction, and are exchanged directly between the supplier and the buyer. However, the software has built-in capabilities that indicate the natural next step. The ultimate goal of the payment obligation is to link the handling and matching of trade data with eDocs – enabling the use of electronic bills of lading and transfer of title. The network can also apply data from GPS tracking systems, adding to the richness of data available to users and market participants, for example by initiating payments automatically when goods arrive at specific locations, and providing complete transparency of the shipment to trading partners and banks.

Digitizing trade finance is an ambitious goal, and one that requires input from a wide range of stakeholders: banks, issuers, customers, logistics professionals, regulators, technology providers and a host of other market participants must coordinate their efforts in order to build a more efficient and transparent sector for all. To get the ball rolling, the major players like companies and banks will be the ones to play the biggest role. But over time, setting up additional third parties will be critical.

Marco Polo’s repayment 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 meet the needs of their customers, and to make the most of the tools at their disposal by encouraging uptake of the next generation of business solutions.

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