Lessons for Banks
The Unified Payment Interface (UPI) which effects money transfers across Banks in India and developed by the NPCI has been duopoly of two FinTech- Google Pay & PhonePe. Ironically NPCI was set up by India’s’ central Banks & a consortium of Banks including Citi Bank & HSBC. Inter Bank payments which otherwise is something in the domain of the Banks and Banks have been totally displaced out with over 60 Banks sharing 5% transaction share along with few non-banks (FinTech). The Deputy Governor of India’s Central Bank - Reserve Bank of India (RBI) warned banks that disruption in a small area of banks' business could be quickly scaled up to disrupt other parts of their business by the competitors. Hence the importance to use a successful model by not losing sight of lessons learnt.

NPCI (National Payments Corporation of India)
National Payments Corporation of India (NPCI) which is promoted by over a dozen Indian Banks including Foreign & private Banks to address issues in ‘payment& settlement’ and innovate has in its 15 years of has changed the Indian payments landscape with mass adoption, instant payments & real time settlements besides continuous innovations with multiple products under its belt. Global accreditation and partnerships for NPCI are some of the feathers in these collaborative efforts of the Banks.

Electronic Trade Documents Bill
‘Electronic Trade Documents Bill’ which is currently being considered in the House of Lords in the UK envisaging legal mandate legitimising ‘Electronic Trade Documents’ should expectedly cascade a series of such laws in about 56 Commonwealth states which have laws similar to that of the UK. While the UK Law has the potential to effect changes almost en bloc there a few which have already adopted such national laws like Bahrain, Singapore and Abu Dhabi Global Market (ADGM). What makes the adoption across globe uniform & seamless is the umbrella framework - United Nations Commission on International Trade Law (UNCITRAL) floated Model Law on Electronic Transferable Records (MLETR) of 2017 With the advent of such a mandate for Electronic Documents Banks may have two options in the changed world of Documentary Credit - Either build an ecosystem where other parties in the chain of world trade join the Banks or Banks choose to join the parties in an ecosystem based on contractual workaround as they exist today. Some forms of electronic trade do exist today with all parties in a platform bound by internal contracts as distinguished from sovereign laws legitimizing electronic documents for Documentary Trade. While the latter mandated by sovereign laws is a business-as-usual approach, the former has the potential to trigger innovations and encourage the players to join the banks’ platform while speeding up adoption.

Innovations & Sovereign initiatives
Sovereign-induced Dodd-Frank Act Stress Testing (DFAST) in the U.S. drove better efficiency & and robustness into banks credit assessment process even though the intent on law maker was never so. At the same time, across the Atlantic, innovations were triggered by banks and Fintechs with the advent of the Payment Service Directive 2 (PSD-2). In India a National Identity Card (Aadhar) triggered landslide innovation while bringing with its efficacy unthought of. The scale of the innovation as a result of Electronic Trade documents can be potentially much higher than the above predecessor with electronic trade documents being accorded the mandate of law. Banks being the central actor with a repository of wisdom in the field of trade for centuries, would not miss this to build a new world in trade documents not only giving a new dimension to their business on this intricate piece but triggering innovations too.

Opportunity for banks
The world’s biggest player in the documentary trade business, predicts that “there will only be significant movement when laws are aligned globally” which gives a sense of direction on the future of electronic trade documents. In trade, banks have served a central role as intermediary centres for over a hundred years. The deep domain expertise of banks in a rather complicated world of trade with a host of laws to voluminous documents awaits leverage. Take an example where a particular law has conflicting claims under it. Banks do have the repository of precedence and interpretation by ‘court of law’ to address such a conflict. This will give definite shape to business rules when a system is set in place or can make space for such scenarios. Banks are enviably placed to surmount legal & procedural intricacies while foreseeing challenges. Surely more documents will make on the list though they might not rival the usage of Bill of exchange or Bill of lading. These documents have assignability, transferability, and negotiability linked to ownership with multiple parties & copies. The Law commission in the UK has recommended seven documents point in time - Bills of exchange, Promissory notes, Bills of lading, Ship's delivery orders, Marine insurance policies, Cargo insurance certificates, and Warehouse receipts.

Current legal landscape
The global umbrella lies in United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL's Model Law on Electronic Transferable Records (MLETR) of 2017 is a legal framework for electronic trade documentation. Individual countries can adopt the law to give legal effect to electronic documents. Several jurisdictions, including Singapore, Bahrain, and Abu Dhabi global markets, have adopted the law. This legislation that is being considered by the British Parliament has the backing of the intense ground work of The Law Commission - electronic trade documents (UK) which aligns to MLETR.
Issues with paper documents In consultation with the Law Commission - electronic trade documents (UK), Bolero International Ltd noted that transition is often partial and leads to dual operational systems for users. A likely scenario is where some documentary bills are electronic and others paper, meaning multiple systems are in use. The intricacies can be any; the list of such documents is dynamic (as legislatures give legality to newer documents), alteration, human-controlled, control of a document - one party at a time, uniqueness as distinguished from copies, endorsement, conversion, and predating. The core challenge of paper documents lay in the Bill of Lading, where it's common to find 50 sheets of paper in a package of shipping documents. These documents sail through/between as many as 30 different parties as per Digital Container Shipping Association (DCSA) in its paper 'Streamlining international trade by digitalizing end-to-end documentation (February 2022)'. It adds an estimated 16 million original bills of lading issued by ocean carriers in 2020, and more than 99% of these were in paper form. As per SWIFT, globally, 42 million Letter of Credits (LC) were issued annually in 2019, assuming each LC has about 20 documents in paper form. Various estimations for a timeline of their automation vary from players in this area. It is a Stockholm-based technology company aiming to become the global technology provider of a standardized solution for digitalized, authoritative original documents. It is estimated that 80% of the documentation might be issued and used in electronic form by 2030. Another gave an estimate of 10%. Such is the variance in estimates of players in the fray.

Current endeavours
Bill of Lading in paper form in 99% of cases contributes to inefficiencies and frauds. Currently, the electronic version is based on contractual workarounds to overcome this legal problem arising from a lack of legal mandate for electronic documents. This is being driven by players like Bolero, Essdocs, and a few more through multilateral contract terms and conditions, which can bind the immediate parties to the platform in electronic form. But the gap lies in the scenario when bill of lading may as well pass into the hands of parties not involved in the platform’s contract terms. While steadily increasing, the adoption rates for these platforms, while steadily increasing, still result in less than 1% of all bills of lading issued annually being in electronic form. Such platforms are both DLT (Distributed Ledger Technology) and Non-DLT (Distributed Ledger Technology).

Banks as leaders/drivers
Intricacies that feature the Documentary Credit from its sheer volumes to the technicalities - Possession, endorsement and effect of electronic trade documents demand deep domain knowledge & stakeholder reach. Banks are a repository of expertise and credibility outpace third party providers to build a platform which draws players into the fold & speeds up the adoption. Banks can leverage such a platform beyond getting parties into the cycle of documentary credit to generate more business with innovative products while rationalizing processes to build efficacy. It however depends on the call Banks choose to take and what suits them. All Banks having their own ecosystem overcrowds the arena. Bigger Banks with a high share in Trade business may be the provider of such a platform with smaller Banks joining them. To be onboard in an existing platform like Bolero or Essdocs and tide over the new changes is another thing, an extension of the status quo.  Banks always do have the option to put their force behind the existing players as many of them have tamed the core of the challenge – ‘Bill of Lading’ by coming up with electronic equivalent of the same.  Banks can also form a consortium like NPCI which has revolutionized payments and settlements in India o A Bank driven/promoted platform may be like NPCI will provide confidence to the players and make adoption fast post the legislative trigger given that the current players have partners/players bound by internal contracts as distinguished from Sovereign laws. Afterall small Banks are not the ones to deal with a Bill of Lading in 3 sets, with 50 pages and say 20 parties along with issues of transfer, assignment & ownership or an Issuing Bank trying to find documentary discrepancies under a LC with over 50 amendments is a problem with big Banks too. In other words, it’s a problem all across and concerted effort may be the anti-dote. The NPCI effort of a common approach to a persistent problem resulting in success & global praise deserves to be considered and sure it has best practices or models worth emulating. Surely with lesson where Banks totally conceded the space to fintech’s in NPCIs’ most popular product – UPI.

Or possibly look at a huge disruption with a tech giant providing this mega platform pushing Banks to anonymity?

PS: The views expressed are personal and not of my employer