Unlocking the Power of Interoperability for Digitizing Global Trade
Recent tests of a new Swift solution demonstrate the prospective efficiencies of digitizing and automating trade payments and documentation.
In the realm of international trade, exciting progress has often been stymied by complex and inefficient payment mechanisms. Recent years have seen a surge in the volume of global trade, with the World Trade Organization (WTO) reporting a significant increase in merchandise trade volume. While extremely encouraging for businesses operating internationally, this growth has magnified the challenges inherent in trade finance, particularly in the realm of payment settlements.
The current landscape for trade payments is fraught with delays, high costs, and risks, primarily due to a reliance on legacy systems and paper-based processes. For instance, letters of credit (LCs) have been used for generations to protect international buyers and sellers against factors such as distance or differing laws. But, in many cases, they are still printed on paper and processed manually, slowing things down. Plus, the banking process for individual organizations is usually managed through each bank’s proprietary system, with data coming from multiple sources—potentially creating additional delays. Amidst these dynamics and a shifting economic landscape, the Asian Development Bank reported that the global trade finance gap grew to a record $2.5 trillion in 2022.
The good news is that numerous industry initiatives are already seeking solutions to digitize the payments and documentation required to facilitate global trade. For example, some banks and fintech companies have recognized that the adoption of electronic bills of lading (eBL)—replacing traditional paper—has the potential to speed up the transfer of documents and reduce associated fraud.
The challenge in putting eBLs into practice lies in the fact that existing eBL platforms lack technical interoperability. For instance, each of the nine eBL providers authorized by the International Group of Protection and Indemnity Clubs (IGP&I) has its own rules and its own customer base. This means that customers of one eBL system can’t take part in transactions handled by another. Instead, players involved in any given trade transaction need to connect to multiple systems, an approach which is inefficient and costly, presenting a significant obstacle to widescale adoption.
To facilitate a broad digitization of both funds transfers and documentation across the landscape of cross-border trade payments, the financial services community must come together and bridge the gap between emerging digital currency solutions and the existing financial services infrastructure.
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Swift Research on Interlinking Solutions
As a global, member-owned cooperative with a secure financial messaging infrastructure that connects more than 11,500 financial institutions, Swift is well-positioned to facilitate compliance with international financial regulations and standards. We recently announced findings from sandbox testing of our new solution that connects different central bank digital currencies (CBDCs)—built on different blockchain platforms—with one another and with fiat currencies, enabling financial institutions to use their existing infrastructure to settle payments. Our experiments demonstrated how digital trade networks can be successfully interlinked with other networks.
Our testing involved simulation of a digital trade platform (DTP) on a hyperledger (i.e., blockchain) technology fabric. Participants in the simulated digital trade network were preconfigured as buyers, sellers, freight carriers, port authorities, or their respective banks, along with a network authority that served as the DTP operator. This setup, integrated with standard CBDC network configurations, ensured a comprehensive testing environment.
Then we ran tests that simulated real-world trade scenarios, including the creation and fulfillment of purchase orders (POs), issuance of invoices, and automated execution of payments. Participants interacted with the system through dashboards tailored to their roles, executing trade and payment processes as per the designed workflows. The use of smart contracts ensured that payment events were automatically triggered once certain trade conditions had been fulfilled.
We built our scenarios on a few key assumptions—for example, the understanding that one PO would represent one trade agreement, but that a single PO might map to multiple invoices. The focus was on facilitating the seamless exchange of goods and funds using distributed-ledger technologies and smart contracts, thereby revolutionizing the trade-vs.-payment (TvP) paradigm.
One core hypothesis of these experiments was that a digital trade network can act as a trusted platform for global trade involving diverse participants like buyers, sellers, freight carriers, and financial institutions. Another hypothesis was that it can also support the tokenization of trade purchase orders, facilitating a digital representation of trade agreements on the blockchain.
Through the testing process, we found that our solution can facilitate atomic trade payments—payments that are completed simultaneously alongside the transfer of assets, rather than sequentially. Additionally, we demonstrated that smart contracts and event-driven programming enable the automation of payments, with funds released only once certain conditions have been met. This means trade flows could potentially become automated 24 hours a day, seven days a week. Financial institutions that participated in our testing highlighted the solution’s potential to reduce delays in global trade, enhance trust among parties, and significantly lower transaction costs.
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How the Testing Worked
With the Swift Connector as the interlinking solution, we simulated a DTP that comprised buyers, sellers, carriers, port authorities, CBDC networks, and buyers’ and sellers’ banks. An open trade agreement between each buyer and seller was tokenized by the DTP’s network authority.
To initiate a transaction, the buyer first selected a trade partner and filled in an order form with the details of the trade—e.g., date, type of goods, number of goods, shipping address. The system notified the seller of an incoming trade order, which the seller could review and update to add relevant information—for example, shipment conditions or carrier details. The buyer received notification of any such updates, and once the buyer was happy, they could submit the order. The system routed the submitted order back to the seller for acceptance and created a PO.
Once the seller accepted the order, the PO details were sent to the DTP network authority for tokenization. The DTP operator issued a token representing a PO, to ensure trust and that there would be no duplicates on the network. The issued PO token was then assigned to the seller to fulfill the trade. Both seller and buyer had a dashboard that showed status updates for the relevant PO tokens.
In the event of an upfront payment to a seller, the seller would submit an invoice. A smart contract would then initiate a payment event with payment message details, such as seller bank, account number, amount, and PO reference number. Then the CBDC listener on the DTP platform would pick up the payment message and follow the established procedure for processing cross-border payments between buyer and seller. On the DTP network, PO tokens were escrowed with the DTP operator for TvP payment. Once the payment was successful, the PO token’s status would be updated.
If a carrier payment was used for shipment, the seller would notify the carrier of the availability of a product to be shipped. The carrier dashboard would then reflect an incoming shipment request. The carrier would accept the request, load the shipment to the destination address, and submit an invoice. A smart contract would then initiate a payment event with payment message details—e.g., carrier bank, account number, amount, PO reference number. From there, the system would follow the same steps as for an upfront payment.
In the event of a customs payment for a shipment, the customs dashboard would be notified of the shipment request with the details of the PO. Customs would inspect the goods, generate a “customs clearance certificate,” and submit an invoice. From there, the rest of the process would follow the same steps as the above scenarios.
For a final settlement, the seller would submit an invoice. A smart contract would then initiate a payment event with payment message details including seller bank, account number, amount, and PO reference number. Once again, the rest of the process would be the same.
To close a trade agreement, the buyer would close the PO in their system after receiving the goods. The DTP operator would then burn the associated PO tokens through a smart contract ]to prevent fraud funding. The PO would be closed on the buyer’s and seller’s systems, and the status on the dashboard would be updated accordingly.
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The Potential for Automating Trade Payments
Ultimately, this experiment demonstrated that seamless interoperability among different digital networks across technology stacks is possible—in this case, using the proprietary Swift Connector. Automating trade payments using distributed-ledger technologies and CBDC payments is technically feasible. And integrating DTP and CBDC networks using the Swift Connector was seamless in our testing, which facilitated real-time communication and transaction processing.
We also proved the effectiveness of distributed-ledger–based smart contracts for capturing trade clauses in a typical trade contract. Additionally, event-driven programming implemented on the digital trade network allowed for automating pre-approved payment workflows between two networks. Payment events were programmed based on documentary evidence, such as customs certificates. For payments processed outside operating hours, this meant a reduced need for manual intervention, paving the way for improved efficiency.
These experiments had important implications for combating fraud across the trade ecosystem. They found that tokenizing a PO—as well as managing the lifecycle of a PO token, and associated payment events, via smart contracts—can reduce fraud and the potential for double financing, because the PO token is escrowed until a pending invoice is settled.
We also revealed the exciting potential for reducing sources of friction within transactions, as interlinking multiple digital networks and streamlining payments can help reduce the number of intermediaries needed in cross-border trade payments. Peer-to-peer atomic trade-vs.-payment was also possible. The findings show that continuing to align on harmonized messaging standards, particularly amidst the industry’s migration to the ISO 20022 standard, will help bring in a common interoperability layer to streamline trade digitization efforts.
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Where Do We Go Next?
With these possibilities in mind, the global trade community needs to build on this momentum and work to address additional challenges in the areas of legal interoperability, technical accessibility, ecosystem-wide standards, and adoption. Now is the time to prioritize initiatives that have a tangible near-term impact on the trade ecosystem.
For example, expanding efforts to include more global trade participants will provide a more comprehensive testing environment. And integrating more advanced regulatory compliance features into emerging solutions will allow for better navigating the complex landscape of international trade law. These features can go hand-in-hand with ensuring deeper integration with existing financial systems and infrastructures to facilitate a smoother transition to this new paradigm of trade payments.
There are also several possibilities on the horizon for leveraging eBLs in the real world. For instance, Swift has developed an application programming interface (API) specification for digital trade platforms that enables different systems to interoperate via a single connection and single identity. We developed the API by working closely with eBL platform providers to facilitate the exchange of data between them and banks over the Swift network. This showcases the ways in which complex, cross-jurisdictional payments can be automated for a clean/open account trade using smart contracts, orchestration by the Swift Transaction Manager simulator, and the Swift Connector for communication between trade and CBDC networks. Swift will also collaborate with FIT Alliance partners to assess the value of creating a trade repository to eliminate the need for peer-to-peer bank integration in the secure and standardized sharing of digital files.
Considering the landscape of these ongoing, innovative global trade initiatives, the industry has an opportunity to focus on further evolving these solutions, embracing a network-of-networks approach and integrating AI to help shape the future of digitized, international trade payments.
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