Trade finance has never lacked intelligent people capable of recognising change. The more persistent difficulty has been translating that recognition into a willingness to change the structures through which the industry operates.

It has been argued for many years that we are remarkably good at acknowledging that circumstances have moved on while remaining attached to processes designed for an earlier environment.

There are understandable reasons for this, given that familiar processes have become embedded within bank procedures and systems, reflected in rules and reinforced through years of training and operational practice. Once something has become established in that way, replacing it involves considerably more than accepting that a better alternative may now exist, as institutions, and ultimately individuals within them, have to decide that the familiar approach should no longer be the default.

The bill of lading provides perhaps the clearest example. While international trade is progressively moving information into electronic form, the industry continues to transport one of its most important documents around the world in physical format.

For many years there were legitimate legal reasons for that caution, particularly because the concept of possession was difficult to reproduce electronically, but this position has changed significantly with UNCITRAL's Model Law on Electronic Transferable Records, which provides a legal framework through which an electronic transferable record can perform the functions traditionally associated with possession of its paper equivalent. Legislation incorporating or reflecting those principles has subsequently appeared in a growing number of jurisdictions, including the United Kingdom.

What has followed illustrates the wider problem particularly well, because removing a legal obstacle does not mean that established behaviour immediately disappears. The 2024 FIT Alliance survey found that 49.2% of respondents were using electronic bills of lading to some extent, compared with 33% in 2022, suggesting that adoption is moving in the expected direction.

Among banking respondents, however, awareness was already high while adoption stood at only 21.1%, which suggests an industry increasingly aware of what is possible without necessarily changing the way in which it operates at anything like the same pace.

We can see something similar in documentary credits, where electronic presentation is hardly a recent innovation and ICC developed the eUCP precisely so that electronic records could be accommodated within documentary credit practice. There is therefore an established framework available to banks and their customers, yet considerable parts of the documentary credit process continue to reflect assumptions inherited from paper, with a physical document sometimes effectively replaced by its electronic equivalent while the surrounding process remains largely untouched.

Perhaps this is where we need to become more willing to separate the purpose of trade finance from the processes that happened to evolve around it.

There is little reason to question the continuing commercial value of documentary credits simply because technology changes how transactions can be handled. Buyers and sellers will continue to seek payment assurance, with banks continuing to provide financing and mitigate the risks that arise between parties trading across borders. While documentary examination can remain part of that proposition whenever payment is intended to depend upon compliance with agreed documentary conditions.

What does not necessarily follow is that the mechanisms used to provide those benefits must continue to resemble those developed when paper documents, physical presentation, and manual processing were simply part of the environment in which international trade operated.

The ICC Trade Register itself describes a trade finance market adapting to an increasingly digital environment, with digital documentation and API connectivity becoming part of the product landscape. That evolution should encourage us to look beyond the relatively easy question of whether change is taking place and towards the more useful question of whether our existing processes continue because they remain the best way of supporting trade, or because replacing them requires somebody to make the decision to do things differently.

Trade finance has always existed to facilitate the underlying commercial transaction rather than to preserve the machinery that grew up around it, which suggests that we should retain structures for as long as they continue to perform that role effectively, while becoming much more comfortable with allowing them to disappear when their strongest argument for survival is simply that they are familiar.

Sources: ICC, UNCITRAL, FIT Alliance, UK Electronic Trade Documents Act

This article represents the views of the author and not necessarily those of ICC.