Marco Polo Payment Commitment: breakthrough in digitalising trade finance with blockchain

As trade finance takes a key step towards digitalisation with the launch of the Marco Polo Payment Commitment (MP PC), Angela Koll, Senior Business Expert for Trade and Supply Chain Finance at Commerzbank, explains why the solution has the potential to revolutionise trade finance.

Speed, convenience and transparency are the order of the day in the modern world. When it comes to global trade, such demands have fuelled the growing popularity of open account settlement. Yet, while buyers benefit from the delivery of goods prior to the payment being due, because there is no financial institution guaranteeing the payment, suppliers are exposed to the risk of non-payment, as well as a working capital burden until the transaction is complete.

With suppliers forced to choose between speed and security, developing an equally receivables-focused solution – one that marries the efficiency and ease of open account trade, with the risk mitigation benefits of traditional documentary trade finance instruments, such as letters of credit (LCs), is a major priority for banks.

A few years ago, the Bank Payment Obligation (BPO) was tipped as a game changing solution in this respect, only to disappear into the ether as the market was not ready, meaning the anticipated uptake could not be achieved.

Now, step forward the MP PC: a solution more advanced, sleek and multi-faceted than the BPO – and with a far more positive trajectory – that is set to transform trade finance.

The right solution at the right time

Although BPO traction was underwhelming, the need for such capabilities remained. With blockchain’s potential to enhance trade finance becoming evident, leading banks have therefore been exploring the idea of handling trade data instead of paper documents in a distributed ledger technology (DLT) network through a collaborative partnership with the fintech Marco Polo Network (previously known as TradeIX). The result is the MP PC, which builds upon the concept of the BPO but offers much more potential to connect to corporates’ ERP systems and other networks, providing enhanced functionality through innovations such as the open source blockchain technology, Corda.

The MP PC provides an irrevocable payment undertaking of the buyer’s bank to the supplier, which is triggered through the automated matching of trade data on the blockchain-based platform. Importantly, from the supplier perspective, not only does it enable payment and country risk mitigation, but it also presents financing options, opening up access to increased liquidity, and in turn helping to optimise working capital and cash management.

Unlike most of its peers, the Marco Polo Payment Commitment provides a solution for both trade finance and supply chain finance practitioners. With the possibility of financing the payment commitment, the product enables both payables and receivables finance on a transactional level by uploading trade data.

This is particularly valuable as a means of support for smaller exporters – with the benefits extending to other participants by enabling greater stability of the supply chain. Meanwhile, as with existing open account solutions, buyers are still able to leverage extended payment terms from the supplier. With this process based on digitalised trade data and automatic data matching rather than manual processing of paper-based trade documents, clients also benefit from enhanced speed, efficiency, security, transparency and cost savings.

Should corporates need platform solutions to finance multiple payables or receivables at once, Marco Polo offers separate module programmes - called Supplier Pay and Receivables Finance - to complete the full spectrum in supply chain finance.   

A recipe for success

The MP PC stands to bring considerable benefits to trade finance and global trade, and it has arrived at an optimum moment. The innovation momentum in trade is at an all-time high and the industry is embracing the need for digital change – a trend fuelled by the COVID-19 pandemic, which created an urgent and very real need for the industry to adopt digital processes in order for trade to continue to flow effectively.

The fact that the MP PC was in part borne from the pre-existing BPO has enabled a more streamlined development process, with direct access to the network for corporates, banks and third parties by means of a DLT node, and fewer regulatory and practical challenges to overcome than had the product been starting from scratch. In this respect, the BPO has helped to provide an important blueprint for future solutions.

A rulebook for the MP PC has been created to provide a legal framework for processing data exchange, matching and issuance of irrevocable abstract payment commitment. In support of this direction, the International Chamber of Commerce (ICC) has published new “technology agnostic” rules that can be applied across all digital transactions. These rules – the Uniform Rules for Digital Trade Transactions (URDTT) – were launched on 1 October , supporting the concept of matching electronic records to create a payment obligation.

The wider picture

The MP PC is also helping to facilitate the transition from paper-based documents to electronic data exchange. The journey away from paper has certainly begun, but it will be a gradual process, and remains dependent on the implementation of standards for trade data.

Work is already underway in this respect. The ICC’s Digital Standards Initiative (DSI), for example, aims to set standards to support and facilitate trade finance digitalisation. Standards are also crucial for connecting different networks and initiatives, thereby enabling the streamlined processing of transactions when counterparties are using different platforms.

Standardisation will also help to enable the MP PC itself to develop. Currently the solution cuts out a great deal of paper-based processing, but paper documents are still being used within the trade transaction; sent directly from the supplier to the buyer. A clear next step would therefore be to connect the handling and matching of trade data with eDocs – a capability that would be particularly useful for electronic bills of lading and the transfer of ownership.

Another possible future enhancement for the MP PC involves its ability to be able to receive and exchange a wide range of data from other networks and technologies, such as GPS, and apply that in the blockchain space. Furthermore, such data sharing capabilities hold great promise with respect to advancing the sustainability agenda.  Equipped with greater transparency and more opportunities to gain data, it will be far easier for businesses to evidence and prove their sustainability efforts – an increasing industry requirement.

Achieving trade finance digitalisation is reliant on cooperation and collaboration within the industry, with all stakeholders united in a common goal. With participants firmly sold on the value of digital, the MP PC will successfully gain market attraction. But it is up to financial institutions to ensure its full potential can be reached – driving client awareness, engagement, market uptake and growth of the network through effective communication, knowledge sharing and support. Only then will clients be able to harness the full benefits of the value-added, transformative trade finance capabilities on offer.