The Evolution of Standards and the ISO Journey in Trade Finance

Trade finance, essential for global commerce, facilitates 80-90% of trade transactions, serving as a primary driver for economic growth. However, its heavy reliance on paper contrasts with the digital evolution seen in other financial sectors. As innovation progresses unevenly across the industry, fragmentation emerges as a significant challenge and the imperative for common standards – as seen across other types of payments – is becoming more pressing as technological advancements continue to reshape the landscape.

Swift Trade Finance Standards and the ISO Connection

For decades, the banking community has relied on Swift Trade Finance Standards, particularly the MT400 and MT700 series messages, for facilitating Documentary Trade (Letters of Credit, Guarantees, Standby Letters of Credit and Documentary Collections). These standards have been instrumental in enabling efficient communication and transaction processing globally.

Recent collaborative efforts between Swift and the International Chamber of Commerce (ICC) have sought to further enhance these standards, and led to the introduction of the first ISO-ready application programming interface (API) for bank guarantees and standby letters of credit in the corporate to bank space, in August 2023. This marked a significant step towards embracing structured data and modernising trade finance practices. But there is still a long way to go, and although the journey to standard-setting in trade finance is following the path set out by migration of payments to ISO standards, it is a complex market characterised by long end to end transaction cycles with multiple counterparties. This makes the move to a common standard a much greater feat than for other payment types.

The Role of ISO in Trade: Opportunities and Challenges

The emergence of conversations around ISO standards for trade signifies a shift and has been spurred on by the pockets of digitisation that have been taking place across the industry. While this journey to digitisation is a welcome step, a significant challenge facing trade finance is the prevalence of "digital islands", which represent fragmented or disconnected digital systems and platforms lacking interoperability, hindering the smooth exchange of information and transactions. Part of this involves stakeholders adhering to disparate technical specifications, making it difficult to achieve seamless integration. Addressing the presence of digital islands is crucial to ensuring interoperability and resulting in efficient end-to-end processes.

Moreover, the alignment of ISO standards with the physical supply chain poses additional complexities, as shipping processes and associated documents may comply with different standards. To fully realise the value of ISO in trade, common standards for digital trade must be established, paving the way for seamless integration and data exchange.

As the trade finance industry navigates the path towards ISO standardisation, lessons from previous payment system migrations serve as invaluable guides. Stakeholder collaboration and innovation are paramount to overcoming challenges and unlocking the full potential of standardised trade processes. Swift's Trade Finance Standards and the International Organization for Standardization have been instrumental in shaping this journey, providing a common framework for efficient and secure trade-related activities.

Aligning Financial and Physical Supply Chain Standards

One of the key challenges lies in aligning standards across both financial and physical supply chains. While efforts such as the ICC's Digital Standards Initiative (DSI) and the Key Trade Data Definitions (KTDDE) project aim to address this disparity, achieving effective and complete harmonisation and adoption will take time.

When considering standardisation efforts - such as establishing common procedures - a cost-benefit analysis is crucial to ensure that efforts are justified by the benefits they bring in terms of efficiency, risk reduction, and interoperability. The question of whether the efforts to adopt enhanced structured data standards could justify the benefits, for Letters of Credit for example, is an industry-wide debate. Yet, initiatives like the increased adoption of electronic Bill of Lading (eBL) based on a common standard are underway, signalling industry-wide recognition of the need for streamlined processes and interoperability.

Whilst development of common standards provides clear and distinct benefits for all, industry adoption is needed for them to have real impact. Global trade by its nature is a complex beast compounded by the number of actors in a transaction, the vast array of documents needed and the data elements within those documents. However, there is clear momentum to address the challenges and drive towards a truly digital trade world with data that is unambiguous and trusted. Alignment of the physical supply chain and all elements of the financial supply chain including finance, risk and distribution will invariably take time. The good news is that we have begun the journey and we know the destination.