The digitalisation of international trade: an opportunity to develop forfaiting


Since the development of bills of exchange by Venetian merchants and bankers, the practice of forfaiting has changed very little. However, this means of export financing is today at the dawn of a profound revolution, thanks to the digitalisation of international trade. An ideal context to make it more widely accessible?

Commercial papers or drafts (bills of exchange or promissory notes) have not survived for centuries by chance: they are relatively simple (only a few indications are required) and very powerful (thanks to the unconditional and irrevocable obligation of payment, independent of the underlying commercial relationship) means of payment, while being particularly efficient, as their ownership can be easily transferred to a third party (including a financial institution).

These papers can thus offer credit solutions, by being discounted.
“Forfaiting” occurs when this discount is without recourse - which mean that the bank ultimately bears the risk of non-payment at due date. The use of forfaiting is well developed in many parts of the world - in North America, the Middle East, Northern Europe and in some Asian countries in particular - and has seen a recent revival of interest with the progressive digitalisation of international trade.

A financing tool, but not only

It must be said that forfaiting offers many advantages for the players who use it. Firstly, it can finance short-term cash flow needs - such as working capital and/or payment terms extensions - and long-term investments - particularly in fixed assets such as wind turbines, solar panels, industrial machinery, 4G/5G antennas, etc.

But it is not only a financing lever; it also allows exporters to hedge against major risks from international trade by making their operations more secure. Non-recourse discounting provides coverage against commercial risk - a buyer’s default - but also against country risks and possible foreign-exchange risks.

For a supplier, the use of forfaiting can also be an additional argument in e-commercial negotiations, as it makes it possible to offer one's clients more flexible and staggered payment terms. It can also be used at the request of a buyer wishing to extend the terms of payments and/or to consolidate the commercial relationship with their suppliers as part of “reverse forfaiting”. Lastly, it is also a powerful accounting tool, as - subject to the approval of the auditor - the underlying receivables of the disposing company can be removed from its balance sheet in application of the relevant deconsolidation policy.

Forfaiting therefore is a flexible solution, capable of meeting both simple and more complex financing needs. Moreover, it can be combined with other tools to structure and secure the operation. The result is multiple advantages in financial, accounting and commercial terms.

Paper procedures being digitalised

Nevertheless, despite all its advantages, the development of forfaiting remains limited by a major obstacle: it still relies heavily on paper formalism, since it involves the transmission by postal service of the original draft, the only documents currently enforceable with third parties. As a result, there are cumbersome processing procedures, which can take time when the buyer and supplier are in different countries. Not to mention the operational risks (losses, delays, fraud...).

This obstacle is now gradually being removed, thanks to the digitalisation of international trade, as digital technologies - including blockchain - now make it possible to digitally replicate certain specific attributes of physical-trade instruments, including their uniqueness and their associated property rights.

At the same time, around the world, the Model Law on Electronic Transferable Records (MLETR), established in 2017 by the United Nations Commission on International Trade Law (UNCITRAL) to streamline documentary exchanges in international trade, is being transposed into local legislation.

Around ten countries - including the United Kingdom and Singapore - have already implemented it, while its entry into force is imminent in France, its entry into force is imminent. Societe Generale is closely monitoring the evolution of the regulations and is already working on preliminary pilots.

Towards a radically different experience

This digitalisation of commercial instruments means that ultimately, a bill of exchange can be issued, accepted, endorsed, and discounted within a few hours, instead of days or sometimes weeks. Societe Generale - as a financial institution - will be able to finance suppliers much more quickly, with limited operational risks thanks to the electronic transmission, validation and storage of documents.

For the client, the experience will be radically different experience, with a much faster and simpler financing lever to implement, as well as a much more transparent and, ultimately, less costly process. As a result, forfaiting should become accessible to a broader range of companies, integrate the financing toolkit of all large corporates' financial managers... and, hopefully, also contribute to boosting export transactions and global trade.

Pierre Courquin Director, Head of Forfaiting, Société Générale