Estimated reading time: 5 minutes

This article will explore digitisation vs. digitalisation, explaining the differences between these two concepts and providing examples of their applications and implications in especially trade finance industry.

What is trade digitisation?

Garther’s definition of digitisation:

“Digitisation is the process of changing from analog to digital form, also known as digital enablement. Said another way, digitisation takes an analog process and changes it to a digital form without any different-in-kind changes to the process itself.”

So, digitisation means converting data from analogue format, like paper trade documents, into digital files. It’s like making a digital copy of originally existed in a non-digital form. This is often done via scanners to improve storage, to enable accessibility and to share data.

Examples of digitisation

Documentary credits (L/C)’s are one of the most worked areas of digitisation. For automation of document examination under documentary credits (L/C), the following flows are done by banks;

– Paper trade documents are scanned,

– The scanned trade document images are processed by OCR,

– The party names, countries, ports, dates, amounts, currencies, etc. are extracted,

– Reading of structured messages, such as SWIFT MT 700 to determine baseline data set,

– Captured trade data are used to support the document examination process for consistency, (for example, applicant & beneficiary details in invoice or B/L literally match)

– Machine Learning and Natural Language Processing (NLP) and RFP can be used.

All of this L/C automation process is digitisation. The paper based, analog structure is converted digital format within the bank, while the business format remains unchanged.

Another pertinent example is from supply chain management: an exporter has to use paper invoices in all processes involving government bodies (such as customs), banks, and buyers, even though all invoice data already exists in the exporter’s ERP system. After these parties receive the invoice for their processes, each of them scans the document to use it within their internal workflows. As a result, every stakeholder creates its own data silo to support their operations. This demonstrates that with digitisation, traditional process flows have changed very little, beyond having accelerated.

It is very difficult to determine the origin of data items in digitised PDF documents, even if they are digitally signed. While the PDF may include structured data for purposes such as AML, ESG, and deep-tier financing, its authenticity is limited to the document itself. 

The individual data items within the PDF cannot be traced back to their originators, leaving deep-tier suppliers unauthenticated. This creates a significant barrier not only for financing downstream firms, especially SMEs, but also for tracking the ESG lifecycle of goods.

What is trade digitalisation?

As mentioned in ICC Digital Standards Initiative (DSI)’s – Trust in Trade – Verifiable Trust report:

“Trade digitisation leaves the biggest portion of the digital dividends untapped by ignoring most of the digitalisation’s change potential.” 

Full digitisation in trade means that paper documents are replaced by structured data. This data can be transmitted through APIs, enabling real-time processing and integration with downstream systems. These systems can instantly acknowledge receipt and provide feedback, also via APIs. A completely digital system for structured trade data transmission and processing is referred to as a “data supply chain.” This data supply chain can support the movement of physical goods in a connected supply chain.

Conveyed trade data via APIs should retain its attributability to its source, no matter how often it has been forwarded, transformed and processed along the data supply chain. The authenticity of data is ensured through a chain of cryptographically verifiable steps linking it back to its source. So the provenance or origin of supply a good or deep-tier suppliers can be proved.

The rise of digitisation coincides with the acceleration of new digital technologies like using cloud computing, machine learning, artificial intelligence, business intelligence, and the internet of things in the last decade.

Examples of digitalisation

An invoice issued in the ERP system of a vendor in Germany must remain traceable to that vendor when it reaches the ERP system of a buyer in Singapore for processing. If routed through a B2B platform beforehand, the invoice must still retain its link to the original vendor. Additionally, any data in the invoice from an upstream supplier, such as a manufacturer, must also remain traceable to that supplier. This would make possible not only deep-tier financing, AML, KYC controls and enabling sustainability measures.

Regarding L/C processes, full digitisation means that:

– Banks would use structured invoice data directly pulled via APIs from the ERP systems of corporates. Similarly, banks could access B/L (Bill of Lading) data as soon as the goods arrive at the port.

– Verifiable trade data would be sufficient to determine compliance with L/C requirements. All checks could be performed automatically, eliminating the need to scan paper documents or process data images using OCR to verify consistency.

As another example, Türkiye has introduced new import inspection rules to determine whether certain goods, identified by their GTIP codes, are suitable for their intended use. These goods are prohibited from being used in the food, agriculture, and livestock sectors. The inspections are to be conducted by authorised customs brokers and the Ministry of Agriculture. 

Although the regulation’s intent is reasonable, without digitisation, it is nearly impossible to track imported goods throughout their long supply chain journey. A single imported item might be resold up to ten times within the country, with each buyer potentially processing it further. Tracking these goods manually becomes a daunting task under such circumstances.

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Digitising trade by merely scanning papers and processing data images using OCR does not meet the modern demands of supply chain and finance, ESG compliance, AML regulations, or Know Your Product (KYP) requirements. Achieving effective traceability requires supply chain data to flow through verifiable supply chain data chains.

Digitalisation in trade is not yet fully mature. To enable this transition effectively, we need robust trade data standards, reliable data-sharing frameworks, digital legal identities, and, most importantly, legal frameworks that facilitate the shift from digitisation to digitalisation.

Jurisdictions must adapt their legal systems to recognise and enforce key principles such as reliability, integrity, exclusivity of control, and singularity in electronic records. These adaptations should align with international standards, like those outlined in the UNCITRAL Model Law on Electronic Transferable Records (MLETR). Additionally, any solution must comply with local legal frameworks to reduce trade parties’ reliance on private rulebooks, ensuring broader adoption and legal certainty.

This article was originally published on LinkedIn: https://www.linkedin.com/pulse/digitization-vs-digitilization-trade-finance-meral-%C5%9Feng%C3%B6z-sdkgf/?trackingId=bWIxEHhVT%2Bal8Z5T%2BL5SPA%3D%3D