Lloyds Banking: the bank completes the first purchase of digital promissory notes in the UK

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Lloyds Bank has completed the first transaction in the UK using a digital promissory note purchase. This landmark transaction dramatically increases payment speed and paves the way for a significant increase in the use of promissory notes for a wide range of transactions.

promissory notes

Promissory notes have been around for almost 4,000 years and are used to conduct transactions instead of cash. In a modern setting, their use is generally limited to large transactions which often involve the sale and purchase of goods.

Using promissory notes allows sellers to be paid based on the creditworthiness of the buyer. The buyer can obtain goods and/or services with a note, rather than needing to have funds on hand. The process for issuing, authenticating and paying promissory notes has changed little since their inception.

The use of promissory notes in the UK is governed by the Bills of Exchange Act, which has hindered innovation due to the requirement that notes must be a physical entity. Transferring a physical paper note between banks and notaries means companies can take a week or more to pay.

Cutting-edge innovation

Under legal direction, Lloyds Bank has developed a digital promissory note – a solution that operates within the framework of contract law and uses the International Trade and Forfaiting Association (ITFA) dDOC specifications, as part of the Digital Negotiable Instrument Initiative (DNI).

On August 18, Lloyds Bank successfully concluded a “pilot” transaction, which is the first under the DNI initiative, and a key step in the digitization of trade finance. The transaction was initiated and completed within the day and involved the sale and purchase of land worth £48million between several UK companies. The Bank’s promissory note was issued using Enigio’s solution, trace:original, for digital original documents.

The new digital solution offers same-day payment to the supplier by eliminating the need to physically transfer the actual notes. This creates a more affordable, secure, flexible, sustainable and transparent online solution that could be applied to other types and sizes of transactions. This innovation is expected to open up a new form of payment discounting to businesses of all sizes for the first time, improving cash flow for SMEs on both sides of a business transaction.

Gwynne Master, MD, Loan and Working Capital for Lloyds Bank, said: “Promissory notes are an important tool for companies undertaking large transactions, but are a relatively niche solution. Their use allows purchases to progress where lack of cash might otherwise prevent them. So far, this industry side solution is usually slow, costly and administratively cumbersome.

“With this first successful transaction in the UK, we have delivered an innovative digital solution that is faster, cheaper and more secure. Digitizing and simplifying this solution is finally opening up this form of payment discount to potentially millions small businesses, improving their ability to manage working capital and supplier cash flow by paying invoices faster.”

Andre Casterman, Managing Director of Casterman Advisory and ITFA Board Member, said: “The digitalization of commerce opens up many new opportunities for financial institutions to improve customer satisfaction. As a member of the ITFA’s DNI initiative, Lloyds Bank has been focused on applying advanced technologies to solve customer issues and is now becoming the leading institution bringing promissory notes into the 21st century.I am very impressed with the steady progress made by the Lloyds Bank team and their rapid implementation of trace:original d ‘Enigio, which is currently the only solution to comply with the ITFA dDOC specifications.

Patrik Zekkar, CEO of Enigio, said: “We are extremely pleased with the way Lloyds Bank has proactively and constructively leveraged the capabilities of trace:original to improve its value proposition, increase profitability and also enable financial inclusion. It is a partnership that puts us challenged to keep improving, for the benefit trace:original is a game-changer to achieve global paperless commerce, given the solutions’ ability to replace all physical paper documents currently in use around the world, with multiple digital benefits additional.

Merisa Lee Gimpel, Managing Director of Solutions Development for Working Capital and Lending Products at Lloyds Bank added: “Lloyds Bank has embarked on an exciting multi-year customer-centric commerce digitization program working with our customers, other banks, government agencies, fintechs and wider industry. This first successful transaction in the UK is a key step in what we have been able to achieve ahead of the much anticipated UK Electronic Commercial Documents Bill.We are also working on a series of pilot projects to test the interoperability of digital bills of lading across international borders We will continue to develop innovative digital trade and working capital solutions to make it easier, faster, safer and more sustainable for UK businesses of all sizes to access liquidity and risk management in supply chains, both domestically and internationally.

The DPN transaction was completed as part of Lloyds Bank’s ongoing digital strategy and paperless commerce initiative which offers customers the ability to transact and present documents fully digitally, opening up the path to eliminating paper from commercial transactions, where approximately 28.5 billion pieces of paper are used worldwide each year. The Bank’s digital strategy also includes a partnership with Satago to provide a one-stop invoice financing and invoice factoring solution.

Find out more about Lloyds Bank working capital solutions.

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