Lloyds Bank said the use of digital promissory notes could cut the time it takes to buy land and property by weeks.
This innovation is expected to open up a new form of payment discount to businesses of all sizes for the first time, improving cash flow for SMEs on both sides of a trade transaction.
Promise paper money has been around for thousands of years to complete transactions in lieu of cash. In modern times, their use is usually limited to large transactions, such as land sales. Using a promissory note allows payment to the seller based on the buyer’s creditworthiness. Buyers can obtain goods and/or services through a ticket without having funds on hand. The process involved in issuing, authenticating and paying promissory notes has changed little since its inception.
The use of promissory notes in the UK is governed by the Bills of Exchange Act, which hinders innovation by requiring the notes to be a physical entity. Transferring paper notes between banks and notaries means it can take a week or more for businesses to receive payments.
Under the guidance of the law, Lloyds Bank has developed a digital promissory note that applies to contract law and uses international trade and forfaiting under the Digital Negotiable Instruments Initiative The dDOC Specification (DNI) of the Association (ITFA).
On August 17, the bank completed a pilot transaction, the first under the DNI initiative, which it said was a milestone in the digitization of trade finance. The deal, which was launched and completed on the same day, involved the purchase and sale of £48m worth of land between several UK businesses. The bank’s promissory note is issued using Enigio’s solution trace:original for digital original documents.
The digital solution provides same-day payment to suppliers by eliminating the need to physically transfer physical bills. Lloyd said this created a cheaper, safer, more flexible, more sustainable and transparent online solution that could be applied to other types and sizes of transactions.
Gwen Master, managing director of lending and working capital at Lloyds Bank, said: “A promissory note is an important tool for businesses doing large transactions, but it is a relative Niche solutions. Their use enables purchases in the face of cash flow shortages that might otherwise prevent them. So far, such industry-side solutions have generally been slow, expensive and cumbersome to manage.
“With this successful deal, a first in the UK, we are delivering an innovative digital solution that is faster, cheaper and safer. The digitization and simplification of the solution has finally opened up this form of payment discount to millions of potential small businesses, improving their ability to manage working capital and supplier cash flow by completing invoices faster. “
ITFA Director Andre Casterman said: “The digitalisation of trade offers financial institutions many new opportunities to improve customer satisfaction. As a member of ITFA’s DNI initiative, Lloyds Bank has been very focused on applying advanced technology to solve client pain points and is now becoming a leading institution in bringing promissory notes into the 21st century. I’m impressed with the steady progress the Lloyds Bank team has made and their rapid implementation of Enigio’s trace:original technology, the only solution currently compliant with the ITFA dDOC specification. “
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