Lloyds Bank says that the use of digital promissory notes could cut the time it takes to buy land and property by weeks.

It expects the innovation to open a new form of payment discounting to businesses of all sizes for the first time, improving cashflow for SMEs on both sides of a trade transaction.

Promissory notes have been around for literally thousands of years, used to complete transactions in lieu of cash. In a modern times, their use is typically limited to large transactions such as the sale and purchase of land. The use of promissory notes allows sellers to be paid, based on the creditworthiness of the purchaser. The purchaser can obtain goods and/or services with a note, rather than needing to have funds on hand. The process involved in issuing, authenticating, and paying out on promissory notes is little changed 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 are a physical entity. The transfer of a physical paper note between banks and notaries means it can take a week, or more, for businesses to be paid. 

Under legal guidance, Lloyds Bank has developed a digital promissory note that works within contract law and uses the International Trade & Forfaiting Association’s (ITFA) dDOC specifications, under the Digital Negotiable Instrument Initiative (DNI). 

On 17th August the bank completed a pilot transaction, the first under the DNI initiative, which it described as a milestone in the digitisation of trade finance. The transaction was initiated and completed on the same day and involved the sale and purchase of land worth £48m between several UK businesses. The Bank’s promissory note was issued using Enigio’s solution, trace:original, for digital original documents. 

The digital solution delivers a same-day payment to the vendor by removing the need to physically transfer actual notes. This creates a less costly, safer, more flexible, more sustainable, and transparent online solution that could be applied to other types and sizes of transactions, Lloyds said.

Gwynne Master, managing director for lending and working capital at Lloyds Bank, said: “Promissory notes are an important tool for businesses that undertake large transactions but are a relatively niche solution. Their use allows purchases to progress where shortage of cashflow may otherwise prevent them.  Until now, this industry-side solution is typically slow, expensive, and administratively cumbersome.

“With this successful UK-first transaction, we have delivered an innovative digital solution that is quicker, less expensive, and more secure. The digitisation and simplification of this solution finally opens this form of payment discounting to potentially millions of small businesses, improving their ability to manage their working capital and the cashflow of their suppliers by fulfilling invoices more quickly.”

ITFA director Andre Casterman said: “Digitisation of trade opens up many new opportunities for financial institutions to improve client satisfaction. As a member of ITFA’s DNI Initiative, Lloyds Bank has been very focused on applying advanced technologies to address clients’ pain points and is now becoming the leading institution to bring promissory notes into the 21st century. I am very impressed with the steady progress achieved by the team at Lloyds Bank, and their rapid implementation of Enigio’s trace:original technology which is presently the sole solution to comply with ITFA’s dDOC specifications.”

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