GTR and BNY Mellon gathered together a group of Italian transaction bankers in Verona to discuss the evolution of the trade and payments industry.
Mauro Bonacina, Emea sales officer, BNY Mellon
Flavio Caricasole, head of trade & payment systems sales, UBI Banca
Gerardo Fumagalli, relationship officer developed markets Emea, BNY Mellon
Francesco Gabriele Lucchese, head of trade products & services, Italy, UniCredit
Shannon Manders, editor, GTR (chair)
Andrea Marchi, banking trade finance and correspondent banking manager, Unipol Banca
Massimo Paolini, head of financial institutions, international division, Banco Popolare
Alessandro Tini, head of correspondent banking, Iccrea Banca
Fabrizia Zambonin, area manager, Western Europe, Turkey, Middle East, Banca Popolare di Vicenza
GTR: Let’s start at the beginning and look at how the financial crisis affected Italy, specifically in terms of trade flows, regionally and globally.
Lucchese: Our experience is that the global trade finance market was always considered to be performing and functioning well. After 2008, the market has remained resilient and with good assets. We noted that the number of requests for country risks coverage and for financial support immediately increased in Italy in the same way as it happened worldwide. That being said, there have been several changes, mainly driven by regulatory developments, including the Basel III rules.
In order to better support our customers we have worked out a number of solutions, keeping in due consideration the reduction of our risk-weighted asset (RWA).
In the last two or three years, we have noticed an increase in open account transactions mainly due to the supply chain market transformation.
We have subsequently experienced an increase in demand for supply chain finance instruments for which we have been developing solutions: currently there are several new trade finance product lines in our portfolio.
For example, we have launched a brand new product for the Italian market this year, the Bank Payment Obligation (BPO).
Zambonin: In the early 2000s, we also noticed an increase in requests from customers confirming LCs, for insurance and so on. I recently visited some countries in the Gulf and Middle East, and noticed that the risk for such countries towards Europe, not only Italy, has increased. They decreased the country limit and they are looking at the risk of Europe all over. All transactions are evaluated on a case-by-case basis. We are not as strong as we were 10 years ago.
Marchi: Since the crisis of 2008, we have seen a deep differentiation in results between companies operating only in the domestic market compared to those able to expand into international markets. While the former have had very negative results, the sale of exports has remained unchanged and has even increased, replacing the decrease in the domestic market with the increase in the export market.
The strategies are different according to the characteristics of the various regions. Central Italy is the area most characterised by SMEs.
The share of sales to Turkey and other countries of Eastern Europe has increased while Russia, despite the embargo, has retained its export share. Asia has proven to be the most dynamic region for our customers, becoming the second export region after the European Union, thanks to exports towards the emerging countries of Asean. Also, Latin America has acquired an increasing role for little enterprises in Italy even with the dynamic roles and risk profiles of the countries in this area. Enterprises have also increased their earnings over the medium term, keeping business risk very low, due to expansions in the international market.
The need for large investment banks to fit between buyers and suppliers will determine, in our opinion, a segmentation of the supply chain finance market, diversified among innovative particular products and up to innovative global solutions, aimed to increase the value of stocks through increasing collaboration and visibility among supply chain partners.
Caricasole: The problem with the global financial crisis was that, when the rest of the world restarted, Italy remained still, because we are still facing a systemic crisis now. We talk about small companies, which are really struggling to gain a new position in new markets. For example, Italian companies were very reactive to the Mediterranean environment. The Arab Spring, which we may have forgotten but the consequences are still there, closed a lot of trade routes, towards Libya and Egypt. That is now recovering but, for three or four years, we had a sort of black hole in Egypt: Tunisia also had its consequences. Algeria is a good market, but we experienced a few months of problems.
The other issue is Russia. I would not say it is unchanged; it depends on the level of exposure you have to that country. In our case, we have a significant exposure and we had to slow down quite substantially because of the environment.
Small companies are not used to approaching the Chinese market. The Chinese continent is a big question mark for them, because they are too tiny to approach such a big market in a substantial way. We have similar problems with companies in the Indian market. The point is that companies are struggling to find new commercial routes.
I believe that the Italian market and Italian companies, at the moment, are leading a sort of transformation phase, where they have to be more aggressive and have the courage to restart. We had a phase in the 1960s, when some of our entrepreneurs started to enter foreign markets.
Yesterday I heard that Made in Italy is the fifth commercial brand worldwide. Despite this, only 15% of Italian companies are abroad. Of the 15%, 85% of these companies export only up to €75,000 every year.
The brand is extremely widespread. The quality is there. The capability to build products is there, but the number of customers or companies already abroad is quite limited. Italy is not as export-oriented as it could be. For example, 29% of our small companies are export-oriented while in Spain, for similar dimensions, 50% are already abroad. This is the situation we are facing and this also influences trade flows and trade finance activities.
Tini: We are seeing the small companies have changed their attitude a little during the crisis. Maybe before the crisis they were suppliers of medium enterprises as a domestic market. Since the beginning of the crisis, maybe since 2010, they started to go abroad, without any preparation, without any help from the banks.
It is also interesting to see the numbers. In Italy, the number of companies that approached the foreign markets increased, but only among minor enterprises. That is quite interesting and very dangerous for our system, because minor enterprises, generally speaking, are not completely supported by banks.
I agree on the trade corridors: the Mediterranean is one of the most important. It is also interesting to see the statistical change over the last two years. According to a Sace report, emerging markets should be the supporting markets for 2016/17, compared to their prediction for the previous year, which pointed to the US. It has completely changed.
It is interesting to see that, in Italy, the numbers of LCsf are reducing. We project these figures to the end of the year and, in the first five months, there is a reduction of only 3%. There are two areas that are increasing – Latin America and the Middle East. They are increasing by 5%. All of the others are decreasing dramatically.
My opinion is that the bigger buyers have an increasing strength to oblige small enterprises, including Italian ones, to accept longer terms without LCs. This is my personal opinion. The problem is that SMEs do not have easy access to supply chain financing. This is the problem and what we are seeing in our system.
Paolini: Another change that I would like to underline is around our job: previously, our main task was to convince our credit department to establish credit lines in favour of foreign banks, despite their ratings and the figures on the balance sheet. Starting from 2008 with the continued downgrading of European countries and Italian banks, our main task now is to convince foreign banks about their rating, the balance sheet figures and our credit-worthiness.
GTR: How are clients’ demands evolving when it comes to supply chain finance?
Lucchese: We are showing companies how supply chain instruments can support their activities. As I mentioned, we concluded the country’s first BPO last February and we are now setting up further transactions despite the difficulty involved in introducing them. I am convinced that companies will find these kinds of instruments useful in the future.
Companies must not only be familiar with ‘plain vanilla’ instruments like LCs and guarantees, but also with all the supply chain instruments.
Structuring, implementation and training are a big investment for us, but we consider this transformation highly important.
Tini: There is also a cultural problem in Italy. Generally speaking, SMEs and micro enterprises approach the foreign market like they approach the domestic one. It is really quite complicated to explain to them that they cannot go to China or elsewhere in the world and say: ‘I want to be paid in advance.’
This is one of the problems with our customers; they approach the market without any preparation. They think it is enough to sign a contract. Each market is different, so you should have a good knowledge of that market. It is not easy for our customers to have that.’
Paolini: Indeed, there are lots of smaller companies that are not so deeply involved in all the typical instruments to approach business abroad. On the other hand, there is a demand, and our bank is investing a lot, for new instruments mainly in remote and mobile banking as well as in the field of trade finance. It is very challenging to fit together these two situations.
GTR: Let us talk about technology: what are your banks spending, and how, to help their clients and stay ahead of the game?
Zambonin: Last year in our bank, we introduced a new IT system for international transactions, because of the increase in international business.
Bonacina: The first effect of the financial crisis and the draining of liquidity has been that all companies, and by definition all financial institutions, have had to make their internal processes more efficient. They have had to squeeze and streamline their processes and try to find synergies, efficiencies and revenue streams within the functions and activities that they already have in-house. Technology has the potential to make a big contribution in this regard. Over time, we have seen the drive for efficiency developing and are now familiar with outsourcing solutions in particular.
In relation to technology enhancements, a very recent development is the need for automated processes. For example, we have been requested to assist counterparties with optical character recognition (OCR) applied to trade processing and document examination. This is something that we have been exploring. However, it is probably too difficult to provide such assistance at present. This is not due to technology limitations: we all have smartphones, we can all capture business cards and have OCR in place. The major difficulty that remains is in relation to compliance controls, which is a major issue, and an area in which banks should invest more in the future.
GTR: Something that has been mentioned is the importance of Asia to clients and SMEs, so let us talk about the renminbi. Who here thinks it is important to support renminbi trade flows and why?
Zambonin: The adoption of the renminbi is still not very relevant. Italian companies are ready to change and possess huge flexibility, but often in response to requests made of them. The impression we have is that the same Chinese companies have no priority for the adoption of the renminbi in their transactions.
Paolini: In my opinion, there is a mismatch between the importance that the Chinese government puts on utilising renminbi in business transactions and the reality of the situation. Some companies are very interested in utilising renminbi. Indeed, we started in 2012 to open a renminbi account on the mainland, and we do notice, year after year, an increase in the number and volume of business, but not in line with expectations.
On the other hand, I would like to underline that the Chinese government has not been helping, and has very stringent regulation in place that practically does not allow this business to boom.
Tini: What I noticed is that, just some weeks ago, I participated in a forum organised by a Chinese bank in Rome, and they are pushing the issue a lot, saying that Italy is quite a case for them. In other countries in Europe, for example in France and England, the number of concessions is growing. The number is completely different from Italy. They are pushing the Bank of Italy to help them open an increasing number of renminbi activities. The number of offshore centres has increased in the last years, in an incredible way, in Brussels, Paris, London, Frankfurt and so on. I have the impression that, for the time being, it is not really an issue for Italian banks, because their customers do not have a lot of requests. I have the impression that, when the government of China decides to open the door completely, it will really become the second currency for trade activity all over the world. The problem is there is no competition at the moment.
I am in discussions with Russian banks located near the border with China. They say that, even if they manage a lot of transactions with China, they say that the Chinese companies do not want to pay in or receive renminbi; they want to receive US dollars. The Chinese companies themselves do not want to push this.
Lucchese: Looking at the business flows in renminbi, we noticed that most of it concerns payment orders and only a small portion is represented by LCs.
I asked our branches in Hong Kong and Singapore for an explanation and they answered that the lower euro or US dollar interest rates in respect of RMB rate, influence Chinese exporters to have an LC transaction issued in US dollar or euro, especially if they discount these LCs. In any case, we are ready to support our customers with trade finance products in Rmb in order to enhance their business, because we are convinced that the emergence of the Rmb as a major settlement currency in global trade finance is more a matter of ‘when’ than ‘if’.
Bonacina: We are the first American bank to have obtained from the Chinese government a full licence to convert renminbi onshore and we therefore have the technical capability required to support renminbi trade flows. The flows we are seeing are not negligible, but they are not yet sufficiently robust to be meaningful.
Despite the fact that the renminbi remains little used, trade flows show a clear predominance of China as a market. From our standpoint as a processing bank, the statistics show that some of these trade flows are rising, with concentration in some cases. We see Italy as the second trade partner of China. On the imports side, we have seen 84.5% of Italian LCs go towards Asia Pacific. Of this 84.5%, China represents more than 38%, with India being a distant second. China is definitely Italy’s preferred trade counterparty, as far as LCs are concerned. However, these LCs are still denominated in euros or dollars.
GTR: Our final set of topics centres on changing regulations and compliance requirements.
Lucchese: As head of trade product services in Italy for UniCredit, I have increasingly heard the term ‘compliance’ over the last few years.
What began as a US-centric trend, to increase regulatory reporting and related requirements and subsequently the time and reporting and related requirements, has been taking hold in the rest of the world.
As a consequence, now, when developing new trade finance products or servicing traditional products like LCs, we have changed all our internal processes in terms of handling compliance requirements and all the other rules, like KYC, anti-money laundering, etc.
We are spending a lot of money on that – on the IT side, we are even changing our banking platform for trade finance, in part due to these obligations.
GTR: What are the challenges and opportunities?
Tini: On the negative side, the statistics issued two days ago said that, for the first 16 banks, legal and compliance costs since 2010 have been around US$300bn. That is enormous.
In terms of opportunities, I would focus on KYC. For the small banks, this could present an opportunity to really know their customer very well and support them.
If the small banks are the only ones that support micro enterprises, and they really know the customer and what they do in their day-to-day day business, they could support them better so that they have higher revenues and more opportunities. That is what I see working in the credit co-operative banks.
Lucchese: On the other hand, these ’exercises’ can slow down operations. For example, due to anti-money laundering and other assessments that we have to comply with, we are requested to know the underlying operation and to be aware of the kind of products our customers are exporting. The assessment of the underlying transaction can sometimes be very difficult but our business guys, trade finance specialists and foreign trade centres, have been well trained. Not only in KYC, but also KYT (know your transaction).
Paolini: KYC and compliance requirements have affected the business a lot, in terms of adapting it. The result is more concentration on RMA [Swift’s relationship management application], which could be an opportunity to select other counterparties. On the other hand, right now it makes no sense – and this is also our policy – to establish new RMA without any flow business and possibilities in the future. We do not exchange RMA on a one-shot basis, when the flow business is not significant to have a sense of managing all the requirements of KYC. This is also becoming an administrative issue.
Marchi: For a small bank like ours, with a considerable number of banking relations, and more than 800 RMAs, this activity also involves the regular collection and monitoring of documents. A lot of our documents and other data are related to banks with which we have significant business. Our company policy is not to work with countries that have a high risk of terrorism, and we have very careful checks against money laundering and export of dual-use goods. We have a consulting service for our customer, because it is very difficult to find out if their goods are dual-use or not.
Zambonin: In August last year, we established a team by which each transaction is stopped if it comes from embargoed or non co-operative countries, like Lebanon or Algeria. Each transaction is stopped and checked with a branch at the border, and then we can reject. Another problem is the number of Swifts we have enforced, where we have to check each RMA. At present, we have 3,800 Swift keys, but we are trying to reduce them. The problem in Italy is that small companies ask you to work with small banks in many countries. You cannot refuse the transaction, because they will go to another bank. This is the big problem. What do you do? You can utilise another Italian bank or another local bank in the foreign country. This is the big problem, because they are more expensive charges.
GTR: Let us talk about those costs: as a smaller bank, how do you go about absorbing those increased costs? What options are available to you?
Zambonin: With Swift and the new KYC service, banks provide the AML documents to Swift which validates and creates a global standardised KYC registry. Information is shared only once and on a standard format. We hope this will help.
Caricasole: I am part of the Swift member group, and they are investing quite a lot, and will invest more in the future, in helping banks to match their compliance needs. I suppose that, in the future, it will be made directly from Swift. You will do your KYC duty with Swift and all the other banks will take advantage of this service.
Tini: The KYC registry is very open as well. The small banks are required to prepare a lot of documentation when requested by the big banks. When you comply with the KYC registry, you can say to your counterparties: ‘I am in the KYC registry. All the documentation is here. Please do not ask me for more and more and more.’
Bonacina: Simply put, the positive of compliance and regulation is outweighing the negative. US$300bn is the known cost. We know that and we can measure it. It is enormous, but it is a known entity. The unknown cost relates to potential sanctions. Ask all the big players, the international and global banks, how much. Big banks have already been fined in the billions by the US regulators in particular.
We are talking about the cost related to KYC in particular. That is one cost. There is also the cost stemming from anti-money laundering and the regulations themselves. Take Basel III. This is a significant additional cost, in terms of capital allocation, the liquidity coverage ratio and the supplementary leverage ratio. It is huge. Being an American institution, we are ahead of the game. The targeted implementation date for American banks is two years before that of the other institutions. Whereas the deadline implementation date for Basel III is 2019 for European banks, it is 2017 for us and we are already at the 80% threshold for our liquidity coverage ratio, to give just one example.
Philosophically, that is definitely the right thing to do and the right direction to move in, but unfortunately it can become too complicated and complex. It is an over-regulated environment in comparison to other professional environments such as alternative finance and crowdfunding, which are not heavily regulated. On the one hand, regulators are focusing on protecting clients in our sector, whilst paying less attention to clients in other equivalent sectors, which also fall within the remit of commercial lending.
Fumagalli: I come back to the point that KYC could become a great opportunity to understand what clients are really doing with you right now. It could be an opportunity to improve your relationship with clients, because, for example, you may realise that what they are currently doing is not optimal or you could explore other business opportunities that they could pursue. I can even say that a good KYC process means quality information that we can use for different purposes, such as in connection with, the new regulatory, capital or liquidity requirements that we have discussed today.
The idea is that KYC could become a real and live document. You do not just fill in a form, answer a questionnaire and put it on the website so that Swift can support it through some automation. Fine, this is the first step. The second step is that what we write and put on the website is the reality. Sometimes, my personal impression – and correct me if I am wrong – is that there is a disconnect between the concept of KYC and the rules between the first line, which manages the relationship with the client and maintains valuable information and, for instance, the correspondent banking division, which is more sensitive in order to fully comply with US or European law.
We are seeing substantial improvement in the Italian market. The difference is huge if we compare it to five or 10 years ago. We have daily dialogues on compliance matters with most of your institutions and, overall, there is certainly a great depth of knowledge. However, there are disconnects: for example, the area manager has some information whilst the corporate departments have other information. It would be great to find a way to improve dialogue internally and to increase the sharing of knowledge and information between those who manage International Banking and are much more exposed to the international market and those who manage the relationships with the clients. That would probably be a good way to make KYC a very useful and efficient tool to manage client relationships.
If we only comply with provisions of law or regulation that we consider to be mandatory, we will probably miss opportunities. We have to make an investment, but let’s do it in an efficient way with the aim of getting to know our customers better and being ready to help them, as experienced advisors, navigate the international markets.
GTR: Do you think there is a disconnect between different areas within banks?
Caricasole: I agree with what Gerardo described that, in reality, we are far away, not for a lack of will, but in the daily management of banking activity. Due to compliance, for example, half of the time of our branch network is engaged in just controlling clients’ credit quality, not what they do, who they are and what they are doing, but just managing the credit lines and the quality of credit analysis.
We are doing increasingly less business.
For the Italian banks, all this compliance activity has come in a period where the level of income of Italian banks is extremely low, because we are facing financial evolution not allowing us to make the same profits and margins as in the past. Meanwhile, we are spending a huge amount of money on anti-money laundering, KYC, Payment Services Directive (PSD) and so on, lowering pricing, for example, because we are not in an open market. We need to apply conditions that are free of charge to the clients, because it is a European transaction. It goes completely against the good sense that we are investing money in technology processes and new structures. Once upon a time, the team of people looking after RMAs was maybe one. Now, there are three, four, five or six people, depending on the dimensions of the bank.
Ultimately, the question is whether we are going to achieve something better with all this. I am not sure, because accidents will happen in any case, and they will be big and well known. My point is that we have never found a case of an evident breach of the anti-money laundering legislation in our bank, because we were very conscious of it before. We know our customers.
We have worked in a very expensive way to cope with all the legislation, investing all our money in this way. Every October, when I go to propose a budget to achieve new products to the VP, every time I propose a new investment on the commercial side, they say: ‘We can hardly answer the legislation requirements. We have to implement new end date for the PSD,’ and so on. That is the situation, as I see it. I am quite sceptical about all this money spent. There are large banks who have spent huge money on AML systems and this was not enough to prevent the accidents they had. They received huge fines from the American authorities. We are spending a lot of money to officially cover or be compliant with the legislation, while the real money laundering activity is taking particular channels.
GTR: Let us progress to talk briefly about SEPA. How are you adjusting to challenges there?
Marchi: We think that the speed of execution of payments may be the next target in this field. The market requests instant payments for the immediate execution of same-day payments.
Tini: From a customer perspective, it is definitely a success to speed up payments. You do not pay for this speediness. One day is not enough, and the banks are obliged to provide platforms and IT systems to comply with requirements. From the customer’s perspective, SEPA is definitely a success. For the banks, I suppose that, taking into consideration that SEPA is not a request of the banking system but by the European Commission and Central Bank, for us and all of our banks, it is zero business. It is all cost. If you think about how much it has cost to comply with SEPA and the request to move from February to August, because we are not in a position to comply with requirements and so on, it has been a nightmare for the banking system.
In a certain sense, I could say that, being a central institution, it is basically a business for us. We have a mass of payments. SEPA is not really a business for us. If you want to see something positive – as we always need to see a positive – SEPA obliges us to be prepared for ISO20022. This is something that obliges the bank to be prepared, by targeted securities to new standards. Paolini: For us and to say something positive, SEPA was, and is, a matter to further convince our customers to migrate to remote banking and IT platforms, but it was zero business, as you said.
Caricasole: We tend to see the payment as a sort of commodity, because it brings no or very low profit. The advantage is to see the process of the payment from invoicing to reporting, at the end of the process. In the middle is this instant moment of the payment, but actually there is the financing side of the business. Another advantage is that, in Italy, we were not so keen on the direct debit concept. We had a form used for facilities like power bills and so on, but the concept of the direct debit, by which the creditor manages the payment process, is not natural for Italian companies. We are trying to convince them that, instead of invoicing and just waiting for a clean payment from the debtor, they should invert the process and review payment processes. They should charge the direct debit and obtain information about a possible unpaid item.
Of course, this brings in another concept that, for the bank, it is easier to finance a flow of business placed or channelised on the bank in a very precise way.
Another point that we expect is the RIBA business. As the LCR in France did not join the SEPA scheme, the RIBA is the same. In the medium to long term, I do not believe we will maintain different tools for very similar targets. I believe that SEPA will have a major influence on the scheme for clean payments.
My last point goes back again to the external factors. Instant payments are a big issue in EBA and the banking system, because there are other players providing P2P or instant payments very effectively, at a very low cost because, in that case, they are not looking again at the payment event, but at the customer experience. For them, it is easy to say you can pay P2P for a charge, because they are very interested in what you are doing in that marketplace. That is another aspect where we are trying to understand how to react positively, without closing our attitude towards this new world coming.
GTR: Are there any closing remarks?
Tini: Looking at cash payments and management, banks in the future may face increasing difficulties earning revenues from this kind of business, due to new kinds of business and system payments, like Bitcoin. We need to begin to think and concentrate not on the product, as we have up to now. To process the payment itself is not enough and is not more efficient for us. We have to provide services to our customers, and new experiences. The big difference will be services we have to provide in the future on the cash management side.
Lucchese: The trade finance market after the 2008 crisis has also greatly changed in Italy – we all learnt the lesson: no-one is 100% safe anymore.
Our senior management is really focused on trade finance and its development. This awareness is fostering the development of new product lines, such as supply chain finance instruments, offering solutions exploiting the recent growth of open account transactions. This means a wider range of trade finance products available, spanning from plain vanilla instruments like letters of credit, international guarantees, ECA guarantees, export credit insurance to supply chain finance, bank payment obligations, and other trade-linked solutions meeting specific customers’ needs, including trade information and cargo insurance.
Compliance and other rules have made business more complex: more accuracy is necessary by all parties involved.
However, this is for our mutual benefit, as we have all learnt from experience that a lack of, or weak control by regulatory authorities in the long run, generates unpleasant situations and consequences.
Banks are offering hedging and tailored solutions and skilled support from the very beginning of negotiations between the parties who are now aware that the support of the banks and the costs claimed by them are backed by real added value.
We are convinced that helping companies to develop a greater understanding of the trade finance business is crucial and are addressing this by increasing the number of training opportunities offered to our customers and stakeholders.
The more customers know about trade finance instruments, the more they utilise them.
Marchi: For a medium-sized bank like ours, the offer of trade finance products should be on two fundamental bases – consulting and operational speed. I agree that training could be a driver for success, in order to develop durable and satisfactory relationships with customers. Some banks do not understand this and, because our customers have failed to achieve the right level of operational knowledge for the international market, we should help them to realise their projects.
Zambonin: It is important for Italy to co-operate. Banks and institutions abroad have told me that they see Italy is coming to the market as five companies with an economic mission. After a month, another five companies come. We must have greater solidarity. This is important.
Banks must also co-operate across Italy.