Over a September lunch in Singapore, GTR sat down with some key decision makers in Asia Pacific trade finance, to discuss the most debated topics in the region today. At a time when regional lending has reached a three-year low, banks are faced with the task of bridging a huge trade finance gap. Simultaneously, they need to tackle the challenges and opportunities of fintech – the buzzword dominating the industry.
- Finbarr Bermingham, editor, GTR Asia (chair)
- Jolyon Ellwood-Russell, partner, Simmons & Simmons
- Albert Lim, head, credit and surety hub, Asia Pacific, Swiss Re Corporate Solutions
- Ravi Manchanda, chief executive, Singapore, Westpac
- Shivkumar Seerapu, regional head of trade finance, Asia Pacific, Deutsche Bank
- Sanjay Tandon, regional head of product and propositions, global trade and receivables finance, Asia Pacific, HSBC
- Azim Walli, assistant general manager and head of trade and supply chain products, Asia and Oceania, BTMU
GTR: Lending levels are down, yet more trade goes without financing. It is a paradoxical time. What would you describe as the one major trend that you’ve noticed in the trade finance market over the past year?
Tandon: Some of the business that banks have built up over the past few years was built on arbitrage in my personal opinion, and that party has come to an end. So effectively, it was great business for everybody to capitalise on the opportunity, but now it’s back to the core business that banks have always done, which is about being the working capital provider to their corporates.
Now the slowdown is hurting us, and it’s both a function of how volumes have dropped and how values have dropped. At least for the early part of the year, if you look at the commodities that moved, there was no drop in terms of actual physical tonnage moving across. Now, that has started hurting and as long as the volume is dropping, and prices are out of our control because they are a function of the market at the end of the day.
I still feel that it’s not all doom and gloom. I believe that it’s cyclical. Asia has had a great decade in terms of trade finance. It will come back. Yes, there will be changes: technology, digitalisation and governments trying to drive change, but that is not going to be immediate, and it’s not going to be the panacea for everything. That will help us manage risks, monitor what goes through our counter.
The biggest challenge I see is that now it’s trade’s turn from a regulatory and compliance perspective. The regulatory overhang is immense now. It used to be all about the payments and cash management business, which went through a lot of automation and a lot of data analytics which helped them manage anti-money laundering (AML) risk. Now it’s trade’s turn, and I think we need to, collectively as an industry, figure out how to make the business efficient. If you are in the flow business, and managing a lot of volumes, that means a huge amount of investment in infrastructure and cost to really give the standard service to your contract.
Manchanda: The compliance bit is killing a lot of banks; the cost of compliance has gone up – I believe from what I read that it’s doubled over the last two years. As a result, compliance colleagues are actually more in demand than frontline officers. In some ways I think the pendulum has swung to the other side, so these are the challenges: currency plus market conditions.
Today we are talking about the crisis around the Middle East, but we’ve got terrorism right on our doorstep here in Singapore and in Asia. So when you add in those additional factors, needless to
say there is a bit of a downbeat outlook on trade.
Lim: In times like this, people tend to try to look for innovations. What’s gratifying to me is that in the last couple of years banks and insurers have been working together, which I think is very positive for the market as a whole and even more so in a down market. That’s where everybody needs to pull in and collaborate to provide solutions to support global trade.
The current situation means banks and insurers can really collaborate as opposed to in the olden days, when trade bankers and insurers tended to be quite suspicious of one another. Insurers viewed banks as those who treated them as a dumping ground for risks, while banks viewed the insurers as those who didn’t pay claims.
GTR: Swiss Re has made a real push into China recently. How is the downturn in China being felt among your insurance clients?
Lim: I think it’s not just in China but globally. Once the price comes down and the volume comes down, it is inevitable that there will be an impact on clients. Take for example the P&C [property and casualty] lines: those are sort of mandatory insurance, yet we are seeing lower volumes and a continuous softening of prices – even more so for the credit business, which is a discretionary purchase. I think it’s also a reflection of the current insurance market environment, whereby claims remain broadly benign. We may need a few major claims in the market to help get the prices up. I guess it’s a bit similar to the banking side.
Seerapu: The contradiction is that on the banking side, it doesn’t always seem to work that way. I am sure all of us will have seen it in our respective businesses. We have gone through periods where there is a specific perception of risk in China going up, or the commodity risk in certain parts of China going up, or there was a potential of a sovereign downgrade for India three or four years back, but none of that resulted in pricing going up at the transaction level. So yes, if you see an increase in claims, then insurance premiums go up, but when the banking industry sees an increase in risk, pricing doesn’t always necessarily go up.
Tandon: I think to a large extent the risks have been isolated or contained. If you looked at some of the bigger, larger trade banks and the reserves they have been taking back, banking hasn’t swung in any form for people to be concerned, like they would be for local banks, who have gone in for a very different form of lending. If you’re really into hardcore trade business and you’re working through the flows and you have visibility on what the client does, I think it’s a much better business to be in than just giving revolvers.
Walli: Do you think we are funding this much as we used to? I found the stats on funding gaps at the GTR [Asia Trade & Treasury Week] conference interesting. Do you think we are funding as much as we used to five or six years ago?
Seerapu: Beyond our willingness, I would like to be able to fund more, but within the defined target markets where we are operating, the demand is not there because of global volumes and global values, or because the pricing does not make sense in some segments in terms of return on capital. There are some segments where, however much I would be willing and able to lend, it does not make economic sense for me to do so at current pricing levels. The fact that we have reduced lending is more a factor of there not being enough demand at the right price.
Manchanda: There are different levels of playing field. Some banks subscribe to Basel I or II, and we are Basel III, so there are different regulatory requirements. When it comes to volumes and the price being down, I think the competition is also foreign banks, and when I say foreign banks I mean Chinese and Japanese banks. Their pricing is completely different, and they are on negative interest rates so they can lend anything above zero. When you have that kind of audience also eating into your lunch, that’s where the biggest challenge is.
Competition is increasing, so we see Chinese banks investing in India for example, Chinese banks moving into Asia in a big way, into Australia in a very big way, even Singaporean banks are moving into Australia, so the Australian banks are also being affected by that entry.
Walli: I notice now that we bankers are complaining less about KYC. We have all reached the conclusion that whatever pain we are going through is a shared pain and we all have pretty much the same requirements, so from that perspective, I find that the noise has calmed down a bit. This actually makes it a lot easier to do business, and especially we, as product folks within our organisations, are trying to keep our products front and centre.
Elwood-Russell: Aside from KYC, I think the new challenge is trade-based money laundering. In our discussions with regulators, we’ve found that they are not there to stop business. The interpretation by the compliance teams of those regulations are sometimes exaggerated, misunderstood and misinterpreted. The regulators have been very clear. They say: ‘In order to do trade finance, if you are a trade finance bank, you have to make sure that you have the right standards and the minimum amount of things to protect against trade-based money laundering.’
For the compliance teams, there is no reason for them to be experienced in or understand over and under-invoicing. They don’t have the experience of trade transactions. They don’t know about different types of trade fraud. But I do think that there is misinterpretation of what the rules put out by the regulators are – which are actually very clear, and there are ways to mitigate against those.
So with regard to the internal battles I feel sorry for front office teams, because we do the deals, and we get to the end and compliance doesn’t understand how the deal is working and adds lots of rules. That’s putting huge delays on transactions. I think that there is a big exercise in compliance understanding the types of trade deals that are out there.
Manchanda: I think because some of us belong to a mothership that is not necessarily in Singapore – some of us are in Germany; in my case it’s Australia – you’ve got to deal with regulators back in those countries. And their interpretation of certain regulations is different from the local jurisdiction where you operate from, so again that mismatch also needs to be taken into account when looking at compliance and KYC. So definitely a lot of that is internal, but I also think it’s cross-border.
Seerapu: Still, in some very cynical ways, some good has come out of it. It has definitely forced my teams to stretch themselves and find ways out of their comfort zones. 2013/14 was the all-time best year for all trade banks, and hand on heart, for a lot of banks it was because of the opportunities in renminbi (Rmb). I don’t think we did anything special to deserve that other than being there with the right products and structures to capture the opportunity.
Now banks are looking at clients, spending time with them, finding out where the niche opportunities are and finding out where we can add value through complex long-term solutions, rather than just confirming Chinese letters of credit (LCs) and making money. I think that has opened up areas of opportunity and when the cycle returns, when the rest of the business comes back, we’ll all be better off for it in my view.
Tandon: The business itself is changing. If you look now at the new digital economy, how are our products today fit for purpose for that economy? It’s a very different ballgame. So I think that’s the exciting part about this and that’s why I fully believe that yes, these are challenging times, but there is a huge amount of opportunity out there.
GTR: Does that excite or worry you?
Tandon: It excites me because it’s challenging us to actually think about how we do this.
Walli: I think transaction banking is one of the most flexible, changeable and responsive areas of banking. To respond to what Sanjay was just talking about, the paradigms keep on changing and there are gaps, absolutely, but I find that in transaction banking, as someone who’s done this for 15 years, we keep on responding to them, don’t you think?
Manchanda: You’re responding because there is a change in needs within the community, the customers. Here, you’ve got fintech stepping into your space, you are now dealing with a different market participant as well, so in some ways you’re dealing with both.
GTR: Has anybody around the table invested in fintech for trade, or have you been developing solutions in-house?
Walli: Both at head office and within the region with various partners, we are exploring blockchain technology very seriously. There are initiatives that are moving into proof of concept.
Seerapu: It is the same for us at Deutsche Bank. We are actively exploring and testing the use of blockchain technology.
Manchanda: In our case, we’ve taken an equity stake in a fund called Reinventure, which is also a fund we set up. It looks at ways of digitising areas within the bank itself, with the view that if it’s well tried and tested, we’ll then market that product across to other institutions. That’s one thing that has gone very well.
We also funded a client in Australia that is involved in agri blockchain, where they track the growth of grain from seed to sale and then post the information onto a blockchain ledger to which people can subscribe and buy from at a particular point, however many bushels they need to buy. That’s actually gone down very well.
These are areas where we’re investing but I don’t think per se that there’s a big burst in terms of desire to embrace it. I think that everyone is talking about blockchain, but we have to look at which areas are going to benefit us most.
Tandon: We’ve taken equity stakes in some fintech companies that are looking at the entire cycle, whether it’s invoice to cash or the procure-to-pay cycle, as to how technology is going to change the way the supply chain or the distribution chain ecosystem works and operates.
What these companies are also doing is going deeper into more regulated markets, so for instance China. Now in China, all of you know that there is a huge spectre of VAT invoices. Before you have financing you need to get paper, you need to ratify it, and so on, so there are companies now who are being authorised by the government to provide the e-services around this. We are working on this and having discussions around this. Tradeshift is one company that is doing this in China.
Lim: I think fintech, in some way, has already been happening, albeit in a very sporadic manner, for the past many years, in areas such as online purchase of life insurance and travel insurance. However, with the changing market landscape we are facing, it is a tougher environment and people are looking for something more structured and targeted.
Increasingly insurers are leveraging on the internet to reach the mass market, especially the personalised line. We have got this big aspiration to look at big data, smart analytics, really using data to help you make smart, informed decisions. It basically rests on the four key pillars of data, technology, people and relationships. I think it fits quite nicely with what everybody’s talking about in fintech.
GTR: Jolyon, as a lawyer, is fintech something that you get a lot of enquiries about?
Ellwood-Russell: Yes, certainly most recently and it is something that I am absolutely fascinated by because it’s very disruptive. This is partly because there are two sides to it: the front-end disruptive technology that isn’t threatening banks at all just yet, but has the potential to, and which has been around forever; and on the other hand, there is the backend which smoothes out the processes around trade and tries to make them all easier and cheaper by getting rid of paper.
The challenge for the lawyer is that a transaction is two things in one: the delivery of goods and the exchange of documents. That is how every sale of goods is interpreted in the law. And so it doesn’t matter how much blockchain or technology or anything is there, when you have a situation like Hanjin where you’ve got US$14bn-worth of assets sitting somewhere in the middle of the ocean, it’s still the fact that you failed to deliver, and the injured party has got to know the documentation process to get recourse from someone. It doesn’t take away the fundamentals. That’s the very thing that we are trying to take people back to: it’s still law. The fundamental principles of law and the intention behind trade financing of a transaction are still all there.
GTR: How do you see this industry changing, looking to the next five years? Do you think trade finance teams need a new set of skills?
Walli: I think we’re all going to be a lot more preoccupied with the benefits that technology can give us in terms of visibility for our customers, which is what they’re looking for, around driving up the bottom line, margin compression – all of this is supposed to be aided by the exponential growth in technology. We’re talking about skillsets and what we look for when we’re hiring, and I think this is a sign of what’s to come. I think you just imagine what the technology space is going to provide us in the way of solutions for our customers.
Seerapu: In five years’ time, I don’t think the core of what we do will significantly change. I think around the edges definitely it will look different. As an example, look at the senior hires we made in recent years in the trade team, one person came from debt capital markets, one had a loan syndication background, and one had a securitisation background. The reason we did that is because even though they don’t know LCs or guarantees or supply chains, they can add so much value by encouraging our sales teams to think very differently in terms of the size of the deals that they can aspire to, in terms of how we can package and engage much more intelligently with the secondary market. These are senior, director-level hires who have never worked in trade finance. I think that we will probably see a lot more of that kind of influence in the trade space five years from now.
Tandon: It’s very much a credit business now. 90% of trade is open account, and as you start looking at the skillsets, it’s understanding credit. It’s understanding a client’s balance sheet. It’s understanding what their cashflows are. I think five years down the line, technology will certainly be deployed much more inclusively into that. And for large shops like ours, the use of the optical character recognition (OCR) or artificial intelligence to make decisions on sanctions and AML monitoring is becoming a reality. It’s a reality, things are going to change and we do hope we’ll still have jobs.
Walli: I can’t wait for OCR to become a vernacular. That is going to be a game changer for all of us and really it should be the status quo. It will be very beneficial both on the traditional LC side and the open account side.
Lim: It is inevitable that things will change and technology will help this. When it comes to innovation in the trade business and insurance as well, everybody will have to work alongside each other and learn to see things from a different lens, for example from the traditional ‘originate and hold’ to ‘originate and distribute’. New channels of distribution, technology, big data and analytics will help us all make smarter decisions to make the world of trade go round.
Elwood-Russell: Innovation comes in many forms and I think we forget that it’s not just about technology. Technology is a facilitator but process innovation is equally as important as any technology. So with that, I think that people should not be too distracted and too downbeat. People say that trade is archaic, but in fact it is not, because actually you’re getting goods across the world, from South America to China for example, getting paid on time at pretty low costs. It’s pretty good work and increasingly with innovation, the aim is to drive it even cheaper and that’s where the value will be.
Image: Left to right: Ravi Manchanda, Jolyon Ellwood-Russell, Finbarr Bermingham, Shivkumar Seerapu, Sanjay Tandon, Albert Lim, Azim Walli