Technology is changing the shape of trade and the way in which it is financed. ANZ and GTR gathered a group of experts to discuss how they are approaching innovation and their outlook for the future.
- Mark Evans, managing director, transaction banking, ANZ
- Aleya Begum Lønsetteig, Europe Editor, GTR (chair)
- Helen Mason, head of corporate and transaction banking Europe, ANZ
- Karl Page, head of trade finance syndications, trade and working capital, Barclays
- Leon Scott, director of funding partnerships, PrimeRevenue
GTR: How are banks approaching innovation in the trade finance space? Tell us about some of the projects you are working on and what kind of technologies are involved.
Evans: There’s a lot in this space around digitisation. The difference with Sibos 2017 was that the year before was very much the year of proofs of concepts. But we’re moving more now to, ‘are they scalable?’ Because if they are not scalable, then it’s just an interesting idea.
The way we have approached it is by saying, ‘forget about the technology for the moment’. The three things we are focusing on are: what are the pain points experienced by our customers when we deliver our services, how can we reduce operational risk for the bank and/or the customer, and how can we reduce the overall cost.
In 2016 for example, we ran a proof of concept with Wells Fargo on nostro reconciliation, which is one of the biggest inefficiencies in banking. We proved that you could use distributed ledger technology (DLT) to streamline the whole process. We proved that concept, and that’s all well and good between Wells and ANZ, but if it needs to be a solution that is provided to the industry, actually Swift is better placed to run
with it. And that is part of the history of Swift’s global payments innovation (gpi) project. Now, the project has about 32 banks involved and it’s really getting a lot of steam going. But it all started not because of the technology being there; it started with, ‘how can you fix the problem first?’
Likewise, at Sibos, JP Morgan, Royal Bank of Canada (RBC) and ourselves made an announcement about what we are doing around payments, the idea being that we’ll use blockchain as the technology source. The first thing was to identify that when we send the payment, it really annoys the customers when it doesn’t get there for a couple of days. Sometimes if there is some data missing or there is a compliance aspect, it gets spat out into a queue, and then we wait for the compliance people to clear it. We then send it to JP Morgan if it’s a dollar payment, and if there is a flag, they then send it to their compliance people – who come back to us and ask for information. Nine times out of 10, that is static data that we hold within the bank. But it goes back through our operations areas to do it. So, generally, there will be a two or three-day turnaround time just to release that payment.
All we are doing is giving them access to static data that is sitting in our systems – of course, remaining subject to respecting our privacy and compliance-related obligations. We have the same processes with RBC. It is a problem that occurs globally. DLT is a means by which we can post a single source of truth: the customer information that sits in our systems can be accessible to JP Morgan. Instead of them having to come back to us and ask us for the information, they can see the information within our systems and decide whether or not it’s a valid concern. That is a two or three-day reduction in processing time and the number of people that have to touch it. The benefit to the customer is that there are possibly less fees but the funds are definitely received earlier.
We picked that project because even if no other bank wants to participate, between JP Morgan, RBC and ANZ, we have enough scale to make this work. That’s why we are not calling it a proof of concept, because we already have scale.
GTR: Are you seeing a general shift from trying to just apply new technology to a process, to identifying a problem to solve first and then seeing what technologies might provide a solution?
Evans: Yes. There was a real fear within the banking industry that all these fintechs were going to come in and take all of our business away. I think that the conversation has progressed beyond that now, because the fintechs, the regulators and the banks have worked out that so many of the fintech ideas are bright ideas but are completely unscalable or completely inappropriate for operating in a regulated environment.
There are a lot of good ideas that have come in. But then you have to ask: how are we going to take it to 50,000 people in 34 countries? How are we going to make money? And how are we going to meet our regulatory obligations?
Over the last 12 months that has really changed, and that focus around finding out what problem you are trying to solve has really flipped around.
Page: I think at the moment it’s a confusing landscape. There is so much out there. At Barclays, we often see ourselves as a partner for other banks, fintechs, our clients, not necessarily a first adopter but a fast follower.
We are channelling a lot of efforts through R3, this is the big consortium that is doing a lot of things across the industry. There are a number of work streams there in the trade finance space. One of the projects we are involved in is the Marco Polo project, which is a platform focused on open account solutions, looking at the whole process from procurement through to payment settlement. Wave was another initiative Barclays has been involved with; this is a solution that digitises, through a blockchain platform, the process of presenting and negotiating documents under a letter of credit. On the Wave platform, a process that normally takes days or weeks took a few hours. Of course, you had to get all interested parties engaged together on the platform: the shipping company, insurance company, customs authorities, banks, corporates; but it did prove that that whole process could be done in a few hours. To what extent that is scalable across the wider market still remains to be seen.
Evans: You raise an interesting challenge just there. You are backing R3; we’re using IBM. They use different blockchain technology. We’re both creating an exclusive ecosystem. The next challenge has got to be, at which node do we actually allow the information that’s sitting on your distributed ledger to interact with the static data that is sitting on our distributed ledger. Because you still need just one single source of truth.
Plus, the other thing that you quite rightly raised is that it’s not just what we do between a customer and the bank; it’s all participants in that supply chain that actually have to get around being digitised. We definitely see different players moving at a different pace, and we definitely see challenges because global trade covers multiple jurisdictions, different legal landscapes and regulators that view things in different ways, and getting the regulators on that journey as well is a bit of an issue.
Page: Banks and fintechs have to be careful they don’t run along too fast with solutions, because if they do that, they are going to leave the regulators and governments behind. We need those guys. We can’t do it without them.
Mason: You can’t do it without them. You can have all the data and all the processes in the world, but unless you have the port signing up and all the different regulatory bodies, you can’t actually get scale. I think that’s our biggest challenge. We have capability; it’s how quickly the market moves, and reaches a saturation point so that it makes sense for it to tip over into that new mechanism. But until then, I think it’s quite tough to know where to go.
GTR: Moving on to supply chain finance, Leon, can you tell us about some of the projects and the types of technologies that you’re working with?
Scott: We are a digital platform, a cloud-based platform, so our solution already provides a fair amount of digitisation for clients from the invoice approval through to early payment, if necessary, and settlement. But we are quite a specific product, and in order to grow the benefit for our customers we need to continue to add functionality and improved connectivity to enterprise resource planning (ERP) systems as one example. This is one of the developments we’ve been working on recently, through our partnership with SAP Ariba.
We recently launched the PrimeRevenue Data Exchange 1.0, which has been certified as powered by the SAP NetWeaver platform. This integration greatly reduces the setup time for connectivity between SAP ERP systems and our own platform and helps reduce the implementation process by as much as four weeks. For a typical 12-week implementation that is quite an improvement and we are looking to extend this across all major ERP systems.
We keep a close eye on blockchain developments. It’s difficult for us to lead the effort in the way that R3 and IBM are, but we are very much aware of what’s happening and have the feeling that it’s ‘when’, not ‘if’ and there will come a time that we need to also be a part of that process.
I think the biggest challenge for us is working with so many different funders. It’s our strength in many ways, because we can plug in 55 different funders in different jurisdictions and currencies, and make it seamless for customers globally, but that means 55 different know your customer (KYC) processes and across more than 30 different regulators.
GTR: Are you seeing a change with the regulators? Are they becoming a bit more involved?
Evans: The Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) are both leading in different ways. One is using letters of credit; the other is using open account. What’s really good, though, is the HKMA and MAS are now collaborating, which is fantastic.
We are working with Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) to help the Australian regulator along that same journey. We are providing some insights to the government at the moment around how digitisation can support Australia’s participation in the global economy. So, we are seeing it, most definitely.
GTR: What are corporates doing in this space and what are the types of projects that they would like to see banks doing?
Evans: I often get asked: ‘When you’re doing this, how are you going to bring the corporate on the journey?’ I think the person that asks that question has it all wrong. Generally, it’s the corporates that are innovating and coming to their banks saying: ‘Come on you dinosaurs, get with the times.’ It is quite interesting that there is still this perception that it’s the banks who are going to have to bring the corporates along. Now, in some instances, we’ve got corporate customers that are actually very happy to just use a simple electronic channel or a fax. They are not the slightest bit interested in change. But others are really trying to streamline things and they are dragging us along.
Page: I think there are some interesting options for corporates now. Technology is compressing relationships to an extent, because a corporate now doesn’t need to necessarily go to a bank; if it’s got receivables to sell, it can go directly to an investor, or to a fintech that is providing a platform for those receivables to be offered to and purchased by other parties. What we are seeing as well is a number of platforms taking care of that front-end origination phase, so the platform might be provided by the corporate itself, or it might be provided by a third party. That can serve to really open up opportunities to a new, wider audience instead of the old, traditional process of ‘here is an RFP’ to 20 banks, ‘tell us what you can do’. A corporate is able to put something on a platform, to a tailored audience that the corporate wants to speak to, and this can be much more efficient.
GTR: What is the realistic outlook for what we can expect in the next year?
Evans: I don’t think there is a silver bullet out there. There has been a shift in the industry away from proofs of concepts to more pilots and actual practical application. There will be incremental improvements in terms of continuing to leverage robotics and machine learning. You will see more pilots and more practical applications being done. You will see banks continuing to retire old legacy systems and prepare themselves for what the future is going to hold. The biggest changes will actually start to be evident in three or four years’ time.
Page: I would agree. I think there are probably not going to be any step-changes in 2018, but more progression, certainly. I would hope there would be more production in 2018 of actual, real, scalable solutions that are tested and proven.
What I would like is to see more progress on the whole KYC/anti-money laundering (AML) agenda. Many banks are just not able to deliver in certain areas because of the risks and the cost of KYC and AML. They have had to pull out of certain markets, and can’t deliver certain solutions for their clients. So, for me, if I had one wish of what technology could help to improve, it is solutions to make KYC/AML processes more efficient.
The additional challenge in connection with KYC and AML is that, as more trade moves towards open account, as a bank you have less visibility as to what is actually going on with the underlying trade; a bank may just be making a payment. So the challenge there is that banks are likely to have less visibility of the details of trade they are financing in the future.
Scott: Since I left banking almost three years ago, there seems to have been quite a big mindset change with the banks. Before, it was more about ‘can we solve this ourselves?’ But there has definitely been a change in mindset and investment recently, which has been positive.
In conflict with that is increased compliance and regulation, so whilst everybody is wanting to move forward, there are some challenges around consistency and around knowing what is going to come in the future.
I’m not sure we’re going see any drastic changes over the next one or two years; I think as Mark said, it will be incremental. There’s a lot of investment, there’s a lot of willingness to change, but I see the change coming three to five years in the future.