In a roundtable held virtually towards the end of 2020, GTR gathered senior leaders in trade finance to discuss the myriad disruptive factors that are reshaping the future of their business in the Americas.
- Geoff Brady, head of global trade and supply chain, global transaction services, Bank of America (chair)
- Inwha Huh, partner, GBS banking and financial markets, IBM
- Patricia Gomes, head of global trade and receivables finance (GTRF), North America, HSBC
- Joon Kim, global head of trade finance product and portfolio management, BNY Mellon
- John Monaghan, global head of supply chain finance, Citi
- Keith Murphy, North America sales head, global trade, JP Morgan
- Jonathan Richman, head of US trade finance and working capital, Santander
- Daniel Son, head of global large cap banks, global trade and supply chain finance, US Bank
Brady: The US elections, Covid-19, trade tensions and macroeconomic shifts are all affecting the trade landscape, with gloomy outlooks for GDP and trade flows as a result. What impact are you seeing on trade flows in North America, and how has this changed?
Gomes: Even prior to Covid-19, trade tensions and protectionism were already affecting trade flows, and this has now been exacerbated by the pandemic. There are significant supply chain finance disruptions and demand destruction in certain sectors, and there are very uneven closings and reopenings throughout the world.
There are also some long-term adjustments that we’re going to see. For example, what is the future of work? What’s going to happen in terms of the production and supply chains of some essential goods and medicine?
In terms of the GDP challenges we’ve seen, US GDP fell by around 5% in Q1 2020, and for Q2 that figure was around 30%, so it’s very significant. In the latest data, the import figures are coming back a little, so there are some green shoots there, but undoubtedly, the economic impact of Covid-19 has affected trade volumes in North America.
We have seen, however, a significant increase in supply chain finance due to more interest in supporting suppliers.
Huh: Beyond the macro GDP impacts on trade flows, which is probably more of a medium-term issue that the US companies are looking at, we have to think sectorally. The hardest hit sectors in the short term in the US are the industrial and retail consumer goods sectors. Their immediate concerns were from an operational standpoint around liquidity and capital. How do they pay their employees? Is the big shift in consumer behaviour permanent? How do they then create a B2C and B2B strategy change, as well as deal with their backlog of orders, which is a tremendous pain point? How can they create flexible manufacturing close to the consumer? These are sectoral shifts, and the fundamentals are changing very quickly in the US.
Richman: Trade volumes are down pretty hard globally as well as in this region. In the early stages of the crisis, the corporate need for liquidity skyrocketed, and companies were putting in all contingency measures possible. As usual, trade finance performed well compared to these other forms of credit during a time of crisis. Companies continue to see trade finance as a reliable alternative source of liquidity, especially in times of stress.
Now, companies have taken various measures and liquidity has increased very substantially. However, the separation between the haves and the have nots has never been greater. There has been a flight to quality and some companies that are investment grade are awash with liquidity. And then there are others, who might be their trading partners, in exactly the opposite position. They are under quite a bit of stress, and it is under these types of circumstances where we as trade financiers play our most vital role.
This situation has created more opportunities for the future for us to help our clients, not just as an alternative source of liquidity, but by putting in programmes that help our companies manage their own liquidity, and now even more importantly, the liquidity of their trading partners.
Kim: In supply chain financing, we’ve seen a greater value increase in specific industry verticals. In the retail sector, looking at traditional retail versus e-commerce, there is a significant delta in terms of how you classify those industries now. The traditional retail segment has suffered a great deal compared to the e-commerce segment.
Meanwhile, we’re seeing that values have picked up for large corporates that do a lot of domestic supply chain financing, while for cross-border suppliers, the value has been significantly down.
Monaghan: The big box stores that remained open continue to acquire goods and services and still need trade finance. Meanwhile, sectors like aviation and some parts of industrials are still having concerns in terms of where to source goods and services. A lot of attention is being focused on the credit aspects and the resiliency and sustainability of our clients’ suppliers.
There are a whole series of questions and concerns raised by our large corporate clients on how to support their supply chain overall. That’s been a major shift in terms of working capital solutions.
Large corporates are now looking at sustainability with onshoring new suppliers. What is the financial health of those suppliers, and how do they continue to support them? We’re seeing a lot of need for new supply chain products, whether it’s pre-shipment finance, or even going back to the traditional letters of credit.
Early on, we had many companies for the first time that were acquiring goods and services related to the health of their employees in the factory. They were buying masks and other cleaning supplies, and we saw an uptick in the traditional letters of credit or financial standbys.
Going forward, the focus will remain on supporting the wider supply chain.
Richman: The name of the game has shifted in terms of supply chain management. It used to be all about efficiency. It was about just-in-time, with deeply embedded, automated processes. Companies now recognise the need for agility and resilience in how they manage their supply chain.
Within that, risk awareness and management, perhaps with less efficiency, is what you’ll see going forward. They’re trying to localise, or regionalise, manufacturing, so as not be so dependent on China or any one particular supplier. All of that increases the need for trade finance. They are ending up with new trading partners, who are less well established, and thus there’s more risk involved in the process. That’s where we step in as trade finance providers.
Companies are managing those concentration risks that exist within the supply chain, but concentration risks also exist in how they manage their liquidity, and treasury functions are now looking at that as well. Before, a lot of my clients might have said that commercial paper, for example, does the job, as it’s the cheapest and the most efficient. But now they see that trade finance not only helps them manage working capital metrics and supports trading partners, it’s also a very good alternative liquidity source. Even if it’s a little more expensive, it’s more reliable. With this focus on increasing agility and resilience, efficiency may be taking a backseat in the post-Covid world.
Gomes: The topic of managing supply chains has now become a C-suite conversation, rather than a treasury or finance conversation. It’s no longer just about optimising your business; it’s about the ability to continue operating your business: are you still going to be able to produce the goods? It’s risen to a whole different level in terms of the strategic agenda of the C-suite.
Brady: We’ve heard a lot about an uptick in demand for supply chain finance around the world as liquidity pressures build up among suppliers. Payables finance really proved itself through the financial crisis, and through Covid, and has established itself as a very viable and important source of liquidity. I think most of us would agree that we would like to go as deep as we could in terms of those supply chains, so that we can get the value to where it’s needed most. What have you seen in terms of the performance of supply chain finance, and the demand from clients?
Son: The pandemic has proven to the industry the resiliency of these programmes. We saw a lot of activity throughout 2020, particularly during the end of Q1, and it was interesting combination of both new and existing clients. During this period, there were a lot of drawdowns on existing credit facilities and new term loans being put in place. This further demonstrated the importance and resiliency of supply chain finance programmes for companies who had these programmes in place pre-pandemic as it largely operated uninterrupted during the pandemic.
As a result, companies that have either not looked at these programmes in the past, or have looked at them but deprioritised them, have taken a more strategic view of supply chain finance, not just as a working capital tool. We’ve now seen a resurgence of interest, and we’re finding it important to re-educate the stakeholders internally that there is real demand coming into play.
The million-dollar question is if this surge in interest is sustainable. Have we already established a new norm, or is this just temporary? Regardless, we know, as an industry, we will adjust accordingly.
Murphy: We’ve seen a massive uptick in utilisation from suppliers, and suppliers have reached out and expressed interest in joining these programmes.
We’ve also seen companies challenge us as a bank on how we can get deeper into the supply chain.
Over the past decade when a lot of these programmes were launched, the bank supply chain finance programmes only targeted the top strategic 200 or so suppliers. Today, given the confluence of not just a pandemic, but also all the ESG initiatives out there right now, we’ve now hearing from our customers who are asking us what we can do for the suppliers that they buy small volumes from. Companies now want to try to ensure that the entire supply chain gets access to early payment liquidity.
As a result, what we’re focused on right now is how can we capture more of the supply chain for our customers, which is something a lot of corporate customers have challenged us to do, particularly as these programmes have shifted from just being a working capital tool that treasury wanted the procurement team to do, to one that is now being managed by the business leaders in a strategic way.
For us, this pandemic has created the opportunity to reinvent ourselves. I’m excited about supply chain finance, and I hope we can combat the negative press around it by showing that these programmes sustain supply chains in a viable way and offer suppliers attractive early payment liquidity, which has just become all that more important in this particular crisis, just like it did in the last crisis. Supply chain finance is at the frontier of where we see growth in the trade finance business, particularly in the Americas.
Huh: From a corporate standpoint, we are all in agreement on the rising demand for supply chain finance, driven by payment term extensions from buyers, as well as cash flow issues from suppliers. But more importantly, the supply chain finance structure for investment-grade companies like IBM and large strategic suppliers has now been commoditised. Any bank who has a tech platform to do it, is able to do it. It’s all about how cheap and fast you can go.
Where the biggest demand lies is in the middle market supplier base. It’s the smaller SME middle market supplier base where, frankly, most banks still can’t take the risk. That’s where the gap is.
Another point I want to make is it’s not just about supply chain finance anymore; it’s about supply chain management. How do banks and non-banks provide additional services beyond just the commoditised financing? How do you expand financing into supply chain management? That’s going to be the name of the game in the near future.
My final point is that recently in the US, new players such as Blackstone and Goldman Sachs have entered the market. All of this has happened during Covid. These are competitive, scalable players, some banks, some non-banks, and they’re all tech-enabled without the burden of legacy systems.
Richman: What’s changed during Covid is the motivations of corporates to roll out these programmes. Pre-Covid, it was all about working capital metrics and cash flow. At peak Covid, it was about managing their own liquidity as an alternative source. As we’ve progressed, it’s become much more about supporting their trading partners, especially those in some stress. It’s about rewarding good behaviour and, as such, ESG initiatives have definitely accelerated.
There is no question that companies are still interested in their working capital management and metrics. Our job as trade bankers is to continue to expand that value proposition. Just providing commoditised funding, post invoice acceptance, is not going to be good enough long term. We need to be able to do that first across a wider range of trading partners, especially the SMEs who really need it.
We also need to look at event-based finance earlier in the process, which again helps to expand the proposition, along with embedded FX conversion, and end-to-end automation.
Geoff, you mentioned some of the issues that have been raised around rating agency viewpoints or accounting opinions. And obviously, those are concerns. But, at the end of the day, there is a tremendous value proposition that we offer not just to high-grade corporates, but SMEs, companies in emerging markets, and companies in stressed sectors who need help.
Brady: Baft’s recently created payable principles has defined to the market what we understand to be supply chain finance. There are alternative structures outside of this definition, and there may be banks that are perfectly comfortable executing those alternative structures. However, it is important to separate those structures from what we in the industry consider to be supply chain finance. The reaction from the community has been that this is a good conversation starter, whether it’s around accounting treatment or whether it’s what the ultimate use of the structure is.
Monaghan: On the topic of how a proper payables finance structure should work with our clients, I wanted to express what we’ve seen in terms of resiliency of supply chain finance since January 2020. These payable programmes are properly structured and adhere to the Baft principles, and we’ve seen a very positive outlook on them.
What we are seeing, though, is not just the extended terms and working capital liquidity benefits to the large corporates, but also a focus on, as Inwha said, extending these benefits to the SMEs. In that regard, the C-suite is very much focused on not just on their own sustainability, but also on the entire supply chain.
The question is, how can these programmes bring forth solutions to the long tail of suppliers? That’s going to take some technology.
Brady: Digitisation is obviously an issue we’ve been talking about over the last couple years. There are a number of topics within that. One is how can we go more paperless? How can we be more efficient and be able to reach more parties? And then there’s another topic that we weren’t talking about a year ago, which is around remote capabilities. Covid has brought all of this into focus. Has this experience been enough to cement the need for digital across the ecosystem?
Gomes: Covid has been a great accelerator for digitisation. The technology for the most part is there and exists and is being adopted with various degrees of intensity by various parties. The challenge is, as we all know, we need an ecosystem to adopt it so that it actually reaches the critical mass to be effective.
We’ve talked about going deeper into the supply chains for the SMEs and being able to get the financing to them in an effective and an efficient way. Using data to manage the compliance risk of onboarding those suppliers is absolutely key. This is where management of data and technology is going to come into place. All this is available. It’s a matter of adoption. We’ve had a lot of corporate clients call us and thank us for introducing them to a digital channel rather than accepting faxes, because that means that we can actually process their documents and remain open for business during Covid. It’s been a great accelerator and a great differentiator, and really quite binary in terms of being able to be open for business or not. It has also sharpened the focus of regulators, industry bodies and corporates around jumping on the bandwagon.
Huh: The question among the trade finance banking community seems to be ‘how fast can everyone go?’ At IBM, we have a concept called intelligent workflows across the supply chain, and that’s an integration across buyers, suppliers, and certain financing companies to connect seamlessly across the supply chain process. I do think that the financial markets need to connect into that, particularly as we think about working capital.
Another area which impacts banks directly today is the hyper automation of operational processes in the mid to back office now, which is critical with people working remotely.
The third area we’re seeing is definitely around the AI analytics. Corporates are very much ahead on this. Banks are working in this space, and predictive analytics, specifically around customers, suppliers and buyers, as well as on the financial crime side around AML and sanctions are particularly important right now.
A further area around trade digitisation is the future of work and remote working. This is a shift for banks as well as corporates. As a tech company, we’re enabling that future of work, and what that really means is redefining what employees do. It means taking out all the paper-based manual tasks and creating a different profile and skillset that employees need for the future. It’s not just about sticking in technology to automate it, but really changing the culture of what employees should be doing as decision makers versus administrative work.
Murphy: It’s about changing the type of work in order to remove friction from the entire ecosystem, not just at the front end where we interact with customers and their suppliers, but also internally. We’ve had a bit of a mind shift on working with fintechs. It’s really incredible what they can bring to the table and how adept they are at taking technology and redefining the way that people interact with each other.
We’re just now trying to understand all the different touch points within the entire ecosystem and what the impacts can be. For example, if our operations team have some of their work automated, they’re no longer having to shuffle paper around and can focus on more value-added tasks.
It’s fascinating how prior to Covid, everyone was kind of humming along at an easy pace. GDP was up, there was a little bit of concern around maybe offshoring and some of the tension between the US and China and what that might mean for supply chains. But Covid has completely changed the whole world we operate in. Everything is about scale and digital and how we redefine the way that people work given that we all now have limited resources to be able to do the work that we want to do. And so it really forces us to think about how we can use technology.
Brady: Another topic that has been magnified recently has been ESG and linking sustainability to trade finance. What are you hearing from clients on this?
Son: ESG in trade finance is not a new topic, but what’s encouraging is seeing greater focus from financial institutions and customers on the S part of ESG, particularly around diversity, equity and inclusion. We’re getting inquiries around setting up structures to provide support to minority-owned suppliers, for example.
It’s a little bit in its infancy and questions remain as to whether we can use an existing programme to structure what these clients are looking for, or if we’re talking about an entirely new type of programme that we would need to facilitate. But either way, it’s great to see this increase in requests around ESG.
Kim: The ESG journey is still a work in progress.
We have started compiling ESG applications for all the clients that we are dealing with. It is a very micro-level application that tells us what a corporate’s ESG strategy is and how they execute it.
Not all lines of business need exactly the same ESG journey. In trade finance, we can talk about different things, whether it’s diversity or green practices. It is critically important for banks to establish these metrics so that we can execute a strategy to assist the corporate clients who are going through their own ESG journeys.
Brady: One of the parts of the journey for all of us as practitioners has been around qualifying ESG, where you know the credentials or certifications and don’t have to just take somebody’s word for it. We always talk about standards as being a baseline for a lot of what we do in the industry, and I think this is probably a topic that we’re all looking forward to getting a little bit more clarity around.
Richman: There’s a lot of action in the ESG space coming from both banks and corporates. We are actively working on programmes and trying to develop those standards by working with experts in the field and third parties who can validate what is a qualified project, or a qualified counterparty.
This is quite real now, and clients are demanding it. If you have a solution that is ESG compliant, where they can reward a supplier for doing good, that can get a programme going. We have a lot of work to do in terms of defining standards and coming up with frameworks and scorecards, but it is well underway.
The next push will be more at the government and regulatory level. We can offer some incentives, but only to a certain point. If the regulator is able to offer capital benefits for projects that are green, or companies that are socially responsible, then we can offer a very tangible economic benefit to all the parties involved. And that’s the next leg of the journey.
Monaghan: Previously, the focus was very much on the environmental side of ESG. And what we’re now seeing is more of a focus on the diversity angle of suppliers, and how those minority-owned or woman-owned business can be supported through programmes like supply chain finance.
Brady: Looking forward now to 2021, what do you think the key themes will be for trade finance, and what are you most optimistic or pessimistic about?
Richman: It’s very hard to make predictions. Will there be more lockdowns coming, will there be a V-shaped recovery? Will there be more trade wars and more economic nationalism? Will fintechs and capital markets players be competitors or collaborators?
Ultimately, I am very optimistic about trade and trade finance. At the end of the day, it has lifted hundreds of millions of people out of poverty. The good trade does is undeniable, and the good of the trade finance industry in facilitating that is equally undeniable. We bring value to our clients. We bring value to SMEs which are the lifeblood of most economies. We help reduce risk, we help increase sales, we become an alternative source of liquidity more so than ever. I can’t tell you what the next couple of months will bring, but I’m optimistic long term.
The challenge for all of us is how we navigate the current waters to get to the other side. What remains to be determined is who we work with, how we get there and how we compete with one another, and that will differ amongst all of us. But I believe in trade as a vital part of the economy and I believe trade finance is vitally important to support it.
Son: I have faith that we will adjust well as an industry and unite as a trade community to co-operate and co-exist with each other to better serve the changing needs of our clients. The goal is to try and be as consistent as we can be while adjusting to change. Trade is a fantastic business. We know the value proposition. We’re here to help companies and communities through all the things that we do in trade. I think 2021 will be a year where the importance of trade will further be highlighted.
Monaghan: Trade finance is key to supporting global trade flows, whether you’re providing risk mitigation solutions or liquidity throughout the supply chain. We’ve been doing that for years. I don’t know what’s going to happen with respect to slowdowns or increases, but I know that we have the solutions.
These solutions may look different in 2021 as fintechs play more of a role in removing paper, and we work more in consortia such as Contour and Komgo.
So I think you’ll see an acceleration on working with some of these partnerships.
Huh: I think for the future, it’s going to be about the survival of the fittest. Whether you’re a bank or whether you’re a tech or whether you’re a corporate company, there are fundamental shifts going on, and it’s not going to be business as usual.
Kim: I’m cautiously optimistic. But for the next few years, we’re going to have a very low interest rate environment. At the same time, we have to fast track how we execute our trade finance transactions. Everybody within the trade finance banking industry knows that the asset classes that we’re booking are helping the world to keep trading. Yet time to execution and time to implementation continue to be a little slower than some of the other lines of business because we have so much legal documentation and paper to deal with. If we accelerate that paper-to-digital process, the marginal value that we can create will be greater.
Murphy: In the same way as the auto industry is in the midst of the greatest transformation it’s seen in 50 years going from combustion to e-vehicles, trade is undergoing an enormous shift. The move to digital opens up a lot more information to the entire continuum, which is why you’ve seen hedge funds and institutional investors become more actively engaged in the space.
What’s going to occur over the next five years is trade is going to become more centred around capital markets driven activity. Banks will play a role, as much as we do today in fixed income. But as things become more and more digital, investors will have more visibility into underlying transactions, and we will see a shift to the institutional side. We certainly want to be a part of that, and we are going to support our clients who no longer have patience for paper, but demand digital, and scale.
Gomes: I see three main themes. The first is remote working. Working from anywhere is here, it’s possible, and it’s the future.
The second is that trade can lead the recovery. And therefore providing trade finance can support the economic recovery.
The third piece I see is it would be a missed opportunity if we don’t harness the power of digitisation and use that as an impetus to transform the industry. And I hope that as an ecosystem, we harness that power.