Global trade is undergoing significant change. The ongoing disruption caused by the pandemic has created a new trade finance landscape, impacting trade flows and supply chains and accelerating digitalisation on a global scale. In conjunction with GTR, BNY Mellon invited experts from leading banks around the world to discuss the new norm, and how the industry can overcome challenges to support evolving client needs and successfully navigate the future of trade finance.
At the table
- Fahad Moussa, head of financial institutions, National Commercial Bank (NCB)
- James Binns, global head of trade and working capital, Barclays
- Eric Schwab, head of global trade finance, Toronto-Dominion Bank
- Augusto Merkt, head of sales trade finance and cross border payments, Banco de Crédito del Perú (BCP)
- Adam Rowe, executive director, risk structuring, global commodities & trade, institutional banking & markets, Commonwealth Bank of Australia (CBA)
- Igor Ostreyko, vice-president, deputy global head, trade and export finance, VTB Bank
- Joon Kim, global head of trade product and portfolio management, Treasury Services, BNY Mellon
GTR: What supply chain trends are you currently seeing, and how do you think the pandemic will impact trade flows and supply chains in the longer-term? How can banks support evolving client needs?
Moussa: I think naturally many businesses have started to explore local and regional suppliers vs overseas suppliers. Additionally, we’ve seen some local businesses trying to replace international suppliers by producing similar products locally; one example is the supply of face masks. Our role as banks will continue to revolve around facilitating the processing of trade transactions, but will also require further development with a major focus on digitalisation.
Merkt: Digital transformation is a key priority for BCP and the pandemic is accelerating every roadmap of digitisation initiatives towards trade flows and supply chains. Hence, we consider supply chain trends so important in enhancing our current initiatives in order to meet customers’ future needs. In my opinion, supply chains will experience not only a greater diversification, but also more intra-regional trade, and banks should be prepared.
Kim: Clients are looking to avoid concentration on any one country, and the creation of alternatives, including domestic supply chain finance (SCF) programmes, is also being seen. In the past, banks tended to position themselves as global entities, providing services in many countries. Now, collaboration among financial institutions is becoming increasingly critical to meeting changing client-specific needs and delivering optimised solutions.
Binns: Since the supply chain shocks triggered by Covid-19, clients have been focused on getting extended visibility into their supply chains to better understand and manage supply chain risk. This includes factors such as concentration risks, border friction, supplier funding, etc. Banks can help by working collaboratively and leveraging technology via third-party SCF platforms to provide funding to a broader range of suppliers deeper into supply chains. As part of this, we’ll need to work with large buyers to help introduce more ESG-based financing solutions in order to encourage greater sustainability for the future.
Schwab: As companies re-evaluate their supply chains, greater due diligence will be needed to identify potential issues. Furthermore, as buyers’ priorities change to guard against potential disruptions, they may not always seek out the lowest-cost goods, potentially leading to overall cost increases. To support evolving client needs, banks can use their international network and local knowledge to provide greater global transparency and feedback on hurdles affecting trade finance.
GTR: Going forward, how will the geopolitical landscape – including new geopolitical risks caused by the pandemic, in addition to pre-existing trends towards deglobalisation – affect trade finance? Could the pandemic indirectly impact the trade finance gap?
Schwab: The shifting geopolitical landscape could result in increased reliance on our traditional trade finance instruments and prompt a move away from open account trade.
Rowe: The WTO has predicted a decline in world trade during 2020 of between 20 and 30% and governments have responded with defensive measures to protect domestic supply of medical goods and food. With the continuation of this trend there’s a real danger of a rise of global protectionism.
Binns: A lot is going on – Covid-19, trade tensions, US elections, Brexit and more – leading to greater uncertainty, risk and, in some cases, opportunity for businesses globally. Banks will need to work both with fintechs to leverage technology and increase access to solutions, and also governments and other agencies to help support credit and operation risk appetite in what will continue to be challenging times throughout 2021. If we can do this, there’s a great opportunity for trade and working capital financing solutions to help support recovery from the pandemic, and in doing so, reduce the trade finance gap.
Ostreyko: The pandemic has seriously changed the geopolitical landscape around the world. Companies will have to decide whether to increase expenses on expansion of warehouse stock or to shorten these chains to limit them in the frames of unified political and economic areas. Such trends may start global changes in the world order.
Moussa: We have definitely seen countries move towards becoming more self-sufficient and less reliant on importing from other countries. I think this will fill certain gaps, but will not significantly affect global trade.
Merkt: With the pandemic disrupting our way of living and working, it’s important to fully understand the long-term impact on trade relations so that banks and companies can prepare for the longer-term disruption.
Rowe: As supply chains become more localised, this will accelerate the current shift away from traditional trade financing towards non-traditional financing methods. I see a greater focus for banks on developing streamlined and efficient SCF solutions to maintain market share, as greater competition comes from NBFIs and fintechs.
Schwab: Without doubt, the pandemic could indirectly cause the trade finance gap to widen. If banks are not comfortable and tighten their credit appetite in certain regions in favour of others, it may limit an exporter’s ability to enter new markets, which may limit its ability to grow, increase profits and reinvest in the business.
GTR: With many trade participants having to adapt to using digital solutions to carry out business processes in recent months, will the pandemic help to accelerate the wider adoption of innovative technologies in the industry and, ultimately, the move away from paper? How will the industry look in three years’ time?
Moussa: Yes, I believe we’ve always been heading towards going paperless. But the global pandemic not only accelerated the process, it turbo-boosted the digitalisation initiative.
Kim: If we can maintain this collective momentum, within three years the sharing of digitised documents amongst banks could become the norm, with paper documents substantially reduced – thereby enhancing the client experience and making trade finance much more efficient, effective and streamlined.
Binns: In a short space of time, remote working has forced wet signatures onto solutions like DocuSign. In turn, regulators in many countries have changed laws to recognise digital documents and signatures. But we have a long way to go. Key will be establishing common technical and legal standards – something the ICC is focused on through its Digital Standards Initiative (DSI).
Ostreyko: E-signature technology is an important step for the further digitalisation of documentary and credit products. VTB is moving towards a fully paperless office and maximising the use of electronic document workflow both internally and with external counterparties. This considerably simplifies business procedures and reduces the cost of transferring documents.
Schwab: This pandemic has caused a wholesale shift in the way we work. Reliance on paper is dwindling. And yet, trade finance is still heavily dependent on the physical delivery of documents to ensure authenticity. We need to find platforms that allow us to bring the paperless mentality to trade finance, while ensuring safety and security in our industry.
Merkt: Accelerating the adoption of innovative technologies is crucial. SWIFT has announced a very interesting digitisation initiative for all its products – LCs, collections, guarantees, cross-border payments – that is expected to be live by the end of 2022. In the next three years, I see SWIFT leading the new digitised transformation platform for the trade finance and cross-border payments industries – a platform to which many other initiatives will have been on-boarded.
Schwab: With many groups working on their own solutions, the challenge is finding a commonality amongst banks, with mass adoption to a common platform. That said, creativity and competition create better results than working in isolation. If all the banks got together today to work on a unified solution, I believe it wouldn’t be as successful as multiple initiatives.
Rowe: I see the industry looking similar in three years. There will be greater involvement from governments – for example recent strategies put in place in Singapore and New Zealand – with an impetus to change constituent components of the industry rather than the industry as a whole.
GTR: What does the industry need to do to seize upon the new support for digital solutions and ensure positive, tangible change can be effected efficiently?
Moussa: Today there are numerous fintech players that have developed and/or proposed solutions for trade finance. However, we have yet to see something that is widely adopted. I believe that stakeholders need to align on a common direction and that should include banks, vendors, regulators, etc.
Merkt: We should work collaboratively to implement efficient, digitised solutions, with global banks and SWIFT leading the most important and inviting us to decide the right moment to be on board. Meanwhile, fast follower banks should start upgrading their legacy core platforms and developing and creating APIs that will allow us to connect to new transformative solutions.
Kim: We need to create industry standards and a streamlined structure to enable a truly enhanced experience. This requires co-operation and co-ordination across the wider industry. Organisations such as BAFT and the ICC are critical in advocating digital change; however, regulatory guidance is needed to accelerate the process.
Binns: We need to collaborate across supply chains to establish open platforms and common standards. Technical, legal and regulatory interoperability will be critical to success.
Rowe: Banks need to work with technology partners to embed financing solutions into the digital ecosystems that clients are creating instead of forcing the status quo of traditional paper-based financing methods. Collaboration with governments, customs authorities and shipping/logistics counterparties will be key.
Ostreyko: Legal issues are one of the main problems for trade finance operations. Most jurisdictions don’t support electronic documents. Moreover, the digitalisation process is followed by growing commercial, regulatory and compliance risks. Solutions to these questions would promote further development of digitalisation in trade finance.
GTR: How could distributed ledger technology (DLT) be leveraged to enhance trade finance and what opportunities could it present to banks and their clients?
Rowe: The traceability of blockchain-based transactions enables an audit trail evidencing origin, transportation and logistics, and ownership details to be produced. This historical transaction data can help to verify the authenticity of an asset, how it was sourced, and answer ethical and environmental questions regarding its production. With transactions encrypted and linked to the previous transactions, DLT also enables improved fraud detection, assisting in understanding the origin and actual existence of goods.
Moussa: Over the past few years we’ve seen a number of proposed solutions that were looking to utilise DLT. However, as of yet we are still waiting to see a final product that has fully implemented the use of DLT. I think we will see more and more participants come into this market and we will soon see a live working solution.
Ostreyko: VTB is an active member of the Russian Fintech Association, which is developing the Masterchain platform, Russia’s national blockchain network for the transmission of digital valuables and information about them. Fintech is continuing the improvement of blockchain-based digital guarantees. VTB provides e-guarantees to clients to ensure maximum efficiency in contract support. The first e-guarantees were issued by VTB in 2018. VTB also recently presented Digital Payment Service, a new payment and transfer service based on DLT, and a token-based (digital cash) model to increase the speed of commerce and allow money to flow more efficiently through domestic and global economies.
Merkt: In my opinion, DLT is a core component of any important digital initiative and will add significant value to trade finance by simplifying on-boarding processes, interface connection, document examination, finance opportunities, etc. We are exploring the R3 initiatives Marco Polo and Contour, which are mainly focused on industry collaboration, leveraging DLT to ensure interoperability with other global trade initiatives and networks in areas including identity, supply chain, cash management and insurance.
Kim: Critical mass and an end-to-end scalable solution – encompassing all parties within the value chain – is needed if blockchain’s full value is to be realised. The real challenge is engaging and collaborating with all the relevant stakeholders to create industry-wide progress. Yet at the same time, the pandemic has created a sense of urgency to take action.
GTR: What other emerging technologies are banks investing in to enhance existing processes and the client experience? How can data analytics bring improvements to the trade finance industry and how are you applying such capabilities?
Moussa: I think blockchain and DLT are the terms we’ve been hearing the most these past few years. Other than that, we’ve seen banks moving away from paper documentation and into digital documents. We’ve also noticed many fintechs targeting the SCF space, creating online platforms for sourcing and trading transactions.
Binns: Whether we like it not, some paper will remain part of trade for many years to come. A key emerging technology is optical character recognition (OCR), which digitises paper documents by recognising different document types and extracting the relevant data. Doing this accurately and consistently will enable automatic processing of documents and data against AI and robotics-based rules engines – thereby significantly reducing cost and operational risk, improving client experience and reducing working capital financing gaps through faster processing.
Merkt: We are creating new APIs to enable interoperability, such as connecting to other front- and back-end platforms. Exploring the use of data is also a priority for us. We’re using it to add value to our customer relationships, understanding how to meet their needs quickly and efficiently by offering the right products in the right moment.
Rowe: Regulators continue to increase requirements on banks when it comes to KYC/AML and financial crime compliance. Incorporating ‘regtech’ solutions that better utilise data and analysis has become a big focus for banks.
Ostreyko: Robotisation is a very important trend. Information harvesting and analysis, work with data, reporting – all these processes can be robotised using robotic process automation (RPA). RPA-based solutions allowed VTB to react instantaneously during the pandemic. For example, robots were responsible for the rapid and secure authorisation of cross-border payments and were used to authorise payments after verifying the details. VTB’s RPA team successfully applies technologies such as integrated AI, machine learning, computer vision and OCR.
GTR: As the December 2021 phase-out deadline approaches, how are you preparing for the transition away from Libor?
Merkt: Our bank is well prepared for the transition and has already duly enhanced all our loan solutions to move from Libor to the new SOFR.
Rowe: CBA has in place a group-wide programme to prepare for the transition. The industry focus is around understanding existing contractual exposures, and systems preparation. For us, a key focus is on supporting clients – by offering products referencing the new risk-free rates and providing the decision-making information they need to make the transition.
Binns: The transition is a high priority project for us all, especially given tight timelines. We have a well-established project team with critical milestones and governance around these. We are also closely collaborating with clients, other banks via associations like BAFT, and regulators.
Rowe: Over recent months we’ve seen working groups overseas publishing market conventions and timelines relevant to the loan market. This market has generally been a little slower to adopt new risk-free rates compared to other asset classes, so this is an important development.
The views expressed herein are those of the participants only and may not reflect the views of BNY Mellon or the institutions that the participants are working with. This does not constitute Treasury Services advice, and should not be relied upon as such.