GTR’s annual Americas roundtable discussion convened in New York in September to tackle perennial and emerging topics in trade finance such as digitisation, the evolution of sustainable finance, the role of capital markets, fluctuations in demand for supply chain finance and appetite for inventory financing solutions.
- Ozgur Akdeniz, North American trade sales head, Citi
- Geoff Brady, global head of trade and supply chain finance, Bank of America (host and chair)
- João Galvão, head of trade finance sales, Americas, Standard Chartered
- Joon Kim, global head of trade finance, working capital and portfolio management, BNY Mellon Treasury Services
- Glenn Ransier, global standby and demand guarantee product manager, Wells Fargo
- Jonathan Richman, head of US trade finance and working capital, Santander
- Anubhav Shrivastava, commercial bank trade head, JP Morgan
- Michael Stitt, head of supply chain finance origination, US Bank
- Maureen Sullivan, head of supply chain finance, MUFG
[From left to right: Geoff Brady, Michael Stitt, João Galvão, Anubhav Shrivastava, Maureen Sullivan, Glenn Ransier, Joon Kim, Ozgur Akdeniz]
Brady: How would you assess the trade and supply chain landscape over the course of the last year? What have been some of the major trends driving demand, appetite and capacity?
Richman: We continue to see increasing overall demand, and the fundamental trend of corporate clients wanting to have good working capital management continues unabated. But demand has increased in different ways. A lot of corporates now are emphasising operational efficiency and new ways to support their trading partners. They are reshoring, and that requires different types of trade finance; they need more resilience in their supply chains, and that also requires more trade finance. They’ve got ESG goals, which can be better met with more use of trade finance.
Overall, I’m very bullish. I think there are a lot of reasons to be optimistic that we’ll continue to see more growth and new products.
Sullivan: We’re not witnessing a slowdown in demand. Despite the jump in interest expense, our clients are laser-focused on working capital solutions and trying to find more low-cost financing alternatives. We’ve witnessed suppliers who were not interested in some of our programmes two years ago, but who then came back and found them much more attractive – not only because it’s a lower cost all-in, but because it’s a potential alternative source of liquidity. Additionally, we have a very large book of receivables programmes, and our clients want to cash out their receivables earlier. That’s because they want to deploy that cash, either to pay down costlier debt, or to get ahead of some future purchases in light of some inflationary pricing pressure they may see on those products. We are focused on large corporates, which has been a fairly stable marketplace for us. I agree with Jonathan – we’re pretty bullish on how this product will continue to perform into the near future.
Galvão: The big topic that we see is the geopolitical tension shifting a little bit. We see in intra-Asia trade, where Standard Chartered has a strong footprint, how markets like Vietnam and India are becoming more important. If you tie in electric vehicles, these markets are becoming even more important for the financing of mining and refining of nickel and copper, for example. That’s a trend that’s going to stay. The CHIPS Act is pushing some companies from Asia to set up plants in the US. This is all leading to a shift in the landscape in terms of who we finance and how we finance them.
Shrivastava: In my 10 to 15 years in trade, I don’t think I’ve ever seen the kind of demand pickup in working capital solutions and trade that we’ve seen over the last six to nine months. And I think part of the reason for the demand uplift is that after the Covid-19 pandemic, corporate management teams have had time to sit down and consider their capital strategy, and one of the things that they converged upon is supply chain resiliency and how they can make their trading partners more stable. But also, how do you generate capital in an environment where capital cost has gone up? Interest rates have been a major driver. Four years ago, who cared about the next incremental dollar? And now the interest rate is 5%. If you could deploy that capital, you could maybe get 10%. It’s a similar reason that dynamic discounting took off big time in that period. Now when people consider supply chain finance, they see you can generate capital within your supply chain.
Brady: What do you think is driving the increased demand? Do you think it’s interest rate concerns? Is it globalisation, or reshoring and nearshoring? Is it working capital management? Or something else entirely?
Akdeniz: I think the key realisation we’ve observed over the last 24 months, but that has really taken hold in the last 12 months, is that the age of free money is over. If you’re not considering your working capital as a source of cheaper liquidity for your own business, you’re already behind the eight ball and, as Maureen has said, we’re speaking to clients now who previously never entertained the idea of a working capital solution. That’s been a clear market change. Interestingly, during 2020 and 2021, we would have probably had around 10 requests for proposals from clients to bid for their business, but since the start of the year, we’ve had over 20. So, clients are not only thinking about it but also approaching this business in a way they probably weren’t in years gone by. I think supply chain finance is more prevalent and the fact that all companies are getting in on it shows that it’s an important discussion.
Kim: The recent supply chain finance disclosure rule changes by the Financial Accounting Standards Board (FASB) have likely contributed to an increase in how people are approaching supply chain finance. We’re probably onboarding more obligor names this year than any other year – the pace is picking up, particularly on the receivables side as well.
Ransier: I think the FASB rules actually help banks because companies have started disclosing supply chain finance programmes and we’re seeing the big corporates all getting involved much more than they ever would have dreamed of some two or three years ago. On the corporate side, our clients are starting to mention that they’d prefer less reporting for these programs. They’re a little bit worried about FASB trying to drill down further and enhance reporting requirements.
The de-globalisation drive in different markets has meant de-risking for companies. I find it interesting that instead of looking for new suppliers, some of our clients are looking to shore up their existing suppliers. They’re not looking to take any risks with new companies. Generally, companies say if it’s cheaper to build a gadget in a certain country, we will go there, but I don’t see that as much anymore. They are really looking to support their supply chain with financing. It’s been a very interesting couple of years.
Brady: To what extent have the adjustments to physical supply chains – such as nearshoring, onshoring and the demand for sustainable suppliers – impacted what banks are doing from a financing perspective? Has it broadened the landscape for us, or has it made it more challenging? Has it brought us to new jurisdictions?
Stitt: For us, there have been a couple of counterintuitive developments. As a working capital shop, we’ve been primarily domestically focused, so providing for suppliers in different jurisdictions is challenging. But one of the things that we’ve seen clients do is move from a supply chain finance or open account structure and back to an import letter of credit (LC) with discounting. All the original gangster trade finance solutions, which were not particularly attractive three or four years ago, are now becoming more attractive if you can get the economics to work for both the supplier and the buyer. It’s a solution that all the banks know and are willing to participate in. Even though it’s documentary and it’s a little clunky, or at least is perceived to be, it works every time. We’re seeing a resurgence of interest in those solutions to access markets that would be more difficult from a financing standpoint. As an old trade guy, I love that.
Sullivan: I don’t see that trend. I think for institutions that have invested heavily in making sure that they can cover global suppliers – we have probably 50 different countries we can embrace suppliers in – our clients aren’t asking us to look at documentary trade, because it is clunky and expensive.
Ransier: I agree, because I haven’t seen an uptick in import LCs at all, but certainly standby LCs have done well to support ongoing shipments or sales. Banks that have closed recently have brought that product back into focus, and there’s an effort by corporates to move to larger banks to ensure that their banks are supporting their underlying contracts.
Richman: I think there’s a tremendous broadening going on with our product set and the audience for it. It goes way beyond just the traditional trade finance products; a lot of our clients’ trading partners need to build new plants, for example, that require different types of trade finance instruments. The old ways of doing supply chain finance where we all zeroed in on the bigger suppliers are less applicable now that we are able to capture the wider supply chain of our clients and their smaller suppliers. This is the focus now for a lot of clients, and it’s the way that we win new business and the way that our clients take the next step forward.
Sullivan: One of the things we’ve been monitoring pretty heavily is the impact that working capital has on inventories. All of us in the room have been fairly competent at managing and coming up with solutions that address our clients’ days sales outstanding, or days payable outstanding. But when it comes to days inventory outstanding, the hidden third leg, we all struggle. For a variety of reasons, including regulatory issues, that’s not something that many of us can embrace. But that to me is where an opportunity really lies in the future to truly address a company’s cash conversion cycle – if we can hit all three of those measures.
Brady: Maureen has raised an interesting topic. I think we would all agree that many of our clients are asking about inventory, especially given the changes some of them are making to physical supply chain management. What are the key challenges and hurdles with inventory financing? Do we need to scale in order to get closer to some ubiquitous inventory solutions? And how far along that path do you think we are?
Shrivastava: Just like how in the early days of supply chain finance we really had to educate clients about the benefits of the product and how it works, we are now at a similar stage with inventory finance. We’ve talked to a lot of clients about inventory, and I feel like clients are not ready yet. It will take us as a group to consistently educate clients. I think that’s where we are in the cycle of inventory finance; it’s going to take some kind of event for inventory finance solutions to get standardised, and only then will we see it pick up. We’re definitely seeing deals, but I’d say only around one in 100 clients are willing to go there, and that’s if they are under stress and have no choice. But if you present it as an efficiency play, the enthusiasm isn’t there yet.
Akdeniz: My experience is that once there’s a million-dollar-plus structuring fee that clients have to pay, or 8% or 9% margin, it’s an immediate non-starter for the companies that we actually want to implement this solution. In the highly leveraged, sub-investment-grade space, that sort of margin might work. But when you put it all together and incorporate the need for third parties to make it work, I’m just not sure if it’s something that the industry wants to move towards. I’m uncertain if, after careful examination, this will be anything more than an occasional exceptional event due to potential limitations in scale.
Kim: A key question is how do we broaden inventory finance? One thing that we’re reviewing is what are we trying to solve. Typically, when we do supply chain financing, we are interested in investment grade or better; we want to do post shipment, post acceptance, and this is how we can improve firms’ working capital. The supplier side becomes essentially an onboarding type of task; more of an implementation issue. Not all banks can play everywhere, so we don’t necessarily want to establish commercial banking just for the sake of onboarding suppliers across the globe. Domestic onboarding we can handle ourselves. Why don’t we think about leveraging the financial institutions that have a very strong presence in markets where they have the onboarding capability? Those banks may be able to offer pre-shipment financing for those clients who are the suppliers, meaning you essentially can create a holistic solution.
Ransier: I haven’t seen client demand for inventory financing, at least in my personal experience. Repo products have existed for quite some time now, but there’s not a lot of trust in the US for warehouses, and there are costs to vetting them. Repos are a very viable product and considered very safe, but as some of us know, they have their own set of challenges, and frankly, I don’t see companies in the US wanting to hold inventory to begin with. So, at least for our market, I think Joon hit on the real issue with supply chain finance, which is that a lot of companies have wanted to support their local suppliers’ needs for pre-shipment finance and that’s something that banks haven’t solved. But it’s something that businesses in America really want.
Richman: I agree we’re at a very early stage with inventory finance, but I’m very optimistic that it will develop. It took a very long time for supply chain finance to become pervasive in the market, and the same challenges in terms of lengthy sales and complex processes, the number of people involved, the accounting treatment – all of these things are issues just like they were in supply chain finance in the early days.
But the prize is big for our clients. It’s not just a metric on a balance sheet, it’s helping clients maintain resilient and efficient inventory levels and reaping the significant benefits of being able to support trading partners, get bulk purchase discounts and secure vital supply. A lot of clients are in the early-stage process and evaluating and piloting these solutions. I think they’ll develop, whether as a form of inventory finance, as a pre-shipment component of the supply chain finance programme, or as prepayment finance as we do in the commodity sector. I think there are many ways to get clients to reap those benefits, and they will evolve over time.
Galvão: My view is that the solution that should prevail is the one that adds value in terms of logistics and warehousing. Otherwise, you’re going to have form over substance. For large clients, this is going to be an issue; if it’s just window-dressing inventory finance it won’t be well received by an accounting team at a large corporate, who will say it’s not an off-balance sheet item. I think it’s early days, but a solution will have some element of helping on the logistics side.
Brady: What do you think the biggest game-changer could be in the industry in the next three to five years? I’ll throw one out to start: the power of data and how it can be used to facilitate, improve and expand trade financing.
Sullivan: I echo that view on data transparency. It really speaks to the idea of the capability to finance earlier in the cycle. We’ve all been limited in that sense because what we have is data that tells us about an approved invoice. But if you had the analytics, and you had AI to support it, perhaps to predict behaviour between a buyer and supplier, you could consider the in-transit phase. Then if you had more data, you could go back to the pre-shipment phase, where you could have some level of predictability of performance between buyer and supplier. Right now, we do it based on financial statements and that has a very limited effect. The data is out there. The question is, how do we harness the data to help us make better decisions? We haven’t come up with the tools yet.
Shrivastava: I think the challenge with that is even if you get the data transparency, even if you create solutions, the problem is the bank adoption. A lot of institutions are not even comfortable with plain vanilla supply chain finance. So, I agree completely with data being on the agenda. It’s a great theoretical idea, but I don’t see our risk organisations adopting that. To make it an industry standard will take a lot of work to get risk teams really comfortable because it’s not going to be a single source of truth until everything is implemented on blockchain.
Richman: I think data has a few parts to it that can be transformational. One is making ourselves accessible to our clients, and that means our clients and our counterparties being able to connect with us in an automated and efficient way. If you’re not able to do that, then you’ll be out of the business. We need to embed our product offerings into our clients’ systems. Then the game-changer aspect of it is being able to use that data intelligently. We talked about it from a credit concept perspective, but we need to be able to adapt our capital models in order to be able to deliver real value to clients, and those capital models need to reflect the value that the data brings to us. That always takes banks a lot of time. But if we don’t do it, then probably non-banks will do it for us. We are making a lot of progress on this front.
Galvão: AI is going to be a game-changer for us. For example, look at the potential to save costs on know-your-customer (KYC). Often, we look at the cost of KYC and it’s an impediment. AI can help banks automate the whole bureaucracy of KYC. Also, AI is going to be crucial for helping to connect the dots between various data points that are collected.
Ransier: I see access to finance as an emerging issue, with different governments tightening monetary policy. The larger clients have no issues getting their loans, but I’m already seeing the smaller and the midsize corporations having some issues obtaining financing; even if they want to pay 7% to 9%, they’re having challenges. That’s going to slow growth over the next couple of years if we don’t figure that out.
Brady: How much progress have banks made on the trade finance digitalisation journey?
Sullivan: Everyone has their own journey in terms of how they’ve introduced it into their back office. I think that’s where it was first concentrated to bring operational efficiency – using OCR, AI, etc. It has helped reduce operational costs. Really, the challenge is the rails have never been established on a global basis that we all can leverage in terms of how to transfer that data from one institution to the next. We still rely on Swift, which was launched 60 years ago and its messages have a lot of limitations. We’re on the journey, but there’s a lot more that needs to be accomplished. I think there are improvements in how quickly you can onboard clients. But then to make this a meaningful experience there needs to be a uniform set of rails, and blockchain hasn’t done that. It’s still out there, but who’s using it?
Brady: What comes first – collaboration on the part of the transactors, or the technology rails? Do you think if the technology is there, the ecosystem will adopt it? Or do you think that collaboration needs to be there in order for the rails to be established?
Sullivan: I think in a way it has to be a collaborative event. And I don’t know who’s going to lead that.
Ransier: Actually, I think Swift is that trusted middle ground. Currently, there is no central repository that everyone trusts and can access. You have all these individual system players, and each one has its software and rules, but there’s no desire by the banks or their clients to purchase 10 different systems and understand the individual consortium rule sets. I think Swift needs to take the lead and somehow create a trusted repository because we all have different technologies, but banks and corporations all talk to Swift.
Kim: For me, it’s definitely collaboration first. In documentary trade, Swift created a wonderful proof of concept where two banks can exchange paper documents in a digital way and can treat those as original documents. So the technology is there, but there hasn’t been a collaborative process to commercialise these sorts of technological breakthroughs.
Akdeniz: Currently there isn’t a need or a desire to do more than one transaction or to go past the proof-of-concept stage. Not all banks have an unlimited appetite to do all the things that their clients want to do. Something which I think could change that is the further development of an ecosystem around asset sales between the banks, which will actually get lenders speaking a lot more and developing relationships because they have to, as opposed to just for making a proof of concept. That’s what could get the industry to take the next step.
Brady: That’s a good topic for discussion: the capital that comes into trade finance. Is that better served by the banks or the capital markets? Or perhaps a blend?
Stitt: The more we can adopt structures similar to capital markets, the higher the velocity of the transactions and the scalability is going to be. We need to think about how to adopt those sorts of things, otherwise, the capital markets may figure it out and leave the transactor and settlement guys like us out if we’re not careful.
Shrivastava: I think it depends on the risk and return of what you’re getting into. If you think about the high-investment-grade asset class and the pricing that we will see compared to when you get into more non-investment or even speculative grades, it has a completely different market which can yield much higher returns, but then the risk is also much higher. Eventually, I think a lot of this book will remain on the bank’s capital; I don’t see this moving much towards the capital market.
Sullivan: I don’t think the market is big enough yet to support capital market sizes, but it may get there. Looking at the trajectory of supply chain finance assets in the last 10 years, it’s still a pretty small market. But the trajectory is positive, we see continued growth, but I think it’s a little premature right now.
Brady: In the context of an increased focus on greenwashing, have you seen the appetite for ESG and sustainable transactions increase, stay the same or decrease over the last 18 months? Is there still the same level of interest from the market on this topic?
Stitt: For us, there’s less interest. That period of clients driving the discussion has kind of tapered, and I think that companies are trying to figure out what they want to do, as opposed to diving into a conversation on this topic with their bank. There’s still a lot of interest, there just haven’t been a lot of actual deal closures around those solutions.
Richman: I think interest in ESG is actually increasing a lot. Maybe it’s because I work for a European bank, but I think it’s coming to a theatre near you in the US as well. There may be new rules that require a large list of corporates to report on their supply chain emissions, and our clients are looking for tools that will help them get the data they need from their suppliers in order to be able to report and measure their progress against their supply chain emissions targets. Even US corporates today already have these targets, and more and more will likely have them in the future. Supply chain finance in particular can be a real enabler for clients in meeting these goals.
Sullivan: I don’t know if our phone has been ringing as much as we’ve been ringing our clients’ phones to try to have these conversations. There is obviously interest, but every company is trying to understand what the metric and the KPIs are. Will it really drive behaviour? Is it too big of a hill to climb, even though they know it’s the right hill to be on? One of the challenges that we’ve seen in our client conversations is alignment between procurement and the sustainability group within those companies – do they have the same goals? I think until that gets to be part of the DNA at companies, we’re still going to be out there educating, still looking to help them drive the behaviour that we think can be improving suppliers. Being able to embrace a broader swath of diverse suppliers is also something that we work on. I think it’s still a concept that’s in motion and we are advocates for it. But there still needs to be some adoption at companies in terms of this being a strategic initiative that we want to move forward.