GTR recently gathered a group of senior industry experts in Singapore. In this, the second instalment of the discussion, they examine the wave of digitisation in trade finance, charting the progress of technologies such as blockchain.
Participants:
Finbarr Bermingham, Asia editor, GTR; Natalie Blyth, global head of trade and receivables finance, HSBC; Yongmei Evers Cai, partner, Simmons & Simmons; Kai Fehr, head of trade, Asia Pacific, Wells Fargo; Atul Jain, head of trade finance, Asia Pacific, Deutsche Bank; Agatha Lee, head of trade sales, Asia Pacific, JP Morgan; Daniel Lit, executive director, global trade product management, global transaction services, DBS; Vijay Shankar, head of transaction banking Asean, India and regional sales, ANZ; Farooq Siddiqi, global head of trade, Standard Chartered; Azim Walli, head of trade and supply chain finance products, Asia, MUFG.
GTR: Where is the Asian market with regard to trade finance digitisation?
Lee: It’s a journey. I feel like I’m a little kid in the car when my dad says he’s going to take me to the zoo. I’m so excited, but are we there yet? There are so many proofs of concept (POC) and we have all done our part in it, but trade is international. If you do blockchain digitisation, is there one body that’s going to govern the whole thing to make it really work? In trade, you’ve got many parties, so unless you get everybody on it, it’s going to be difficult. I have got a corporate client who says: ‘Aggie, this is great that you’ve done a concept, but I have many banks. You have one POC; another one has another POC, so who do I choose? It’s an interesting point of view, but the thing is, when will we get there?
Siddiqi: Do you know what is changing there? A lot of us are now sitting and partnering together, or we are partnering on specific clients. It’s forcing banks to come together to collaborate a lot more. Even if you don’t want to join the party, you don’t have an option. I can think of some conversations we are having with quite a few of the folks here. It’s a joint piece.
Whether that collaboration will result in standards, the answer is unknown. But at least we aren’t just talking to ourselves.
Walli: We’ve arrived at the zoo. I’ve seen the elephant but I haven’t seen the giraffe and the rhinoceros yet. At the roundtable last year, Natalie said that she believed that in the next six months we were going to move from POC to actual pilots, and I have seen that. Last year I said that although we’re partnering, the scale isn’t there, the standards aren’t there, and who knows how long that’s going to take? It could be five, six, seven, eight, 10 years. Who knows? But we have arrived, and we’re looking at certain animals but we haven’t got the whole zoo yet. So I’m encouraged by that, and the fact that we have moved away from POC to actual pilots and bilateral collaboration between banks and customers.
Lit: It’s a key challenge for us to scale up a digital solution. We saw solutions probably a decade ago, and the reason why they failed is because they worked in a closed ecosystem. The moment you don’t provide a full solution to the customer and achieve that instant fulfilment or solve their problem in totality, they will continue with the existing way. It is painful to toggle between paper and digital. The positive side is that now banks are more willing to come together and recognise that we need to collaborate to make it happen.
Shankar: We see two things. One is that we still have not learned from history. All of us are sitting here setting up trade platforms. On the cash side, we achieved almost 90 to 98% straight through processing. All clients went onto that and even though it’s multibank, they still do cash on the system. Trade is at best 63% in some of our markets, while 18% is the worst-case scenario. This is trade embracing technology from a customer standpoint. So why are customers not coming onto the current channels? There is a fundamental problem in the way customers operate. Unless a change happens, we can keep building the new toys but nobody will come. That is the challenge that we need to all address. There are some historical issues around why customers are not onboarding.
Second, while we are talking about the buzzword of co-operation among banks, a few of the regulators already raised concerns about cartel-like behaviour the moment we started collaborating. We need to be watchful of that, because when we get into the real approval process of it, they will say no. These are two things we need to really work towards to ensure the regulators are comfortable with what we are trying to do, and that there are no competition commission angles coming into this broader blockchain. It is not going to be an overnight success; it’s going to be slower.
Blyth: That is something that we should be able to navigate well. I agree with you that as soon as the regulators are the key catalysts of this, that is a real gamechanger to make it happen. We have a responsibility to not be in the back of the car; we need to be in the driving seat. It is our legacy, it is our time. We are in a very privileged position at this critical juncture to influence something really quite significant in the industry. We have that responsibility. And, digitisation is not just blockchain. There is so much more from OCR onwards which will enable us to transform an archaic, 2000-year-old paper-based system into something that is much more automated.
Fehr: That’s an important point for any of these discussions. What exactly are we discussing here? Is it distributed ledger, is it big data, is it AI? Each one of them has a different impact on our business.
Walli: And different trajectories. So blockchain is five, 10 years away from scale, while machine learning and AI are here today.
Fehr: In principle, I don’t see distributed ledger transforming the trade world as fast as we hope. We are still operating with three original bills of lading, and that has to change. But the complexity of the supply chain is such that we need our clients to agree. Then you need the port in, for example, Vietnam to agree. And secondly the regulatory and jurisdictional environment. So it’s the technology, a party, then your jurisdiction plus regulatory environment. Given all that together, in my view, we are years away in the trade space. In the payment space, consumer to consumer, distributed ledger will revolutionise what we are doing. In the trade space I remain very pessimistic.
Going back to different parts of the digitalisation world, AI will revolutionise our back office. Everybody can use this. Machines can read the letter of credit, they spot the differences, and that will have an impact on all of us and will benefit our clients.
Siddiqi: I completely agree that if you try to tackle the issue without looking at it from the point of view of all of the various people in the chain, it will fail. The regulatory push is the big one. The other thing is data. We look at the transformation of our business to look at how a data-led business model in trade is going to look. It’s not just the point about digitising the process; it’s about changing the way you write risks. It’s the way you actually collaborate on data with people to create new opportunity. And trade is the heart of that and it is ripe for an opportunity to do something with all the data that we hold.
Blyth: It’s the deepest, richest seam of data that banks have.
Walli: And banks are leveraging it already. We, for instance, use robotic process automation (RPA) for limit allocation requests for our trade asset distribution desk based in Singapore. And through RPA there’s not a human any more who is assessing the limit availability; it’s all done on RPA and email. As far as driving efficiencies and building scale and reducing operational errors, reducing costs, we are already starting to see some of those benefits today. So, going back to the zoo analogy, we may still be in the car on blockchain, but we have arrived already in terms of machine learning.
Fehr: Farooq made a very important point on pricing our risk right. We have all grown up where you have people in the credit world who assess the counterparty risk. But is the counterparty risk different because I have big data to prove that these parties have been trading for 18 years with not a single time payment delay? Would that be a different risk to somebody new with a different payment history? It’s still the same counterparty but there are different parties involved.
Lit: The other aspect around how you can manage the risk is that now, with technology, we can create the transparency and visibility of the underlying trade. This will help us mitigate risk, better manage credit decisions and in turn, allow us to better support our corporate customers’ financing requirements.
Jain: We’ve talked a lot about regulators. The challenge is regulators themselves don’t speak a common language. The talk about blockchain, robotics, machine learning and the cloud is a good example. You have markets like China, Korea, Indonesia and Malaysia, where if you want to keep business there you have to have your data reside onshore. If you want to use cloud technology in Singapore, you can, but you have to go to the regulator to seek approval for material outsourcing. And so the regulators do need to come together and have one view on what digital means to them, and come at this with one voice that allows them to bring these various participants, not only banks but clients, customs authorities, and the logistics providers, to the table.
What I would say is that the disruption potential in trade finance is highly visible, the consequence of which is that we have seen a lot more investment dollars flowing into this space. So to me it’s not only about creating greater awareness, but also about determining how best to collectively channel our spend.
There is still this perception of a moat when it comes to banks in trade finance, which is partly the fragmented nature of the industry and partly a function of the regulatory and compliance scrutiny around the business. It makes it very hard for us to be disintermediated on the one hand but, as a consequence of that, creates this belief that it’s good enough to pull trade innovation across a linear plane, whereas we know our space has development potential that is much more exponential. And that does come back to advocacy, for sure.
It also comes back to finding a way to create a bit of a fear factor, and create an interesting enough space for people to invest into.
Fehr: Scale is a problem for many of us. The big players will have the scale filtered to their business model, because they obviously run a much larger machine. The issue is with the mid-sized trade players, because the cost of operating that machine is almost similar and therefore we don’t have the scale. You have to invest into technology to keep your costs at bay. If you’re not able with your advocacy to get the investment dollar to optimise your cost structure, it will be very, very difficult for a midsize player to survive in this business. We all agree on a good year, what if the year is not so good?
Read the first instalment of this discussion here.
