Following the recent launch of its global survey, Overcoming the Trade Finance Gap: Root Causes and Remedies, BNY Mellon, in partnership with GTR, invited industry experts to take part in a virtual roundtable to examine and build upon the findings.
Participants:
Maurice Iskandar, Assistant General Manager, Head of International Division, Banque Libano-Française
Joon Kim, Global Head of Trade Finance Product and Portfolio Management, BNY Mellon Treasury Services
Michael Lim, Head of Financial Institutions, Transaction Banking, ANZ
Olivier Paul, Director for Finance Development, ICC
Fernando Pierri, Global Head of Trade Services, Banco Santander Brasil
GTR: BNY Mellon’s survey revealed that trade finance rejection rates were increasing in a third of institutions that participated. How worrying is it that rates appear to be accelerating in such a large number of institutions? Should this finding be an incentive for the industry to act with even greater urgency?
Paul: The reality is there is a huge financing gap. It is not new, it has existed for many years. This financing gap is potentially increasing year-on-year. The Asian Development Bank (ADB) is in the process of undertaking a new study to build upon its findings from 2017 and determine where the gap is today. It is anticipated that it could be higher than two years ago – which aligns somewhat with your findings. For me, the urgency in terms of filling the gap is very real. We need to address it now, not in two or five years’ time.
Kim: Though we cannot conclude from our survey that the trade finance gap is increasing overall – as rejection rates could be decreasing in some institutions – the fact that so many participants reported accelerating rejection rates should be concerning for the industry. The trade finance gap continues to negatively affect global trade and will not be resolved unless we, as an industry, decide upon and proceed with an appropriate course of action. We must work together swiftly to implement effective solutions and optimise trade finance support.
Lim: I agree that there is a material trade finance gap globally. However, I can’t say that ANZ’s rejection rates have been increasing. Our trade finance business has been in growth mode for approximately two years now and we’ve also been consistently growing our home market share.
Iskandar: From my experience, we haven’t really seen an increase in rejection rates. But we have seen an increase in costs linked to compliance in order to satisfy the requirements of our correspondents. We have witnessed more scrutiny from a compliance point of view, which means that we receive more questions on some transactions than we used to receive, but I have not felt that trade finance transactions are being rejected because of it.
Pierri: On the one hand, tighter regulatory requirements – especially in terms of compliance and capital rules – are putting some pressure on banks’ costs, while on the other hand, margins are increasingly tighter either due to higher competition or lower demand from clients. This trend calls our attention even more towards improving efficiency across trade finance. This should be tackled through greater collaboration among market participants so that better services can be delivered to clients – SMEs in particular.
GTR: In the survey, technology and regulatory revision were both highlighted as being the most effective means of reducing the trade finance gap. What do you believe to be the best way to close the gap and what needs to be done to implement such a strategy?
Pierri: Both are important, but technology is the most effective way to reduce the trade finance gap, as greater efficiency would be delivered not only to banks, but also to the end client through simpler and neater solutions. The industry has been working on many initiatives with the purpose of improving efficiency. For instance, the Swift KYC Registry on the compliance side. We believe, however, that other technologies, such as distributed ledger technology (DLT), could be developed as a way to tokenise trade receivables, reducing operational risk as well as costs.
Iskandar: Technology will be able to provide some form of solution to the compliance requirements, but I think we are very far away from that because the issue is with the interpretation of very different rules and regulations across the world. I haven’t seen technology solutions that will satisfy this.
Lim: Technology and regulatory change will assist in closing the gap. International trade is highly paper-based and the physical operational capability that is required to service a trade finance proposition is a material barrier to new finance entrants. Digitisation reduces this barrier through the ultimate elimination of paper. It is encouraging to see proof of concepts becoming a reality and moving into production mode. From a regulatory perspective, trade finance, if executed properly, is a lower risk prospect than vanilla debt because it provides the financier with greater visibility into the underlying use of funds as well as the cash flow source that will ultimately repay the facility. That greater visibility should be rewarded by regulators with a more preferential capital requirement to encourage greater participation.
Paul: There are thousands of businesses – fintechs, banks, corporates, consultants – all looking for a technology solution. It is good to have so many people involved, but only if we have a standardised approach allowing the different platforms to communicate with each other. Otherwise, it will not create a real solution for the industry; it will create a local solution among a limited number of corporates.
Kim: Technology or, more specifically, the effective application of technology, has the potential to significantly enhance trade finance, and help to reduce the trade finance gap. It is up to all of us, as an industry, to ensure we use technology competently and maximise the opportunities it is presenting. For instance, centralised databases such as the Legal Entity Identifier, could prove to be a game-changer by transforming KYC processes, but such solutions need large-scale support if they are to be a success and make a meaningful impact on the size of the gap.
Paul: We need to bring together different elements – including technology and revised regulation – to form one solution that, ultimately, will result in the closing of the gap. I don’t believe there will be a final solution if we just apply one element.
GTR: What roles do banks need to play in helping to address the trade finance gap?
Iskandar: Banks, especially international banks, should start with themselves. There should be common KYC rules and procedures throughout an individual bank across all its locations. In fact, there should be one KYC form across all banks. A few years ago, most correspondents would use a Wolfsberg questionnaire. Today, each correspondent has separate lists of questions and documents that we need to address. This is confusing, time consuming and costly. There should be one standard template that satisfies everyone’s needs. If a few international banks could agree on standard forms it would make things substantially easier.
Pierri: Trust is probably the most important asset in trade relations. Santander believes that banks should focus on creating an environment to help with ‘trust assessment’ – making correspondent banking relationships simpler, more transparent and more resilient.
Paul: Whatever happens with the evolution of regulation, technology and the strategic approach taken, I don’t believe that the banking industry alone will be able to fill the gap because it is simply too huge. There are many institutions – insurance companies, pension funds, investment funds – looking for assets in which they can invest. The International Chamber of Commerce’s (ICC) Trade Register demonstrates that trade finance is a very low risk business with a reasonable level of remuneration for investors. Though not the case today, one day, trade finance will be considered more of an investment grade asset. I am quite sure that new commerce, bringing new finance capacities, could sustain the filling of the gap.
Kim: Banks, as key figures within the trade industry, are in a position to use their knowledge and experience to help promote positive change. This is supported by our survey, with respondents identifying greater collaboration between banks and regulators as by far the most effective way to drive regulatory revision. Furthermore, one of the most important roles for correspondent banks in addressing the trade finance gap is their advocacy to government trade bodies on the value of promoting trade finance. This highlights the importance of the voice of banks in informing and guiding the wider industry when it comes to effecting change – including acting as industry advocates, communicating the needs of clients to help bring about client-centric developments, and promoting the adoption of certain solutions to generate the network effect.
Lim: In addition to moving towards a paperless future, attracting more non-bank capital will be key to addressing the trade finance gap. ANZ is participating as one of a dozen banks in the Trade Finance Distribution (TFD) initiative, which is focused on bringing corporates, banks and investors together to more efficiently distribute trade finance risk. It will be challenging but the potential of securitising trade assets to a broader array of investors is a means of closing the trade finance gap. The theory of developing a standardised financial instrument that investors could purchase and thereby participate in the trade finance industry has been a topic of discussion at past Sibos conferences. An efficient and standardised means of distributing trade finance assets would attract more non-bank capital to the sector.
GTR: How can industry collaboration drive change and help to close the gap? What could this collaboration look like?
Kim: The two solutions identified in the survey as holding the most promise for closing the gap – technology and regulatory revision – are very different. But a clear theme across both approaches is collaboration: without effective dialogue between the wider industry and regulators, the challenging compliance landscape will persist; without buy-in from the global market, the full benefits of technology will not be realised. Harmonisation and co-operation are fundamental to delivering enhancements to trade on a global scale.
Lim: There’s an opportunity for regulators, financial institutions and international bodies to improve dialogue and make concerted efforts towards embracing digitisation that facilitates trade finance. Collaboration is maturing in the industry with organisations recognising that they cannot digitise an industry or supply chain alone, or even as a small consortium. Collaboration on standards and interoperability of networks are essential to avoiding the development of various micro-networks that add no value. Everyone wins if these networks are interoperable because we then begin to benefit from a significant network effect.
Paul: With respect to regulatory compliance environments, people are ready to co-operate very efficiently. For instance, the ICC Banking Commission has a clear mandate from the banking industry to advocate on regulatory issues, particularly with the European authorities and the Asian authorities in Basel III implementation. When it comes to new technology, we need to have co-operation to develop common standards, but in my view, there is less co-operation. Everyone would like to be the first to propose those standards and the global technology that would allow us to create a universal way to deal with digitalised transactions. It means that when we try to analyse where we stand, there is hesitation from players to share their developments and findings. It will be interesting to gauge at Sibos the level of co-operation that people are prepared to give.
Iskandar: I think a lot of banks say and agree on the same things. But when it comes to application, they don’t act the same way. We see different interpretations and different behaviours within the same bank, let alone among different banks in different countries. Fundamentally, we have to decide whether issues around KYC can be addressed with a private sector initiative – combining strength and finding common ground – or if it has to be regulatory. When I see the large number of initiatives taking place, with none gathering enough momentum to achieve a definite solution, I think there has to be some official regulatory initiative or momentum.
Paul: An important role of ICC is to make sure people are aligned. We are trying to create a global ‘club’, gathering all the main players of the industry to agree on a single scenario that we will try to develop and implement altogether. My feeling is that it will take time to onboard all the industry, but once this takes place, things will evolve quite rapidly.
GTR: With the survey indicating that the industry favours centralised KYC databases and regulatory revision as methods to close the gap, what now needs to be done? How can we use these findings to drive change?
Kim: As is often the case when there is a problem to overcome, a multitude of initiatives have emerged to help tackle the gap. But when the solutions landscape becomes diluted, it can divide focus and result in definitive solutions taking longer to come into effect. The industry as a whole should therefore decide upon a course of action. For example, our survey indicates somewhat of an industry consensus regarding the value of centralised KYC databases. With the value of such systems seemingly established, a clear, focused approach to developing their potential can help to ensure they can be successfully implemented, and fully utilised to support global trade.
This does not mean to say that the industry must choose just one solution. Indeed, a single, isolated solution could be restrictive in terms of what we can achieve and when we can achieve it. But by focusing our efforts on methods we judge to have the most value, we can maximise the benefits of those solutions and bring about change more effectively and efficiently.
Iskandar: A central KYC registry, where we would plug in most of the needed documents, would certainly take some load off our daily routine. But it is not going to be a solution for everything. There is still going to be a lot of manual work to do to satisfy the demands of compliance and of our correspondent banking partners.
Pierri: Standardisation is key to reducing compliance costs. However, we support rationalising the level of information that is required to perform onboarding or the KYC refresh on correspondent banks towards a simpler but not less resilient process as a way of having more banks adopting the same common procedures or platform, such as the Swift KYC Registry.
Paul: Sibos will be a good opportunity to bring people together to try to determine the best approach for all of us.
GTR: While we work to close the gap, what should banks be doing to best support their clients and help to ensure trade opportunities can be grasped?
Paul: Two thirds of the transactions rejected by the banking industry are originated by SMEs. A key issue is that SMEs don’t always present their transactions in an appropriate way for the banking industry. A way of addressing this would be for the industry to establish a trade finance training system, with sessions explaining the banking product, how it works, the risk analysis, etc. I think this would help SMEs significantly in having a better dialogue with their banks.
Lim: The trade industry has a lot of jargon and we can support clients by making it easier to understand. Many people think of trade as complex and, as a result, in developed markets many SMEs use more expensive forms of financing, such as overdrafts.
We need to be explaining products and solutions in a better, simpler way.
Pierri: Banks, especially regional banks, should look for different sources of funding and/or risk sharing solutions to improve capacity and provide more trade finance to a wider range of clients, including SMEs. Fintechs, which were seen as potential competitors to banks, nowadays are seen as partners able to deliver cheaper and quicker solutions tackling inefficiency, which should improve quality of services and the client experience.
Iskandar: Many of our correspondents are implementing innovative technologies and advanced platforms. Although this can make it easier to interact with individual banks, it becomes more complicated when we deal with a large number of banks. If every bank has a different platform, it can be confusing. So it is an issue of standardisation again. We are heading in the right direction with emerging technologies and artificial intelligence. In the meantime, our major correspondents are really putting a lot of work and effort into making things easier, more accessible and quicker.
Kim: Participants in our survey ranked risk sharing partnerships with global banks as the most effective way of encouraging additional financing capacity. This shows that the value of correspondent banking relationships in delivering trade finance solutions and facilitating trade growth continues to be well recognised. It is important that banks maintain such relationships in order to support trade – sharing knowledge, experience and capabilities to enable end-clients to benefit from enhanced trade service and solutions.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
