In recent years it has become increasingly apparent that the trade finance market is gradually losing the vast pool of knowledge upon which it had built its reputation over the past decades. But why is this happening and what can be done to remedy the issue? Kenton Hartwell, deputy head of trade finance at Crown Agents Bank, provides his view.
To begin with, let’s think back over 20 years to when the trade finance market was booming and how that enormous sea of expertise was achieved.
In the mid-1990s the City of London was, without doubt, the centre of global trade finance, with many banks, large and small, involved in the financing of commodity flows on both a vanilla and structured basis and at a time when letters of credit were the main facilitator of international trade. This led to most banks setting up not just a team of highly experienced front-office originators, but also a back-office operations team that were also experts in their field. It was also a time when forfaiting was in its heyday and the ability to combine traditional trade finance with a promissory note, accepted bill of exchange or similar financing was at the forefront of a bank’s product offering.
Trade finance was a sector that was different to many others as knowledge and experience were the overriding requirements for origination roles. These roles were dependent on not just an understanding of a client’s business, but also the ability to look deeper into its trade cycle and how to put together a bespoke financing requirement to not only facilitate the trade cycle, but to finance cash flow gaps and manufacturing/processing periods. This was done using a variety of different trade finance products and differing security and collateral packages.
Trade finance operations was also very different to other back-office roles in that the requirements were not only for individuals who were good at timely processing, but also those that had a comprehensive understanding of the the ICC rules and the ability to liaise with customers regarding documentation, processes, etc. These teams had a working knowledge of shipping documents, their make-up, content and purpose within the trade cycle.
It was also in an era when many banks were recruiting school leavers at 16 to their back offices so that they may have a comprehensive grounding on the banking environment. This meant that these youngsters were willing to undertake a longer time, maybe two or three years, in understanding an operations role and gaining invaluable knowledge which they could then take forward as their careers progressed. Progression was straightforward if you wanted it. You had a period where you ‘learnt your trade’ in operations, working closely with experienced colleagues with a lifetime of knowledge coupled with a close link into the front-office origination teams. Those identified as having potential were then moved into a middle-office-type role where structuring, facility documentation, security, etc were added to their existing knowledge.
It was only then that the final progression into the front-office origination roles was possible, where the more rounded individual could be confidently put in front of clients and be able to facilitate trade finance discussions that are key to identifying the potential financing opportunities as part of the overall trade cycle.
So, what happened?
Over the last 10 to 15 years a variety of factors have contributed to the decline in trade finance knowledge in the market.
First, it was bankers’ move to trading companies. Many of the international commodity traders realised that the knowledge and experience that they required was sitting within the banking industry. This led to a flow of talented trade finance individuals, mostly from operations teams, moving from banks to the commodity traders. This had the effect of limiting progression and banks having to train additional staff to replace those who had moved on.
Secondly, led by the larger international banks, the trade finance product offering became much more fragmented with the wider introduction of individual teams focussed on specific areas of the trade cycle including supply chain finance, pre-export finance, vanilla trade finance and structured trade and commodity finance. This led to a watering down of knowledge and specialisation in one area.
Thirdly, outsourcing became the buzz-word, with many of the operations teams from the larger banks moving to different regions, countries, etc, and these roles becoming more of a processing function. Again, this limited progression and meant that the bottom-up knowledge tree became broken.
Finally, and perhaps the most significant of all was the rise of university education in the UK. This meant that banks no longer employed school-leavers but preferred to resource from the ever-growing pool of university graduates with high-quality, forward-thinking mindsets. Whilst this has worked and continues to do so in many instances, especially in the fast-moving investment banking world, in trade finance the market has suffered considerably because of the requirement for better detailed product knowledge obtained, more often than not, from an operations background.
Partly because of these reasons, we find ourselves now in a position where the trade finance market is largely made up of a group of highly experienced people in the 40-plus age group but with a huge gulf in talent and experience in the younger generations.
So, what do we do to change?
Some recent developments have tried or are trying to address this position.
Training companies continue to provide much needed trade finance education through various training courses focussed on transferring the knowledge from experienced trade financiers onto a new wave of upcoming trade professionals. These can either be comprehensive courses across the trade spectrum or on specific product-focussed areas.
In addition, trade finance industry bodies led by the International Trade and Forfaiting Association (ITFA) are also becoming more involved in facilitating courses and seminars designed to share a wider range of industry specific trade finance experience and knowledge. ITFA also offers a mentorship programme which looks to pair young trade finance professionals with older experienced individuals to achieve similar outcomes.
Furthermore, banks are now starting to offer apprenticeships to school leavers after sixth form at 18 years of age in a step designed to plug the knowledge gap.
However, despite all these measures, the overriding requirement in a trade finance environment continues to be that of knowledge and experience. Whilst training courses can give individuals the understanding of structures and products in a focussed environment, there remains a huge lack of experience in the market from both a front and back-office perspective.
Whilst the CDCS and similar qualifications have added some structure around trade finance, especially in LC operations, the relationship between the back and front-office teams, the lack of progression already mentioned and the ongoing segmented approach across the trade finance spectrum, means that from a sector perspective it is increasingly difficult to attract, retain and train good individuals in the trade finance market.
In reality, knowledge and experience are only gained during a hands-on role in a trade finance environment over many years.
At Crown Agents Bank we are trying to make a difference in this respect. Internally we work very closely between our front and back office with a view to sharing the knowledge that has been gained over many years and in different institutions. We hope to foster an open working environment whereby we begin to establish the progression from operations to a front-office role, plus the all-round, versatile, trade finance knowledge that is missing from the market.
Outside of the bank, our trade finance mandate is to create opportunities that allow our partner banks in Africa to enable their clients’ businesses. Combining traditional trade finance products and a hand-holding, knowledge sharing approach, with a significant commitment towards understanding our clients’ needs (and thus those of their clients), we focus on facilitating trade, allowing our clients to have access not only to customised trade finance solutions at competitive cost levels, but also to our significant experience in trade finance.
Our small team of trade finance professionals is made up of a front-office team of two highly experienced individuals in the trade finance market, having covered all aspects of trade finance from vanilla through to more structured trade in different organisations. Our operations team is a mixture of experience and a training ground for the future. We use this experience to fully understand our clients’ requirements and to assist them in providing solutions to their own clients.
We hope that in a small way, we can help our clients and our own employees to better understand trade finance and add value in the industry/sector that we have grown up in, in the future.