With their trading clients facing up to one of the most challenging years yet, GTR gathered a selection of the UK’s top trade and export finance bankers to hear their views on the changing landscape.
- Eric Balish, head of corporate trade sales, UK and Ireland, Bank ABC
- Russ Grazier, head of ECA and trade and working capital London, Barclays
- Mark Ling, head of trade and working capital, Santander
- David Locking, managing director and head of working capital solutions, Wyelands Bank
- Gwynne Master, managing director and head of trade, Lloyds Bank (chair)
- Mirka Skrzypczak, head of working capital and trade products, NatWest
- Ian Tandy, head of global trade and receivables finance, HSBC UK
Master: Understanding the trade flows in and out of the UK is something that Lloyds Bank spends a lot of time on. We recently launched a quarterly report that provides nationwide statistics around demand for UK exports and international supply chain conditions. We looked at data from over 40 countries and 25,000 global businesses. Some of the key findings around UK trade show that export growth has slowed to its lowest level in nearly three years, largely in manufacturing in the intermediate goods sector. Consumer goods have held up, offset by some of the automotive weaknesses that you’ve all been reading about, and specifically in the service sector, businesses have signalled a fall in exports.
In terms of general themes, there is a fear of future input shortages and delays. This has led some of our UK manufacturers to ramp up stockpiling, and we see that as having an impact on working capital, which has been further impacted by some pinch points in the European supply chains.
British manufacturers note that European clients are also adopting a wait-and-see-type of attitude in terms of their approach to longer-term contracts, and we see that firms that have been able to grow exports cited expansion into Asia Pacific and the Persian Gulf as some of the reasons behind that growth.
What trends have emerged over the past year in terms of trade flows and financing of these flows from a UK perspective? Are clients changing their sourcing and selling patterns? What are their trade finance needs, and are these demands being met?
Tandy: We are not seeing a huge change at the moment, to be perfectly honest. Our clients have some genuine concerns about what’s happening on a geopolitical basis, clearly some are concerned but others see opportunities. The HSBC Navigator report, which is about trading conditions, found that 74% of companies, two thirds of which are trading internationally, had a positive outlook on the future, which was good to see from a UK point of view.
British businesses are flexible and they are entrepreneurial by nature. Concerns about supply chain and fluctuations in foreign exchange rates are challenges that they deal with on a day-to-day basis. We are focused on providing as much relevant information as we can. As an industry, we should all continue to provide them with high levels of relevant information.
Ling: We all have our own reports and the good news is that we are all getting the same messages. There have been rumours of stockpiling but it is not evidenced in the utilisation of our facilities. For both our pure working capital and trade facilities it hasn’t changed, and that is across the board. But there is more talk of it.
We are trying to get all of our relationship directors and international working capital directors to have more discussions. We are trying to get as much information back out into our customer base as we can, but the challenge is what are you going to say to them that is different from what they might be reading in the press?
Skrzypczak: From NatWest’s perspective, we are seeing some UK retailers increasing imports from Sri Lanka, Bangladesh, India and Taiwan. Interestingly, we are starting to see those jurisdictions following suit in terms of adoption of open account trade, so those flows are definitely on an ‘up’ trajectory. But everything else is pretty much in a holding pattern.
Balish: As a niche trade finance bank, mostly active in Middle East, North Africa and Turkey markets, we see an increasing volume of letters of credit coming from new clients who are exploring new markets, including Algeria, Morocco, Egypt, Tunisia and Libya. There is good business being done in these markets and a dawning realisation that British businesses need to look beyond their traditional markets to exploit new opportunities for growth. It’s quite reassuring that we can see that change in behaviour.
As these are largely ‘emerging markets’ the activity is quite sector specific: medical devices, pharma, construction, telecommunications, power, energy and extractive industries. So it is literally ground up, and British exporters of all sizes are getting involved.
Grazier: We released a report in 2018, Brand Britain, that focused on the global export opportunity. Across the piece there is real appetite for British goods abroad. Whether we maximise these opportunities from a corporate, bank or government level to ensure UK Plc capitalises on these is questionable, but the appetite is there. Collectively, we have to find ways to alert businesses to the opportunity in a much more consistent and coherent manner.
Master: Lloyds has committed to helping 25,000 businesses export for the first time by 2020. How are the smaller UK exporters faring?
Locking: Wyelands Bank is a small two-year-old bank with a focus on the SME working capital space. We are seeing increased utilisations: a number of our clients are selling into tier 1 buyers where there’s an increasing trend of them being asked for longer terms. Because they struggle to extend terms on their payables to match, we are seeing quite a significant increase in demand, which is great for us, because we are starting to grow and can help our customers to grow too.
As for the trade flows, we see a fair amount of our business from the wider Alliance Group, in which Wyelands Bank sits. We are beginning to see quite a bit of change around the trade flows of this expanding business notably, but not exclusively, in the metals space.
At the smaller end, we are beginning to see clients feeling the pinch, not being able to stop and wait for an outcome on Brexit, for example. They’ve just got to keep going, otherwise there is the fear that they are going to get railroaded. They are therefore having to spend more money now and do some stockpiling. They don’t necessarily have the infrastructure, or resources, to do it, so it is getting really quite difficult for some of them. This is creating an opportunity for us.
Ling: According to the most recent surveys, access to finance is down at three or four – it’s certainly not at one or two. That has been quite consistent for a couple of years now. I’m not saying that is not going to change if we get into a very turbulent period. But at the moment, the surveys talk about lack of skills and expertise, and the complexity of business regulation as the top issues. As an industry we have got to find a way not to make the rules more client-centric than they are today.
Grazier: Barclays published a series of reports last year with King’s College London, and the focus around this initiative was to have a coherent export strategy led by government and being able to therefore provide the right guidance at the right time through the right channels to businesses. There is an assumption that all small businesses are now IT literate, and the reality is that’s not always the case. So, putting all education and support channels to exporting small businesses through ‘digital’ is not necessarily the singular answer. We have to be able to access those businesses in a systematic way, and that might mean different ways or different channels for different businesses.
Master: Do smaller businesses have sufficient resources to safely manage these challenges?
Grazier: It can be difficult for very small businesses to have a strategic view on where the opportunities are. It almost contradicts what I was saying earlier, but most businesses – irrespective of how small they are – will have a web page. Immediately they can become international traders by accident rather than through a strategic approach.
Ling: That is what has happened. Small companies become exporters by accident. Banks have stopped being an organisation that gives advice. I’ve had a lot of my colleagues in the past say, ‘We are not allowed to give advice’. But this is an area where we need to give advice. We need to help clients understand if you’re going to start exporting to Brazil, for example, what are the challenges and pitfalls, how do you need to get match fit? How can you be ready for that export?
People have got scared of that trusted advisor phrase. In all of our organisations, our people need to be trusted advisers to SMEs, to midmarket firms, so that they can be more comfortable about taking some of the steps. They have still got to do their own due diligence, but we’ve got to help them all.
Master: Do banks, governments and SMEs know what they don’t know? Given the fact that 40% of UK trade is European-based, there is a degree of risk here. At Lloyds Bank, we’re focusing on training and equipping frontline teams with the right knowledge to support clients, but do SMEs have a sense of what’s required for international trade in terms of documentation and so forth?
Skrzypczak: Last year I attended the supply chain summit hosted by Warwick University, and there were some very big and very small companies talking about their readiness for Brexit. The big companies were saying that they had substantial Brexit teams to deal with the complexities involved and assessing impact on their supply chains, but the smaller ones didn’t. Putting any political agenda aside, they felt a lack of clarity around some admin areas. When was the last time they had to fill in a duty declaration? Simple things like that. I think we can do more to help them and provide our support where appropriate. I’m very glad that the government came up with the VAT solution, but a few months back, before this news got published, SMEs didn’t realise that suddenly they would have to pay VAT straightaway. Fortunately, that threat is now gone, but six to eight months ago, that threat was very, very real.
Grazier: This goes back to the point about a systematic export policy by government to ensure that we can signpost those businesses effectively. Five or six years ago, a House of Lords select committee published a report that focused on government’s exporting policy at the time. They are now looking to complete further select committee reports into exporting policy and support, and I think it’s likely that the findings will be broadly similar. The advice, guidance and support is out there, but actually accessing it if you are a business that is new to exporting, or an accidental exporter, can feel difficult.
Locking: What can we learn from what the Germans are doing differently than we are? How are they, seemingly, getting this right?
Grazier: The Cole report talked about the German use of their Chamber of Commerce system and also about the role of export education. There are clearly some lessons for us to learn through looking at Germany and other successful export nations.
Locking: We can, and sometimes do give some ad hoc advice, but actually the whole initiative needs to come from government and start much earlier, including at school.
Tandy: We have to be careful about making assumptions about UK SME companies. I was at a roundtable with some SMEs the other day and we were talking about the continuity of supply, the potential for further depreciation of sterling and the impact of WTO tariffs. The sense I was getting was that many of the companies are well informed and that these are the sorts of issues that they deal with on a day-to-day basis.
The UK has some absolutely brilliant SMEs who know how to run their businesses, and most of them do understand currency fluctuations. A lot of SME businesses are run by people who have worked in larger businesses before, who have that knowledge base and are looking for more sophisticated advice from us. The sense I am getting is that through conversations with clients they are cognisant of the challenges around them but they are looking for ongoing advice and support, which I am sure we are all happy to provide.
Balish: Part of the problem is we haven’t got enough exporting SMEs in the first place. Fundamentally, we need to grow the actual reservoir of SMEs that are exporting. You’re right, we’ve got a lot of experienced SMEs who are very capable. That’s fine. But we’ve got so many potential exporters who are just not getting engaged. We need to grow that stock of new exporters so that we have a vibrant, long-lasting, productive future in exporting – that’s really the thing to change.
Tandy: Businesses have tough choices to make every single day. The point is, they may consider a long-term view, and that’s where we come in. There is GDP growth in Asia, and of course many markets are growing faster than others. I see our role as providing this type of information tailored to our clients’ needs. Our job as international bankers is to basically say, have a look, and if you do decide to export to new markets, these are some of the things you need to consider and we can provide that insight.
Master: How has the UK’s supply chain finance industry been affected by Fitch sounding the alarm over current supply chain finance programmes and calling for reverse factoring to be classified as debt?
Ling: Supply chain finance, or supplier finance in particular, absolutely works if it’s explained to people in an appropriate way. But, if you make the wrong calls about your level of exposure, then guess what? It can end in a bad way.
Balish: In our experience, the demand for supply chain finance on both sides of the equation has never been greater, and it’s not likely to get any less any time soon.
Locking: I do worry though. I’ve had this debate internally with credit officers and some are minded to say: ‘If companies didn’t have access to facilities such as this, what would they have? They’d have debt, so let’s call it debt.’ We’re going to end up in a very nasty place if we carry on going down this path unchecked. This can suddenly develop into something more and lead to much tougher conditions in which to try and support clients with innovative solutions.
Grazier: The invoice approval process is part of the historic problem here. But where we have engaged in policy with UK government on some of its planned large infrastructure projects, it has been very keen to ensure that not only are fair payment charter rules met, but that we ensure the invoice approval process is reviewed such that we can deliver for those clients, particularly those SME clients across what are often multi-tier supply chains. It’s not an easy conundrum, but the government is really trying to work with business to try and overcome those obstacles.
Master: In terms of government support, can more be done? What government mechanisms are proving to be the most useful for you and your clients?
Grazier: Our research paper, published in partnership with King’s College London Policy Institute, evidenced the fact that those businesses that access government support in a consistent manner are generally more effective in their exporting achievements.
We support the recommendations in the paper in so far as we all need to find ways to ensure that there is a consistency of access and delivery of export support to UK businesses. Moreover, there is a real need to ensure that when we say ‘support’, we really understand what that support is, in addition to how we then deliver it to businesses in a consistent manner. There are a number of really positive initiatives from government. We’ve all seen the £2bn of additional monies going into UK Export Finance (UKEF) direct lending, but beyond that, there is £50bn-worth of lines available through UKEF globally. About half of those are currently utilised. There is a huge opportunity to support businesses in their exporting ambitions where banks need some additional support to be able to finance overseas contracts.
When I’ve been overseas and talked to other ECAs, they are currently a little in awe of UKEF in terms of the schemes it is bringing to market, the level of appetite and how prominent it is in some of the overseas tradeshows. It is really trying to promote UK Plc. There’s always lots more that can be done, but I genuinely think there is a lot of positive momentum.
Skrzypczak: Last year I was part of the UK-Australia Fintech Bridge initiative. Government does realise technology will play a key part in the future and they are addressing it head-on. It took a leading role in Australia last November, and that was quite refreshing. It was great to see that level of future thinking connectivity, and trying to learn from both sides in terms of the latest fintech developments.
It’s also very encouraging to see what the government is trying to do on the services side, because services is potentially one of the easiest things you can export.
Balish: We’ve been working with UKEF on their supplier credit product, helping them reshape it. We did the first deal in five years with them last year, a proper, straightforward supplier credit – it’s a product that has been on the shelf and pretty moribund. There are lots of reasons as to why that has been the case, but UKEF has got an appetite to do more, and has invested in it.
They now have three people in the small transactions team who are very effective. They have listened carefully to what the banks have collectively said about the way in which they need to react to this part of the market, where core manufacturing business is looking for credit that’s beyond 12 months, say, between two and five years, or even slightly longer. This has been a fallow space, leaving British manufacturing to some extent at the mercy of the Germans, French, Italians and Swedes, who have prospered with support from their ECAs. The new UKEF team has risen to the challenge and been incredibly supportive. The deal we did was in Argentina for three years – the repayments are on schedule. So, now the supplier credit product is back out of the box, and we are delighted that we are getting our money back as designed.
Ling: Louis Taylor has done a fantastic job in the last couple of years of getting a completely different attitude and focus and lining up with government, but also I think that you’re finally seeing government really align to this. We have nine new trade commissioners. These people are going to be really key whenever I’m overseas and meeting government overseas, and they are all commercially focused. They now understand their job is to sell UK Plc. To further encourage UK trade, the government could look to see how it can better use its soft power. The UK has significant amounts of influence around the world, particularly in developing countries, and government shouldn’t be afraid of pushing trade and UK businesses when engaging in these regions.
Grazier: There is a slight concern about what is known and what is not known. I think the latest stat is that 75% of British businesses have no awareness of UKEF. It won’t be the solution for every business, but what it actually does do is alert businesses to the opportunity for finance where they might perceive that it will be a barrier for them.
Master: Moving on to the digitisation of trade, is technology a differentiator for clients today?
Tandy: There’s an expectation that we can help customers be faster, safer and more efficient. HSBC
has an app that allows you to follow your trade transactions. It’s live in 24 countries and the take-up has been incredible. It’s about the fact that people want to access that information. That’s what’s needed. Our view is that advances in technology, including potential blockchain solutions for trade transactions, could be as influential to the industry as containerisation was to the shipping industry.
Skrzypczak: Blockchain is a complete game changer. It takes the technology to an entirely different level in terms of interoperability. You can’t do it alone, and we are shifting our mindset massively. Collaboration is taken to an entirely different level where we bounce ideas off each other.
It’s interesting what’s happening with the law, because if you have data that can get you consensus that previously was only achievable through legal contracts, you are moving to the next level.
Master: What are the regulatory or legal barriers that you are experiencing around digitisation?
Balish: Common standards are probably one of the biggest challenges in getting to an agreement on exactly what fits in the blockchain box, and what is certifiable and acceptable in practice.
Grazier: It’s also about managing people’s expectations, because with each new pilot or initiative around blockchain, people expect that out of the back of it comes the end solution, and that isn’t going to be the case. Digitisation is evolving, and whilst there isn’t an overnight solution to some of the regulatory or legal barriers, I have no doubt that it will eventually lead to an environment which benefits us all in terms of the speed, efficiency, security and cost of trade.
Skrzypczak: Regulation is key. We have started to see the regulators coming globally together about simple things like KYC and KYB. The moment an institution can act as an ‘oracle’ you start seeing the flow is much easier. We’re going to start seeing more and more progression towards a regulatory landscape that will allow us to build the power of the network. We need to have the ‘finality’ – or approval – from a regulatory perspective in order to make it a widely accepted solution.
I also see an interesting shift from the central banks around the world. They are looking at tokenisation of currencies and things like the fiat currency exchange between central banks. They are very serious about cryptocurrencies that are linked to a real asset.
Even the Prudential Regulation Authority (PRA) has started looking at the technology angle and has been involved in a number of tech sandboxes to explore blockchain, which is very encouraging. But trade is a global animal hence we need to make sure it’s not just one country, we need the network effect to drive it.