Defining the trade finance agenda in 2017 - The ICC interview
Late this summer, the ICC released their annual report on the regional and global trends in trade and trade finance. The report is based on expert opinion and the results of a major survey. It provides insight and analysis into issues such as the trade finance gap, access to finance, export finance and supply chain finance – and how digitisation and new technologies like blockchain and FinTech are reshaping the industry.
The 2017 report saw several central themes emerge and others mature. Trends such as a growing emphasis on sustainability in trade and the trade finance gap came into sharp focus, while the move towards digitalisation again grabbed the attention.
On the back of the report, Nordea spoke to several senior ICC figures to get their take on the report’s findings and how they see the major trends developing in the coming years.
Digitalisation requires a full ecosystem of participants and contributors across the trade finance industry, and beyond, including international institutions, government bodies, the private sector, and academia. Dave Meynell, ICC Banking Commission Executive Committee
Digitalisation and standardisation
Dave Meynell, ICC Banking Commission Executive Committee
Some 50% expect most of trade flow processes to be digitised by 2027 – while an almost equal portion expect the evolution to take from 10-25 years. Why is the timeframe so long when it comes to digitalisation in trade finance?
The digitalisation of trade finance is a complex and sizeable task, requiring simultaneous changes across different industries, and for whole supply chains to digitalise. For the benefits to be widespread, the industry needs to reach a point of critical mass where there is sufficient appetite for digitalisation. At the same time, many trade financiers focus on digitising their internal processes without linking up with the wider industry – certainly, we need to enable digital connectivity.
What’s more, digitalisation has so far focused on converting paper documents into digital images rather than on data extraction, which leads to reduced error rates and simplification. Enhanced uptake of this will lead to increased efficiency and help banks with decision-making and their strategies.
Overall, banks will use technology for incremental improvements to their existing processes and practices, rather than perhaps using it for truly transformational initiatives. Technology will therefore play an evolutionary role to trade finance, rather than revolutionary – hence why the process is likely to take some time.
What do you see as the major opportunities for digitalisation in trade finance over the next three years?
Opportunities presented through partnerships between banks and FinTechs will likely be a key focus for the industry – a movement that is already underway. This can be seen by the fact that technological evolution is now at the top of many company agendas, demonstrating a widespread acknowledgement of the benefits it can bring – for example the potential of distributed ledger technology. This has driven a mind-set change to find new solutions across various competencies and at the same time the expectation for data to be visible.
In turn, with improved visibility, digitalisation will help improve banks’ ability to make decisions when lending to corporates, therefore reducing risk and increasing available liquidity for reliable corporates.
How can the trade community work together to ensure standards are set across the industry and ensure consensus, transparency, standardisation and simplification?
Organisations are often good at digitising their own processes, but face barriers connecting with other digital entities. So, we need to enable digital platforms to connect to multiple entities faster. For this, collaboration between banks, corporates, industry players, and platforms is crucial to accelerating digitalisation in the industry.
Ultimately, the best way to understand the benefits of digitisation is by encouraging banks and corporates to participate in the movement – such as getting involved where digitalisation is already in place and growing. However, there is still much uncertainty around digitalisation and the sooner we provide standards and legal enforceability the better.
How do we create minimum standards so we can enable different players to communicate effectively?
ICC’s Working Group on digitalisation aims to develop a set of minimum standards for the digital connectivity of service providers across legal, liability, information security and technology. What’s more, the group aims to address the enforceability of electronic rules and ICC rules – such as the electronic UCP – to ensure these are “e” compliant.
In addition, government “digital agendas” influence how geared an economy is towards digitalisation, as well as the importance placed on standards. For example, the UK’s government support has helped drive the UK FinTech industry to be by far the biggest in Europe.
Digitalisation requires a full ecosystem of participants and contributors across the trade finance industry, and beyond, including international institutions, government bodies, the private sector, and academia.
What does the digitalisation of trade mean for the relationship between corporates and their banks?
Since digitisation will enhance transparency, corporates will likely see a shift in the relationship with their banks whereby the latter seek more data and information in order to improve their services to the client. Furthermore, we are likely to see closer collaboration between banks and FinTechs, leading to a sharing of the client relationship, and thereby further enhancing the customer experience.
By working together, global banks’ extended reach and scale can be combined with the client bases and unrivalled country-specific insights and knowledge of local and regional banks: a “win” for both parties...Leveraging new technology to underpin well established correspondent networks is the key to ensuring future success. Dominic Broom, ICC Banking Commission Executive Committee
Doina Buruiana, Project Manager, ICC Banking Commission
How is sustainable trade defined and why has it become so prominent in the last couple of years?
Sustainable trade encompasses the business and activities of buying and selling commodities, goods and services that meet some environmental, social and economic standards. It should also be capable of benefiting all actors involved and minimising adverse impacts – while fostering sustainable global development. A greater focus on sustainability has been underway with significant developments around global policy and regulatory trends, e.g. COP 21 Paris Agreement and the United Nations Sustainable Development Goals.
In recent years, there are higher expectations for all parties involved in global supply chains to address the issue of visibility and socially responsible and environmentally respectful practices and processes of sourcing. Banks – involved in the financing of the supply chains – are also incentivised to participate in this monitoring activity to meet expectations of clients and, possibly, regulators.
There are multiple aspects that could be identified when looking at sustainable trade operations and sustainable supply chains, which can be grouped under the following main categories:
- Environmental (agriculture, commodities, end consumers)
- Social (human rights, employees and other stakeholders)
- Economic (generate profit and growth in a positive spiral)
Increasingly, corporates are encouraged by end consumers’ expectations to have more transparent processes and publicly available information about their supply chain operations.
The ICC Banking Commission has formed a Working Group on Sustainability in Trade Finance. What are the objectives of this group and how will these objectives be translated into concrete actions for banks and corporates?
The Working Group seeks to promote industry-wide consensus on a common view and definition for sustainable trade finance, to eliminate inaccurate use of the term, or “greenwashing.”
It also aims to encourage awareness and understanding of sustainability in trade finance by promoting best practices and their implementation – in anticipation of potential official regulations and in line with more conscious and demanding customer expectations. Finally, it will provide guidance for sustainable trade finance operations, including specific procedures to identify sensitive sectors and commodities, and criteria to evaluate available standards and certification requirements. Still, the group does not seek to create any procedural burdens for trade finance operations, but rather to build on and spread current and evolving best practices.
The state of correspondent banking
Dominic Broom, ICC Banking Commission Executive Committee
Reducing the number of correspondent banks obviously has benefits in terms of reducing reputational risk associated with non-compliance by a partner bank, but what are the negatives sides of this?
Crucially, correspondent banking enables domestic and cross-border payments, including remittances, thereby supporting international trade and cross-border financial activity. According to the IMF contribution in the report, the number of active correspondents globally declined by about 5% between 2011 and 2015, while the number of relationships actually increased by 30%. The pressure on correspondent banking relationships has aggravated economic fragility in markets, potentially affecting long term growth. In fact, de-risking has significantly impacted remittance flows, which are crucial to international development, and is therefore receiving increasing attention among policymakers.
What has driven up the cost of maintaining a basic correspondent relationship, and do you expect the costs to rise?
The termination of correspondent banking relationships reflects the fact that banks are increasingly assessing their profitability and risks. Regulatory requirements around banks’ level of knowledge about counterparties with which they interact and conduct business have meant that the costs of maintaining a correspondent relationship have risen from perhaps €15,000 to €75,000 per relationship, depending on location, largely driven by compliance costs. Unless innovative ways can be found to ease the regulatory burden, these costs can be expected to rise. What’s more, the reputational risk associated with non-compliance by a partner bank has contributed to the consolidation of correspondent relationships, and institutions are retrenching back to their core networks, often away from emerging markets, especially those perceived as higher risk.
What does the future hold for correspondent banking?
In recent years, many global banks have retreated from some geographical and market sectors, which has resulted in a yawning trade finance gap. This financing gap is a key concern, and although local and regional banks are actively trying to address this issue, often with the support of multilateral agencies, many of them simply do not have the capital or facilities to make the necessary impact.
This is where collaboration is crucial. By working together, global banks’ extended reach and scale can be combined with the client bases and unrivalled country-specific insights and knowledge of local and regional banks: a “win” for both parties. Through collaboration, all parties and most importantly, end users, can benefit from one other increasingly critical and central factor: technological innovation. Leveraging new technology to underpin well established correspondent networks is the key to ensuring future success.
We need to ensure that we continue to be central to the financing and risk mitigation around global trade flows, that we narrow the annual $1.6 trillion trade finance gap, and that our practitioners’ competencies and skills advance with market requirements and client expectations. Alexander Malaket, Head of report Editorial Team, ICC Banking Commission Executive Committee
Corporates and supply chain finance
Mark Evans, ICC Banking Commission Executive Committee
More than one-third of respondents consider supply chain finance a high priority and predict significant growth, and over 21% view it as under analysis and consideration. What processes do companies need to go through before they have an SCF plan in place?
Companies should be aware of the main players in their physical supply chains, any events that can be matched against their financial supply chain, and have an understanding of what data is available to show that a financeable “event” has occurred.
Furthermore, they should guarantee the availability of historical data that verifies the track record of the underlying assets being financed – for example, dilutions and defaults – ensuring that sufficient data is available to the programme manager and/or financier to meet all compliance related reporting observations.
Depending on their role in the programme, an understanding of their current financing – or other commitments – may include pledges or security that need to be addressed prior to committing assets to an SCF programme.
Finally, if the proposed SCF programme involves any linkage to a technology platform, companies should ask themselves if their systems are capable of accommodating the technology, and whether they are comfortable with the security of the platform to prevent cybercrime.
Concluding remark: The future for trade finance
Alexander Malaket, Head of report Editorial Team, ICC Banking Commission Executive Committee
Some 57% of respondents believe traditional trade finance will exhibit little or no growth – while 22% think it will decline outright year-on-year. Is this a worrying statistic for the future of trade finance? And what will the industry look like 10 years from now?
The financing of international commerce – like other commercial endeavours – evolves over time. While traditional trade finance mechanisms have exhibited flat to negative growth by volume/value for some time, it still accounts for roughly 10%, or $1.5 trillion, of global annual merchandise trade flows.
More importantly, the lessons and practices developed in traditional trade finance continue to be central to industry discourse, and to inform the evolution of new propositions. The trends reflected in the ICC Survey around traditional trade finance are not a matter of concern, but rather a matter of natural and long-overdue evolution. One of the things we need to do is to ensure that our value proposition, and the skills and contributions of trade financiers, evolve accordingly.
We need to ensure that we continue to be central to the financing and risk mitigation around global trade flows, that we narrow the annual $1.6 trillion trade finance gap, and that our practitioners’ competencies and skills advance with market requirements and client expectations. We need only look at recent developments in the physical supply chain, and coming changes in the information supply chain, to begin to appreciate that trade financing is facing a decade of unprecedented transformation. 3-D printing, drone-based delivery, supply chain wide data-mining, and increasing accountability for supplier behaviours and practices will help shape the business of trade financing, which will inevitably grow to involve non-bank capital and non-bank providers.
To discuss how these trends could affect or be of benefit your company, contact your trade finance advisor at Nordea.
For queries relating to the report, or to contact the respective respondents, please contact Doina Buruiana, ICC Banking Commission