Fintech innovation is causing a huge stir across the finance industry, with new developments emerging that have the potential to alter the very nature of transactions. In the heart of London – a city at the forefront of global fintech innovation – TXF’s Hesham Zakai sat down with a group of experts at a BNY Mellon-hosted roundtable to discuss how the landscape is unfolding, the impact of fintech on the more “traditionally renowned” trade sector, and how banks are responding to the surge of new technology meisters entering the finance space.
At the table:
· Jussi Snellman, senior advisor, Cash Management & Trade Finance, OP Corporate Bank
· Shona Tatchell, head of innovation, Trade & Working Capital, Barclays
· Akhil D Shah, head of bank propositions and network management, Global Transaction Banking, Lloyds Banking Group
· Ashley Skaanild, chief commercial officer, essDOCS
· Mauro Bonacina, global trade market manager, Treasury Services, BNY Mellon
· Dhiru Tanna, sales officer, Treasury Services EMEA, BNY Mellon
· Hesham Zakai, associate director, TXF (chair)
Hesham Zakai: Thank you all very much for coming today. Let’s begin with the growing role of fintechs and how they are impacting banks and the trade industry.
Jussi Snellman: Fintechs are a major disruptor and there are two points I’d like to raise in relation to this. Firstly, the vast majority of fintechs are building on infrastructure provided to them by banks; there are very few exceptions (although the distributed ledger is one). Banks are still needed for the foundations. Secondly, the vast majority of fintech activity is retail-focused. A key reason for that is that in the consumer space, there’s no legacy systems burden – you upgrade your “system” by buying a new smartphone, which is easy and relatively inexpensive. In the corporate space however, it’s not banks alone that have years of legacy platforms to navigate – our customers do as well. It’s therefore much harder to build and achieve the network effect.
Dhiru Tanna: Yes, it’s not just one system, it’s a legacy of multiple systems. That’s where a lot of the challenge lies.
Ashley Skaanild: EssDOCS very much regards itself as a fintech company, one which addresses operational and finance processes for international trade of physical cargoes, with a specific focus on eliminating the burden of paper documents. One of the key documents that we digitise today is the title document, the bill of lading (B/L). We have a framework in place that enables that electronic version to be seen as the legal and functional equivalent to the paper version. We have a large number of corporates and banks signed up, and we see ourselves very much in the middle space. We provide banks with tools that can sit on top of their legacy systems to interact with their customers better, and we also provide corporates with tools to interact more with each other and with their banks.
Akhil D Shah: We need to consider the whole ecosystem of global trade and all the various participants. In order to drive digitisation of the whole process, you need all those parties to be digitally connected. That’s where I think the challenge is. But that’s the way we need to go, because by digitising the whole process you’re making it cheaper, faster and easier, which is what all consumers of these services want.
Skaanild: Yes, one of the biggest challenges is our network. In general, world trade is quite a conservative industry and people tend to like to hold on to the papers that entitle them to the goods. What we’ve found is that our customers like to take a step-by-step approach, so we haven’t changed the process they are used to that much. When you look inside our system, the B/L looks precisely like the paper version. Getting the shipowners to sign them has been challenging – it’s taken many years to get to the stage we are now and where we can now call it fairly mainstream.
Mauro Bonacina: I completely agree. A step-by-step approach can be very effective.
Skaanild: Taking trade to the next level – the distributed ledger, the blockchain – is a huge step though. What we’re trying to do is build that infrastructure, build the network and take the first step in digitising documents. Once there is a bigger network, and as the blockchain develops and becomes more tangible, we plan to build what we’ve got into that. We’ve got letter of credit (LC) presentation, bank payment obligation (BPO), and open account. There’s no reason why this can’t fit into the blockchain.
Shona Tatchell: Distributed ledger technology is really about providing that base infrastructure upon which the rest of us can build our middleware and applications. We don’t know who’s going to develop it, but the winners will be those who create the best user experience and the smoothest means of interacting with clients. But the market is massive – there’s enough trade for everyone to have a role to play. It’s not banks versus fintechs. I think, jointly, we can all help to move the market to e-documents.
Tanna: Ashley, you said something that was interesting – the documentation looks the same, everything is there. So what’s holding people back?
Skaanild: It comes back to the network. We have a lot of customers who want to transact but they can’t because of the way our legal agreement works. Everybody involved in the process – the exporter, the shipper, the agent, the buyer, the trader etc – needs to sign the legal agreement and be ready to conduct these trades. In today’s market, people are selling to wherever they can and we don’t necessarily have that buyer signed up. To try to address this, we’ve decided to specialise (initially) in terms of both sector and geography, focusing on the North Sea with crude oil and tanker ships. The idea is to start small, do a good job and then take that model and expand it elsewhere – again, a step-by-step approach.
Tatchell: It can also come down to a lack of client knowledge. I don’t think as an industry we are keeping our clients up to speed with developments. For example, many remain uncertain about exactly what the BPO does – and that’s hindering adoption. We need to educate clients and make sure they feel comfortable with new products and technology.
Skaanild: We find ourselves being the educators in this because we don’t see banks informing their internal teams to explain the benefits of BPO to their customers.
Bonacina: BPO isn’t as safe an instrument as an LC. It’s an alternative to open account but it costs much more than open account transactions. It’s a hybrid that has to be positioned to the right counterparties.
Skaanild: Most of the initial BPO transactions we did were conversions from LC to BPO. The trust is still there, the relationship is already there. We’re beginning now to see bank-assisted open account BPO transactions where the BPO serves as an instrument, enabling a bank to step in where they didn’t before to finance goods where a BPO is in existence.
Tanna: Is that for a specific type of transaction or a specific need? Or is it across the industry?
Skaanild: It’s a specific need. Essentially, it’s an extension of payment terms. That’s quite exciting for us. It’s a new area, it’s what BPO was designed to do – it wasn’t created to cannibalise LC business.
Snellman: Looking at how customer needs are evolving from a slightly different angle; digitisation isn’t only disrupting our processes, it’s disrupting trade itself. I’m based in Finland, and in 2015 Finland’s total exports declined by about 1%, while service exports rose by 15%. I believe, with the advent of new technology – think 3D printers, the internet of things, smart contracts – the share of trade that’s made up of physical goods is only going to decline. While customer needs in such a world aren’t going to be fundamentally different (there’s still risk mitigation to consider and a payment to be made, for instance), the processes we’ve been discussing are very much geared to serve the physical world. How is that going to be adopted in this new environment in which we’re exchanging IPO rights and transmitting data instead? Could it be that the blockchain is a perfect solution for this problem, which is likely to become ever-more prominent in the future?
Tatchell: I completely agree that the whole face of global trade and supply chains – other than perhaps in the raw materials sector, which you can’t replace with 3D printing – is going to change. Everything is going to become much more dematerialised because trade is becoming about intellectual property – physical goods may become locally sourced rather than traded cross-border.
Bonacina: I agree, but we also have to keep in mind a key sector that we are servicing: SMEs. There are some SMEs that still handwrite B/Ls and invoices. Trade is often more about these companies than big multinational businesses.
Shah: Banks must continue to put the client at the centre of decisions. This will ensure they know what the clients want and can be clear about how banks can help. That’s when banks can create very clear, valid propositions. The challenge is how to ensure banks and the various parties come together to invest time and money against already constrained resources.
Skaanild: Another challenge banks face is the sheer number of fintech companies out there. There’s us, Bolero, and a whole host of e-invoicing platforms and other types of platforms. Who do you back?
Bonacina: It’ll come down to the survival of the fittest. Many of the fintechs are probably destined to fail, but the best will be successful. I see the emergence of fintechs as more of an opportunity than a threat. There are a number of reasons for banks to partner with them – regulators are circling banks, while fintechs aren’t regulated at the moment, for example. But the main reason for banks to partner with them is that, while we don’t know where the exact path is for the future, something is boiling up, so we can’t afford to remain on the periphery. That’s why we must participate.
Tatchell: My job is to look to the future, and when I was appointed to this role as head of innovation, I was effectively told that my remit is to make sure that fintechs aren’t going to eat our lunch. The cleverest fintechs will be those that collaborate with banks because they recognise the value of what we have to offer. We should all be learning from each other.
Shah: Fundamentally, banks are trusted institutions. But banks can’t do everything and that’s where collaboration is important. The whole dynamic of the regulator is actually two-way. On one hand, they’re trying to open up the market with initiatives such as PSD2 and Open Banking, for example. On the other hand, there’s need for strong capitalisation and the emphasis on security through anti-money laundering. So banks are getting pulled both ways. Plus, the customer continues to seek support based on their changing needs. I think the question is how do you come to market quicker with solutions? It’s about building on your own strengths and partnering with others whose strengths you can leverage.
Zakai: The global regulatory landscape differs when it comes to attitudes towards fintech, and it seems there are certainly some geographies that are very encouraging of start-ups, fintechs and innovation, while others are still reeling from the 2008 crisis. Singapore is probably one of the most innovative, and has initiatives such as the regulatory sandbox where a fintech can set itself up and doesn’t have to apply for any permissions, licences and so on. Is that the spirit of innovation that you’d like to see more of here in Western Europe?
Tatchell: Yes, and I think the opportunity for banks to be able to participate in those sandbox activities alongside the fintechs is important as well.
Tanna: I actually think the UK regulatory authorities are the best in the world in terms of embracing fintech. The regulatory sandboxes we have already established are effective and we have established a really positive approach in terms of how they, we and the fintechs operate. The UK is a good role model for the rest of the world.
Bonacina: Certainly, The Bank of England is openly supporting and endorsing blockchain.
Zakai: And the UK government invests in things like funding circles, peer-to-peer lending.
Bonacina: BNY Mellon opened its London innovation centre at the end of 2015. We now have six in total across the globe. The level of innovation seen in Singapore certainly makes it a strong candidate for the location of future potential innovation centres.
Snellman: With regard to the regulatory environment in Finland, it might not be up there with Singapore or the UK yet, but it’s not far off. Traditionally, we have a very relaxed attitude towards banking innovation and we try not to restrict it too much. There can be internal restrictions, of course. But I do think European regulators are struggling to decide whether banks ought to be allowed to cooperate or not. And it’s this – at least in my country – that is holding us back far more than any other regulatory pressures when it comes to exploring new technology.
Skaanild: We’re a partner to a number of banks and we find them to be quite competitive. I’m unsure how willing they would be to work more closely with each other.
Tatchell: Yet that’s exactly what R3 is doing, for example – 50 of the biggest banks in the world are involved, working together on the blockchain concept. The attitude is very much that we can all do this together, and there are corporates joining as well.
Bonacina: There are some other good examples: SWIFT is a consortium, the Bankers Association for Finance and Trade (BAFT) is a consortium. We have open conversations, then it’s up to us, together with the regulators, to determine the best direction to go in.
Shah: SWIFT’s Global Payments Innovation Initiative (GPII), which aims to make cross-border payments more transparent, is also underway. I think that’s where the industry can really start moving, as collaboration comes more and more into play. I think regulators will start to consider this.
Tanna: There’s real effort going into blockchain development, and once we start seeing the actual applications, applications that we all feel comfortable with, I think things will start taking off.
Snellman: I think it will be eight-to-10 years before this happens. You need to build a huge network and everybody using that network must be ready to go.
Shah: Banks by nature are prudent. I think the best way to approach it is to have a range of specific, planned value offerings where you can see an immediate benefit. It might not be an enormous or scalable opportunity that revolutionises everything, but it’s the basis on which you start to build successes.
Zakai: Jussi, you’ve done a lot of research into payments. Why do you think fintech innovation is progressing more quickly in this sector than others?
Snellman: There are a few reasons. Payments data is extremely interesting. If you capture that data and see what’s going on, why those payments are made, to whom they’re directed, the extra details carried with the payment, you can really analyse the intricacies of the customer’s behaviour. There are a lot of things we can do with that data. There are a number of other technologies that can be utilised without having to bother with a network, and the big data angle is what makes payments extremely interesting.
Tanna: Big data is very important. We have a lot of information on big data, and we’re looking at how we can pass that information back to clients so they can begin to utilise it.
Snellman: Payments are also very attractive because of two important reasons. Firstly, the fact that they are done every day, by individuals and companies, both in good and bad times, makes them a reliable and resilient business, less prone to up- and downturns compared to other sectors. Secondly, as many start-ups are trying to solve a problem identified by their founders, based on their own experience, the fact that we are all making purchases, and thus payments, daily means that any potential areas for development in the retail payment area are easily exposed to entrepreneurs. On the other hand, areas such as trade finance are much more a “secret science”, of which only a strictly limited number of people have deeper experience and understanding, thus making the pool of people likely to identify lucrative new ideas much shallower.
Bonacina: This seems a good time to raise the topic of the convergence of trade and payments. In my own opinion, where banks are concerned, it never really diverged.
Tatchell: Cash and trade convergence goes in and out of fashion. Sometimes trade and cash get put together, then they get pulled apart and trade goes off into the investment bank.
Snellman: I agree, it changes over time. It also depends on the organisation.
Tatchell: To go back to whether fintech offers us the opportunity to actually make our business more efficient at a lower cost, if we can do that and harness that, trade, as a business, will become more attractive again. Fintech can be a facilitator to a new, brighter future for trade.
Bonacina: Yes, and the trick is to be realistic. Technology is there to help us, but we must cooperate. But, as we mentioned, we must take a step-by-step approach because it wouldn’t be realistic to imagine a future where everything can be done by machines automatically; smart contracts, no need for lawyers, no need for trusted counterparties, no need for a clearing hub, no central banks and so forth. That seems a bit too much.
Zakai: Thank you. Moving on, in times of sluggish global growth such as these, there tends to be less of a focus on investments in technology. Would you say that concurs with your experience or do you think that an environment where growth is quite slow is the ideal time to invest?
Tatchell: It should be the ideal time but generally it’s not. It’s always going to be that in slow times, when everybody scrutinises their returns and their profitability more closely, businesses end up cutting resources rather than investing in technology. In the UK, we’ve also got structural reform coming at us like a train and this is where, certainly from our perspective, many of our available resources are being directed because we’ve got to do it, we have no choice.
Tanna: Similar to the challenger bank concept, it provides the opportunity to start from almost a blank slate.
Shah: As a bank, we continue to invest. It is the case, however, that through lean times, making investments can become more difficult.
Skaanild: From a corporate perspective we’re seeing a bit of both. The way to leverage technology is to invest in connecting your ERP system to the documentation production platform that connects to the banking world, which connects right down the chain to the buyer, allowing this seamless flow of data without any human interaction. Some are investing in that with us at the moment. Granted, you could argue it’s not a great time for them to be investing, but they are nevertheless investing for the future.
Zakai: We’re coming to the end of the discussion. To finish, Shona, you mentioned earlier that your job is to make sure that fintechs don’t eat your lunch. Do you think that the strategy should in fact be to invite some of these new chefs to the table, make a much bigger meal and all enjoy it together?
Tatchell: Absolutely, and we’ve got the benefit of having Accelerators that we run globally, which gives us a great opportunity to see the start-ups that are coming through with amazing ideas. We don’t just sit and watch them, we dive in. We roll up our sleeves and invite them to understand how a bank works, including what our challenges are in the real world. But we also help them to shape their offering so that the benefit they get from working with us is as great as the benefit we get from working with them. I think collaboration is absolutely the way forward. I’d also like to see corporates playing a bigger part in all of that as well, and maybe invite them into the sandbox with all of us.
Tanna: The reaction when fintech really got going – when bitcoin and the distributed ledger suddenly became buzz words – was one of uncertainty, and how we can stop them “taking our lunch”. But actually it’s not a question of how to stop them, it’s how we work with them, how we collaborate and make sure they understand where we’re coming from and that we understand exactly where they’re going. They’re going more quickly than we’re accustomed to, but we have to take that step. Ashley talked about building things slowly and taking time. We have time, there’s no need to rush; build it carefully and get it right.
Zakai: It’s been an interesting and fascinating debate. Thank you to all.
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.
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