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Talking tomorrow’s trade finance with SWIFT: Blurring the lines

TXF sat down with industry experts to look at how changes in corporate trade and supply chain and digitisation are blurring the lines between cash management and financing international trade sustainably. This wide-ranging discussion was hosted by SWIFT in London.

Participants:

Bridget Cosgrave, senior product manager trade & supply chain, SWIFT

Huny Garg, head of trade & supply chain, SWIFT

Anne-Claire Gorge, global head of product management & innovation, trade services and finance, Societe Generale

Peadar Mac Canna, MD EMEA trade co-head, Citi

Vinay Mendonca, MD & global head product, propositions & structuring, trade and receivables finance, HSBC

Nick Pachnev, chief technology officer, GlobalTrade Corporation

Sameer Sehgal, CEO, Traydstream

 

Katharine Morton, head of trade, treasury & risk, TXF [moderator] 


TXF: How are corporate supply chains being affected by issues such as trade wars?

Vinay Mendonca: All the attention is on the US/China trade corridor, which is very significant and material. But in the undertone there are also some good news events that are not talked about that much. They are going to drive a change in some of the more strategic corridors over time. Europe and Japan have signed the Economic Partnership Agreement for example and wine exports into Japan have been growing significantly as duties have been slashed. Trade on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has been growing which is about 70 markets. So, for example, Vietnamese exports into Canada are up significantly.

With the trade wars there is definitely uncertainty that nobody likes, but larger sophisticated clients are beginning to diversify their supply chains and there are some winners and losers. But having said that, it is not that easy just to pick up and change your supply chain and distributions that quickly. With a 10% tariff scenario we know clients may look at different ways of absorbing that through the price points, passing it on to clients or holding it within their margins. When it comes to 25% tariffs, it’s too early to assess.  

But the large trend is some clients want to manufacture and source closer to their distribution markets. And the pickup in intra-regional trade is truly happening. Vietnam is also a big winner in this. Also because a lot of these tariffs are going to have to be absorbed in the margins, corporates want to make sure there is no stone left unturned in terms of taking out costs. Trade processes are still very manual, archaic and leave room for a lot of efficiency to be unlocked and that ties into the digitisation of trade. That's not so much been in terms of trade finance but trade in itself where clients will push to try and see how they could get more efficient. Those are just some of the macro trends that we're seeing.

 

TXF: You're seeing intra-regional trade in Asia rising, but is there some diversification away from China?

Vinay Mendonca: When you say intra-region trade, there's also domestic traders picking to the point where people are sourcing near to their markets. China is still going to have significant growth power behind it because its own consumer demand is so high so we're not necessarily going to see a material slowdown. But definitely the beneficiary is in ASEAN intra-regional trade. Markets like Japan will benefit and clients who have traded typically with one counterparty over generations are now realising that's no longer an option – you've got to have diversified supply chains.

  

TXF: Peadar are you seeing good news as well in terms of the current global trade situation?

Peadar Mac Canna: It is mixed. The shock of protectionism that really hit last year has created a huge amount of uncertainty. On the CapEx side investment is slowing down in certain developed economies, while for companies that have been struggling with growth for a number of years this is just another risk on the horizon. We've seen a big shift to balance growth with optimising returns and if you look at some of the performance in terms of share prices we’ve seen strong correlation with focus on working capital metrics and the focus on return on capital employed.

Touching on Brexit, as a more tactical strategy, we're seeing a bit more stockpiling which has created some increased demand and financing needs alongside.


TXF: Are there any particular countries that are specifically seeing stockpiling –China, the UK?

Peadar Mac Canna: It's more dependent on the supply chain. For example in the auto industry, Brexit is out there and you saw a big impact registered in the  PMI [Purchasing Managers' Index] certainly in [the first quarter 2019], but then Brexit didn't happen, yet. We need to consider what then happens with inventory. Is it consumed or not? We've seen average Days Sales Outstanding [DSOs] kick out a little bit and then come back in a bit over the past 12 months. That's quite interesting in terms of risk appetite. Are companies looking to bring in their overall risk profile on the sales side given the volatility or extend terms to grow sales?

 

TXF: And that affects the entire supply chain when DSO goes out.

Peadar Mac Canna: Absolutely in terms of cash availability, credit risk and costs of holding inventory.

 

TXF: Are you witnessing shifts in supply chains at Societe Generale?

 Anne-Claire Gorge: What we can confirm is the fact that clients are looking at more regional trade to secure their supply chains. But the good news regarding the trade war between the US and China is that China needs to trade in any case! It needs to find new partners in Europe and Africa for example, which are locations where Societe Generale is strong, so it is good news for us. Another big negative consequence of trade wars is also on sanctions and embargoes. The sudden changes and the uncertainty have a great effect on our business.

Back to the question on shifts in supply chains, it is interesting to notice that our clients are not only looking at more efficiency in trade finance but also in the way they trade together and the way they ship their goods.

We can observe the development of B2B marketplaces, which are a new way of buying digitally. Those marketplaces are sometimes really specialised and really adapted to some sectors, enabling companies to significantly digitise their trade processes. In parallel, companies are looking at how to optimise goods shipment. There is a rapid change in the physical supply chain space. Freight forwarders, shipping lines and a significant number of start-ups operate e-business platforms offering new solutions to optimise the cost and the lifecycle of the transport, and consolidating the view on where the goods are, how to track them. For high value products, it is even possible to check the transport conditions thanks to connected objects: was my luxury car jolted, did my frozen shrimps remain under the right temperature throughout the journey?

The trade finance space is the third space where new solutions are emerging. It's moving fast but it's not the only one and that's good news as well because the future is to connect those three fields: trade, logistics, and trade finance.

 

TXF: Are you seeing the same sorts of flows in your business today?

Nick Pachnev: Exactly. From a technology point of view also if you have an increased demand for the tools to manage the risk, to manage this uncertainty. It might not be good for corporates but it is good for technology businesses and for those providers who can create those tools quickly and give them to the corporate to manage risk. In our case it’s improved visibility into the trade finance part of the business providing better view of the guarantee portfolio, better view of the export LC part of the portfolio, to become more agile and be able to quickly react to the changing market. We are seeing that a lot in our business right now and demand for that technology is growing. Banks and fintechs that can provide those tools and who can react quickly will certainly see better demand for their technology and better stickiness to the client in terms of how the clients work with the banks.

 

TXF: Are you seeing similar things at Traydstream?

Sameer Sehgal: Absolutely, this is one of the most exciting periods in the trade finance industry in the past few decades. The ensuing uncertainty, is forcing everybody to rethink what trade finance as an industry should be as opposed to what we currently have.

As Peadar mentioned, protectionism and nationalism continues to move contrary to globalisation and it's forcing a new global order and new trade corridors because some of the bigger conventional markets and flows are getting blocked out. It's amazing today that some companies are as big as country GDPs and from that perspective when there is a block to the free flow of goods, it has a huge impact on the world order.

The other thing that we're continuing to see is a huge convergence where different industries are coming together, thanks to technology. The best analogy one can give is about the mobile/smartphone where several industries converged to bring all that power in one device. We're on the cusp of witnessing it in banking, insurance, logistics, supply chain as they all converge and will as industries probably look very different in the next three to five years.

The third observation, probably a sobering one, is that the last financial downturn was almost 10 years ago in 2008/9. In some forms, it feels like a lost decade as banking has been soul searching ever since. However, certain markets are already fearing that another downturn in the next six to nine months is round the corner, and that will force a lot more reflection on the efficiency solutions Peadar mentioned.

 

TXF: How is SWIFT looking at these flows and how are trade wars, etc, manifesting in your view?

Huny Garg: Payment volumes have been growing over the past two years despite the introduction of new trade tariffs. Whether it is high volume corridors, such as China-US, or faster-growing corridors, such as China-Africa, it has been growing. China-Africa trade grew 15-20% last year, depending upon whether you are looking at imports or exports. There is also growth in other regions despite the tensions in some corridors, leading to traders finding new routes, new supply chains and new ways of procuring materials.

 

TXF: We've been talking a bit about working capital management, companies the size of countries and DSOs coming out and in. Let's delve a bit more into supply chain finance (SCF) and payments. Where does SCF end and payments start from your perspective?

Vinay Mendonca: From a SCF perspective, given the current environment, one of the big challenges is that SMEs are the largest pool of suppliers in some of these emerging markets. The need for competitive finance for them has always been an issue. That only gets accentuated when they need to be even more competitive to be able to absorb tariffs. Sustainable SCF is all about making financing available to these suppliers at a competitive price that they can really get extended terms competitively. But the real challenge is the ability to grant credit to them that even starts with being able to get KYC on suppliers, because especially when they're SMEs the costs involved and the way in which credit is traditionally done has got to change.

Fintechs rely more on the online flow of data and real time visibility of trade data rather than pouring over balance sheets and profit and loss statements in the way bankers traditionally did. We need to be able to get financing to these SMEs in a very different way to address that issue. That is going to be key to support these changing supply chains to keep them competitive.

To the point where supply chain finance and payments come together. I'll actually take a step back. When we talk to clients, the more sophisticated ones don't even look at it that way. They look at it as 'procure-to-pay' and 'order-to-cash'. Making payments is just one step and accessing SCF is another step within that.

Increasingly they don't want to have to have a different process for financing and for payments. Where they have partners that they could collaborate with to manage their procure-to-pay or order-to-cash that's where they're going and then they're saying 'freight logistics providers, banks, insurers you can all just access those aggregated platforms'. That's the level at which they'd want to go forward and that's where a lot of these inefficiencies we've talked about can come out as well.

 

TXF: From the perspective of one of the biggest SCF banks, financing international trade isn't really specifically trade finance alone. How are your SCF programmes set up for cross border trade?

Peadar Mac Canna: Just to touch back on one of Sameer's points, there's the disruptions of supply chains and tariffs and trade wars, but also, possibly even bigger is the actual disruption at an industry level which is causing changes and shifts in supply chains. Just taking auto and thinking about what it looked like 15 years ago and today in terms of electric vehicles, etc, and how that's affecting operating systems in terms of design and then moving into providing platforms for ride sharing or rentals.

All of a sudden their supply chain, their commercial terms, how they get paid, the owners of assets are actually changing the supply chain. Those are trends that we're seeing with our clients across different industries. Some of them are being more heavily disrupted than others, metals and mining is still in the nascent stages for example but certainly auto, music, entertainment, hotels, travel are all heavily disrupted.

And also in the business to business or business to consumer flows:  they are moving from a traditional settlement process to a world of e-commerce and generating different settlements flows. A retailer used to have a consumer visit their store and pay cash into the till in local currency, now how much is online, offshore or if instore is through cards?

Just another observation and coming back to Huny’s point in terms of the Africa/China [trade corridor] you could also look at the increase in the use of renmimbi. It's small, but it's growing and over the next 10 years what's that going to look like with those growing trade partnerships between China, Russia, India?

 

TXF: Given all the changes in supply chains, are banks going to become invisible? Is it all going to be so disrupted in payments that in 10 years’ time there won't be any banks around this table? Let's start with payments and come on to finance.

Anne-Claire Gorge: Regarding payments, the challenge for banks is to make sure we move to open banking so that we can be the ones who can provide efficient payment solutions to e-commerce platforms, to B2B marketplaces and every trade which will go digital. Either we fully achieve that, and banks not only do what regulators ask them to do, or new players will emerge as we can see already in some parts of the world, for example in China. To achieve that in an efficient manner we absolutely need to find a way to standardise those APIs to avoid our clients and all those e-commerce platforms having to develop as many APIs as banks. There is a real collaboration challenge.

 

TXF: And on the financing side. Invisible banks?

Anne-Claire Gorge: On the financing side there are at least two aspects: risk and funding. Someone has to take the risk. This is what banks are good at, it's in our DNA. As of today, even if fintechs can provide good technology platforms and good solutions, at the end of the day someone has to take the risk. Banks are taking it. Then the challenge for banks is to provide this as a front line to our clients in order not be commoditised. We are underway and working hard on that but it's not a given. A key success factor is to offer full range solutions to our clients including, but not limited to, trade finance and to simplify client access to those solutions.


Huny Garg: Banks are not invisible but data is increasingly important for financing. One of the key enablers in risk management and decision making in a supply chain or trade context is the availability of data. Technology is now blurring the lines between payments and trade finance funding because, in payments, you're moving money from point A to point B. In trade, if you know who owes what to whom and by when, and you know when the invoice is due, you can fund it.

Many supply chain platforms started out as e-invoicing platforms and then extended their proposition into the banking world, leading to commoditisation of funding, to some extent because data is with them. Banks realise this and want to leverage the flow of data between corporate supply chains.

In our experience, when we think deeper about the roadmap for SWIFT gpi (global payments innovation), it could have just been about payments up until now, but corporates want more, they envisage a procure to pay or order to cash cycle. They want to know why a payment is coming in, what the underlying invoice for it is, and if they can use the payment information for reconciliation. And, if they can share this information with banks, these extra data points can be used to finance the receivable or payable by the bank. The data can go from being payment data to a trade finance transaction, the boundaries are less obvious.


Sameer Sehgal: I agree. All these boundaries are blurring, for example between cash management and trade, and I would go even further to say businesses are merging and converging because of data availability and technology. The terms 'cash management' and 'trade' themselves were created by banks since trade was seen as more complex owing to the transactional rules and data to be processed. However, if all the data was intelligently gleaned and available and if you had an ability to process it really quickly, trade could go near straight through processing as well. I grew up in India where we used to pay each other with cheques, now people just wire each other or most parts of the world.

Trade is getting there exponentially fast. The only reason trade existed as a separate business was that the knowledge sat in somebody's head. If that knowledge is universally and industrially available, there's no reason why trade can't be processed instantaneously.

The same is true about the differentiation between corporates and banks. Today we have the conventional  four box model – importer, exporter, importer’s bank, exporter’s bank. Technology allows solutions, where those boxes could converge because if the data is available in real time within the four parties, in a safe and secure manner, you can actually make quick decisions, and that's going to fundamentally change the way transactional settlements happen.

On a predictive level then, just like Google AI tells us about our meetings/ journeys, etc, banking has to get there. Rather than being reactive and meet a clients expressed demand, based on the past, and obviously other enabling factors, we should know from the supply chain data, what the client needs. You should be able to serve the client proactively, rather than reactively.


Bridget Cosgrave: If we look at the physical movements of goods, there's a lot of vertical integration in players in the maritime sector. The sector is under severe pressure due to overcapacity on the vessel side and environmental regulation that's going to change their cost base, particularly fuel, and so they are desperately seeking to integrate vertically into freight forwarding, customs broking. And they are exploring the financing of trade.

Given that they know the customers, they know the country risk and they have a deep understanding of all the operational aspects, and certain of them have the balance sheet that they could be using alternatively, they could compete with banks.

Going back to data, in trade finance, what was it all about? It was about distance which impacted country risk and the time that it took for the goods to get from point A to point B. When the trade flow data is available real-time the risk assessment changes and the margin opportunity from that time element is gone. Given the time immediacy of the data, risk assessment and arbitrage opportunities are fundamentally altered.

 

TXF: It often used to be that the funding could take longer than the trade, now it's the opposite?

Nick Pachnev: Building on the data point, it is also important to look at which data you're looking at. Banks still continue to look at the data within the confines of a single bank. That's where SWIFT with its global view of the bank business can provide help. If you compare it to the some of the cloud or some of the online payments systems, SWIFT is looking across the industries and markets and at a much bigger pool of data that it can build on and use to analyse the flows and the benefits they can provide where the banks continue to be siloed. Using SWIFT as the model or as the platform to get this global data and trying to use it for common benefit would be very useful in banking.

 

TXF: How is the convergence of data and information going to help with creating sustainability along supply chains?

Vinay Mendonca: This is something that's already happening. For example, in SCF, in order to align with the UN sustainable development goals, large anchor corporate clients buying from different suppliers, are setting up ways in which to index or rate their suppliers on different measures. And typically they would link financing or the access to financing through SCF programmes based on where they stand on that. They can also incentivise and drive towards a low carbon economy, better labour standards, safety, etc. Some of the suppliers, where they are delivering green or renewables energy business, turbines etc, can get straightforward green financing.

The future of this is far more deep and rich. With blockchain technologies coupled with the ability to tag some of these ingredients you can go back to the provenance of goods, like precious stones. That's when the next measure of sustainability will kick in. The ability to track that will create green supply chains end-to-end and you as a banker, regulator, customer will be comfortable from where they've been sourced and produced as well.

 

Anne-Claire Gorge: As of today, banks have a very limited view as to what the clients are doing when they trade together. We arrive at one moment in the process when clients need risk mitigation, finance, or payment, and then we leave the client.

The good thing about distributed ledger technology is that it brings together many different players coming from different spheres: companies, transporters, insurers, inspectors, banks, even if they don’t trust each other and don’t have the same interests. Once you manage data transparency correctly, and thanks to the distributed architecture, you can solve the lack of trust between all those players. Then the blockchain platforms enables disclosure of a certain amount of data to those entitled to access it: the origin of goods, how they were transported, what is in the container or in the truck. For banks, it would ensure that we finance what we want to and not what we don't want to, for compliance reasons or due to our ESG policy.

 

Peadar Mac Canna: Ultimately in terms of sustainability you're trying to use data to understand future risks or differentiate in terms of the price that you might charge for that credit and why you would charge a different rate for that credit because someone has met those sustainability metrics. The other very important side is the inclusion side, particularly in supply chain where there’s an effort to bring much smaller suppliers into the system. We will need to collaborate together and with fintechs to provide cost efficient solutions as we work on meeting that $1.5 trillion of unmet demand.

 

Anne-Claire Gorge: There is a big issue regarding KYC for small suppliers in SCF, and for SMEs in general. That's where the SWIFT KYC Registry is really attractive. If in the future, thanks to the fact SWIFT is not there to make money with KYC, it becomes the place where we can easily get access to KYC elements for a huge number of companies including SMEs, then the cost of KYC could go down dramatically. It would be positive for sustainability and inclusion as it would make SME financing easier.

 

Peadar Mac Canna: I agree it is such an exciting time. It really is. But these changes need everyone in the ecosystem – the banks, clients, fintechs, regulators to be involved.

 

Huny Garg: With availability of data they can trust, banks can focus on building client relationships rather than just collecting information. So often we hear bankers talk about their sales team spending more time on internal processes rather than clients. Not surprisingly, one of the key reasons for the global trade finance gap is lack of KYC data. Solutions like the KYC Registry can go a long way to fulfilling the information gap and improve the process. It is still early days because early adopters will be large corporates – but in 10 years’ time, it will be interesting to see what we have achieved, but is a massive opportunity.  

 

Vinay Mendonca: Just from the point of sustainability and inclusion of suppliers being able to get SMEs financing. We've talked about SCF for that. But what we forget is Letters of Credit (LCs) are one of the biggest ways for SME suppliers in emerging markets to get financing. It is a key instrument for risk mitigation, and trust, but is also the way in which a lot of small suppliers can access financing at competitive rates. We shouldn't forget that.

 

TXF: You've anticipated my next question – what are the trends for technology and corporate use of documentary trade?

Vinay Mendonca: The process is painful, let's not duck that. It's highly inefficient, it's cumbersome, paper based, etc. But despite that, the core need for risk mitigation and the need for financing has not gone away. Open account is growing faster than LCs. But risk mitigation is still very relevant. What you do see is open account trade but backed with trade credit insurance. Because LCs have been such a cumbersome and painful process, clients have found it more cost effective to manage open account backed with trade credit insurance. If we could just make LCs a little less painful, more digitised. The need for risk mitigation has not disappeared at all. Yes, the world has become more globalised and counterparties know each other and there's more data there. But intrinsically they do still want to cover credit risk especially in times of tariffs, etc. We see that as a reminder about how quickly we should get the LC into the new generation to keep it relevant.

 

Anne-Claire Gorge: Definitely, the LC is a fantastic instrument, an unrivalled solution to mitigate risks and finance. But the bottleneck regarding electronic LCs is the question of electronic documents. While some fintechs have been working for years on solutions to enable electronic issuance of documents, we still find clients who really want to move to it but simply can't get the e-bills of lading they need.

 

TXF: What’s SWIFT seeing on documentary trade?

Huny Garg: The trends are clear, last year was the seventh year of decline in LC volumes globally (2.4% for LC issuance over previous year). With the exception of South Asia, most markets saw a decline. The good news is that it was second year of double digit growth for values (10.2% growth over previous year). The message from the global trade community is that they don't necessarily see it as the way forward. 

 On the payment side, we are now able to deliver much more speed, transparency and rich data through gpi. Naturally we are thinking about whether it would also makes sense for trade. SWIFT gpi is built on three pillars: one is the SLA (Service Level Agreement) where banks actually agree to specific processing guarantees, to tackle differing bank service levels, one of the biggest pain points in LCs in addition to the process. Under gpi all actors agree to play by certain rules.

 So can we do an SLA for trade? Can we use a tracker to bring that visibility to trade? These are the key questions. We are clear that trade needs to be more transparent and we look forward to working with banks to improve the  corporate experience with LCs and making it more cost-effective for banks to process them.

 

Sameer Sehgal: SWIFT has a pivotal role as it is connected to all the banks and is the communication backbone of the financial industry. A big challenge in front of SWIFT at the moment  is how that connection should be extended to the corporate sector. That’s when the power of SWIFT would really be unleashed. The big problem with trade classically has been its unstructured and non-standardised nature. No two invoices are the same, bills of lading vary between companies, etc. At the moment, the only structure is in SWIFT, because, at least in the banking sector, messages are structured, everybody understands them the same way. If that could be potentially expanded into the corporate sector, whether it be through MT798, Alliance Lite or Finact that would be a step change in the industry. 

 

TXF: How are you going to be developing your trade offering for corporates after TSU goes [in December 2020]?

Huny Garg:  From a corporate perspective, there are corridors where we usually see higher open account trade but for some LCs still play an important role. For example, approximately 70% of LC volumes are in Asia. Corporates in Asia demand improved processes to run their business on LCs, especially when they are dealing with multiple banks. Our digital trade channel has seen growth of 50- 60% every year for the last five years. The corporate demand for SWIFT connectivity has been growing consistently which validates the proposition. We want to put more energy and focus on developing it and we could see a stronger growth story in the next five years. 

 We have over 2,000 corporates connected to SWIFT as of today and some of these are the largest corporates in the world. They have a connection to SWIFT built out of their ERP [Enterprise Resource Planning] systems. That's a huge network of corporates which could be harnessed for trade-plus purposes.

 

Peadar Mac Canna:  SWIFT has a huge role in terms of trying to bring some standardisation. But having said that, banks and the trade ecosystem need to manage efficiently unstructured data because in global trade you're going to always have unstructured data and different standards. And the more transparency and trust that we can get on the underlying data, the more credit and risk appetite there will be, the more investors will come into trade as an asset class. This increased supply drives cost of credit down which will increase inclusion and it will bring asset classes that people are willing to invest in at a competitive rate that’s much more viable. 

For instance, financing inventory for African distributors by knowing where goods are at any time with IoT (internet of things) brings more visibility. We still need to build for efficiency. Blockchain is not the only solution, but it will help with multi-layered transactions.

How to handle unstructured documents in an efficient way is critical. For instance, Optical Character Recognition (OCR) is important for our ability to handle information from clients efficiently. Super if they want to send it via API, great if they want to deliver it via their ERP or host-to-host or if they’re using our proprietary platform. But guess what, we sometimes still get a big stack of paper with wax seals on it! It’s going to take time to change. On top of that is driving the efficiency on regulation, KYC, sanctions screening, removing false positives and trying to be more risk-based from that perspective. That's critical in terms of digitising the core to be able to handle the mixed channels that our clients are going to want to interact with and their clients and their ecosystems. 

 

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