Uncertainty is turning up the heat on international trade, agreed speakers and delegates at the ICC Banking Commission’s 2018 Annual Meeting in Miami. Flow reports on how the current era of protectionism is galvanising the industry to find new ways of keeping trade moving
“We have to focus on surviving in an environment where the new normal is one of uncertainty,” opened Daniel Schmand, Global Head of Trade Finance at Deutsche Bank, and International Chamber of Commerce (ICC) Banking Commission Chairman, at its flagship Annual Meeting on 5 April in Miami, Florida. It was a statement that set the tone for the rest of the event.
Miami offered the perfect backdrop to such high-level trade discussions. For while the hustle and bustle outside the American Airlines Arena the Tuesday before the start of the Annual Meeting confirmed basketball tickets to the Miami Heat as the fastest-moving goods in town, it is very much international trade that oils the wheels of Miami’s economy.
The Florida International Bankers Association (FIBA), ICC’s partners for the event this year, reports that over US$142.8bn of merchandise trade moved through Miami’s air- and sea-ports in 2016 – much coming from, or going to, Latin America. Indeed, so much so that David Schwartz, President of FIBA, referred to Miami as “the capital of Latin America”, while adding “we also speak English”. But Miami’s influence is also broader – it counts China, Japan and Germany within its top trading partners.
As the opening speeches highlighted, however, the outlook for trade is not quite as sunny as the Floridian weather. Financial institutions face a triple threat of new forces: geopolitical tensions, post-crisis regulations and competition from new market players. Fortunately, the banking industry is far from a fair-weather one and its resilience has been evident on many occasions over the past few decades. It always survives, and often finds a way to thrive. As such, the over-arching message from Miami was positive: all challenges can be overcome via innovation, by embracing new technology and data, and by fostering collaboration between all parties in the trade ecosystem.
Taking the temperature of global trade
One of the first day’s highlights was a panel discussion, moderated by GTR’s Shannon Manders (read her review here), which noted the very real threat posed by prevailing protectionist and anti-trade measures. No surprise given that, merely two days before, the US published its proposed list of 1,333 Chinese-made goods set for US$50bn worth of tariffs, with China responding on the eve of the Annual Meeting with news that 106 extra US commodities could soon face a 25% tariff.
“We are in the middle of a ‘cold war’ where trade is used as a weapon – exerted through protectionism and the sanctions regimes imposed globally,” stressed Schmand. “This centres on rhetoric and domestic politics, and has little regard for the downside impact on international trade.”
Indeed, OECD analysis of a hypothetical scenario in which Europe, the US and China raised trade costs across the board by 10 percentage points showed a 1.4% fall in world GDP and 6% decline in global trade.
“The biggest losers of protectionism are always those that impose the barriers to trade,” added Dominic Broom, Global Head of Trade Business Development at BNY Mellon. Schmand agreed, highlighting that US protectionist measures would likely harm its own economy more than any other. He cited the fact that German foreign direct investment is at its highest-ever level, with the only decline being in the value heading to North America. Uncertainty about a potential escalation in the “war”, he re-iterated, is the biggest threat to global trade and investment. The panel noted that China, the biggest holder of US treasuries, has a joker in its hand in these negotiations.
Despite fiery rhetoric from both sides, the wheels of administration are turning slowly: The White House has opened a public consultation on the tariff proposals, with a public hearing set for 15 May, and further comments accepted until 22 May. Another dark cloud, meanwhile, is the potential US withdrawal from NAFTA – though sentiment seemed to be more positive on the potential outcome there.
With the panel agreeing that there is a “serious misconception” at both governmental and public level concerning the putative damaging impact of trade, much burden will fall on the ICC to continue to promote the benefits of free trade and globalisation.
For now, regionalisation, rather than globalisation, may offer a way forward. Patricia Gomes, Head of Trade and Receivables Finance, North America, at HSBC referenced the bank’s Navigator survey, which gathered opinion from 6,000 business across 25 countries, and indicates that most are now trying to keep their trading relationships closer to home. Indeed, 74% of companies in Europe and Asia-Pacific see their ‘home’ region as the most important to their growth today.
Ernesto Revilla, Head of LATAM Economics at Citi, said that a boost to intra-regional trade may be the one silver lining for Latin America. He has already seen indications of Mexico – a major buyer of agricultural products from the US – shifting some of its demand to Argentina and Brazil. Mexico, along with Peru and Chile, is also a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – the successor to the TPP which lost the US in January 2017 – which connects the Americas with Australasia. The UK may, post-Brexit, join the party. All good news for the region’s trade outlook, if not for US farmers.
Indeed, Revilla demonstrated that Latin American growth is generally healthy and that inflation levels are converging between many countries. Yet, as with elsewhere, protectionist sentiment is alarming and major national elections this year are likely to bring a number of anti-establishment winners, and market volatility.
A more strategic view of trade
Trade may be hampered by tariffs, but it us underpinned by finance. And no trade finance conference worthy of its name is complete without a discussion about the trade finance gap – estimated by the ADB to be at $1.5trn.
Dominic Broom – previewing results from the ICC Banking Commission’s Global Survey, due to be released in May – explained the stark landscape where just over 50% of trade finance rejections are due to risk issues. Compliance remains a perennial headache, while the Survey showed a marked increase in the impact of capital constraints (highlighted by 64% of respondents as a key barrier this year, as opposed to 11% last year). This environment, Broom said, spelt a significant opportunity for newer market entrants – something that should be embraced by all if the growth of world trade is to be preserved.
Alexander Malaket, Executive Committee Deputy Head of the ICC Banking Commission agreed, adding that there has been a movement towards a “more strategic perspective on trade, from one where we look at a buyer and seller in a linear sense, to a more sophisticated approach where banks look at supply chains more broadly, and consider how these can be financed holistically”. Certainly financing the “long-tail” of the supply chain, and the SMEs this covers, has become a much bigger focus for the industry. The Survey results confirmed the increased focus of supply chain finance (SCF) – with 30% of respondents confirming activity in the payables finance space alone.
Payables finance really took off around the financial crisis, explained Deutsche Bank’s Jonathan Richman, who heads up SCF for the bank in the Americas, in a following panel. Naturally, this was when the corporate need for liquidity was it its highest. “The drivers of growth in the market have evolved rapidly,” he explained, “with a shift to a focus on providing liquidity for suppliers, followed by a focus on working capital metrics and better balance sheet management to, more recently, stability and competitiveness of supply chains. Now we are seeing significant interest in SCF on the sell-side and as a way of driving revenue growth.”
Disintermediation of banks in SCF was a hotly-debated topic on the panel. The corporate view, provided by Doug Scoch, VP of Captive Business at Siemens, held much weight here. He suggested “little interest” in exactly where the finance came from, as long as the funding was diversified – in terms of providers and geographies – so as not to throw additional geo-political risks into the overall SCF programme. That said, he affirmed that “banks will continue to be the leaders in this space”, although they need to integrate larger amounts of transparency and real-time information, in order to allow information sharing and better adaption of programmes.
“It’s a growing market with a number of players,” agreed Richman, “although many will come and go. We need to know where we add value as originators and structurers, with the ability to be able to stitch elements together in terms of technology functionality and bringing the capital markets into play.”
Given the fact that SCF is still an emerging product, with many players having limited precedent and experience, accounting treatment is extremely important. This area, agreed the panel, needs work. At this stage, many attendees reached for their copies of Deutsche Bank’s Payables Finance guide – which covers this issue in detail, and was one of the best-read documents at the Annual Meeting.
New kids on the block, but more maturity required
Digitalisation has often been considered one of the antidotes to the trade finance gap, and has been a key shaper of the SCF market.
“There is no doubt that the digitalisation of trade finance is inevitable, but the ICC Global Survey shows that this process isn’t moving as fast as the headlines would suggest,” said Mark Evans, Managing Director of Transaction Banking at ANZ.
Evans expressed surprise that, given last year 40% of respondents to the Global Survey said digitalisation was a priority area, as many as 66% this year admitted to having only just started to implement technology solutions or planning to do so in the next few years. Worryingly, 7% asserted it was not even on the agenda. Evans stressed that documentary transactions – which are the biggest drain in terms of processing and inefficiency – was the most ripe area for digitalisation.
The “new kids on the block” fintech panel delved into some of the key initiatives shaping the industry, including the we.trade blockchain consortium (backed by Deutsche Bank), the Marco Polo initiative – consisting of a of a group of banks, TradeIX and R3 piloting a trade finance solution leveraging blockchain – Maersk and IBM’s joint venture applying blockchain to digitise supply chains, and Evergreen teaming up with Bolero to introduce paperless bills of lading and dispatch documentation.
Faced an array of audience questions on the hype surrounding blockchain, another panel devoted to the technology affirmed that it has the potential to shorten trade processing times from weeks to mere hours. Such a change would be transformational.
Yet, there remain challenges to scalability. Srinivasen Sriram, CEO of Skuchain – which conducted a letter of credit utilising blockchain alongside Wells Fargo in October 2016 – accepted that the offering wasn’t a “forklift upgrade” for banks. The right approach, he believes, is instead to partner with existing vendors, integrating such solutions as an add-on to broader, more holistic trade finance offerings (something Skuchain is now doing).
Daniel Schmand had made it clear earlier in the conference that adaptation of rules and regulations to allow for digital innovation would be required, as well as standards to allow connectivity and interoperability between systems.
David Hennah, Global Head of Trade & Supply Chain Finance Products at Finastra, seconded this opinion: “Blockchain will not succeed without digitalisation, digitalisation will not be possible without interoperability, and interoperability can only happen with common rules and common standards.”
Hennah referenced plans by the Hong Kong Monetary Authority and the Monetary Authority of Singapore to link trade finance platforms they are developing with blockchain technology as a move in the right direction, although he stressed there were many challenges to doing this successfully.
While numerous speakers relayed the immense challenges in moving away from paper, there was also little doubt that digital technologies will play a key role in facing present and future challenges in the trade finance industry – from tackling trade-based money laundering and helping with KYC practices (with machine learning or AI a big area of interest and investment) to bridging the trade finance gap. There was much discussion on the best model for collaboration, with the idea of fintechs building on top of bank platforms – leveraging banks’ infrastructure, experience and scale – well received by most.
The “new kids on the block” referenced a slightly more mature peer in their closing remarks, citing Bill Gates, who once said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” The key take-away being: while the pace may be slow, banks must not rest on their laurels and embrace change.
The much-maligned Bank Payment Obligation (BPO) is often criticised with respect to the speed of change. In response, the ICC Banking Commission announced the launch of its BPO Working Group in order to “re-energise the instrument”, with a key aim being to include both buyers and sellers within the Uniform Rules for Bank Payment Obligations (URBPO). The Commission stopped short of promising a draft of the rules at the Technical Meeting in Tbilisi, on 15 October, although clearly that is the aim. It also didn’t rule out a name change for the BPO given the new focus on both buyers and sellers.
Facing down threats
Technology does not come without risks, however, as David Watson, Head of Cash Management Americas and Global Head of Digital Products at Deutsche Bank, outlined in a cybersecurity panel. He stressed that cybersecurity should not just be considered an IT problem: “As a business leader, it’s imperative that you work with your chief information security officer to understand the cyber-risks associated with products and clients in order to best service them. I speak to my clients about this day-in day-out, and it’s an integral part of their expectation around the services we provide to them, so good practice has commercial results as well as security ones.”
Practically, there was much talk about the importance of a cybersecurity “playbook” – detailing pre-decided incident response processes to a range of scenarios – which should be invested in and tested continuously. The evolution of ransomware – which can create a prolonged denial of service and data –was highlighted as a particular emerging threat. The question of whether or not to pay out is one that needs to be answered now, and enshrined in the playbook.
Cyber insurance, which has grown significantly in recent years, created much debate. Despite the growth of the market, a full 50% of US firms do not have cyber-risk insurance, even though 61% of them expect cyber breaches to increase in the next year. The panel discussed the difficulties in obtaining effective insurance: how do you quantify the loss in terms of a data leak, and the impact on reputation, and how do you decide if the premium offers value for money? There were no clear answers. Clearly, it remains an area that needs education and maturity.
What is clear, however, is that cybersecurity should be an area of collaboration. David Watson made the point that he doesn’t compete on cybersecurity and that if one bank gets hit, they all get hit in terms of reputation (the SWIFT attack being a clear example). “The industry as a whole should strive for higher standards,” he concluded.
The attacks on global trade more generally – from populist rhetoric, trade wars, regulation and risk issues, or shifting business models and new entrants – are no less severe. Yet the future remains bright, and will likely be led by a new breed of trade finance practitioners. The ICC Banking Commission’s launch of its new ‘Successors in Trade’ programme – which includes Deutsche Bank’s Tan Lu – is evidence that it’s planning for the long term.
The ICC Bank Commission 2018 Annual Meeting took place 3-6 April 2018 in Miami, United States of America. A full set of photos from the event can be accessed here
Head of Trade Finance | Deutsche Bank
Head of Trade Finance and Financial Supply Chain Americas | Deutsche Bank
Head of Digital Cash Products and Americas Head of Cash Management | Deutsche Bank
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