Waves of changes

Trade Finance

Waves of change

June 2020

flow reports on a joint EY-ITFA event that took a closer look at how banks and corporates are responding to theCovid-19 crisis, supporting their business and clients, and what lies in store for the industry’s evolution in coming years

There is little doubt that the Covid-19 pandemic has caused widespread disruption to the trade finance industry. With lockdowns preventing the physical exchange of documents and the delivery of goods, the industry has faced a series of unprecedented challenges in adapting to a new operating environment. From initial concerns relating to business continuity, to a renewed hope for a revolutionised trade finance ecosystem, the crisis resulting from the pandemic has led to numerous changes in conduct from corporates and banks alike.

Which of these are here to stay? Dai Bedford, Global Banking & Capital Markets Advisory and Global Trade NextWave Leader at EY opened the discussion on 3 June 2020 with Sean Edwards, Chairman of International Trade and Forfaiting Association (ITFA) – setting the scene for what was to be an engaging and informative webcast.

 

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Big bang versus small bang

From the start, the topic of digitalisation was central to the discussion. Covid-19 has focused the needs of banks, and the wider trade industry, to embrace digital solutions and increase efficiencies across the business – predominantly to ensure operational resilience.

While institutions will already have plans in place to cover business continuity, this has become the number one priority throughout the pandemic. How to keep the business running smoothly and successfully? How to ensure operations can continue with minimal disruption?

The use of technology is an obvious answer – helping employees work from home, automating some forms of work, digitising others. However, when it comes to trade finance, the use of technology is more complicated than it may seem, with regulatory and legal barriers hampering the use of digital trade finance documents.

It is here, Edwards argues, that a two-pronged approach could work. “I like to think about a big bang and a small bang. The big bang will take longer, it is more holistic and revolutionary.” This would include the lobbying of regulators for changes in regulations affecting to trade finance. “At the same time, we come up with practical solutions that can be used now,” he adds. “Small bang can also work though. People are no longer in the office, so signing by email is something everyone has been focused on. In the long-run, to be a viable option we will need to understand the risks and put new procedures and processes in place but it’s a perfectly legitimate approach.”

Balancing these short-term and long-term requirements is something the industry has so far managed relatively successfully. Though what this crisis has highlighted is the need for deep reform within the industry, including of the regulations that govern it. Reaching out and encouraging governments and regulators to safeguard trade finance is critical to the continued viability of the global economy.

 

"You need to be agile. You need to look at your processes. Now is the time to review"

Daniel Schmand, Global Head of Trade Finance & Lending, Head of Corporate Bank, EMEA, Deutsche Bank & Chairman of the ICC Banking Commission

Luke Templemann

Agility is key

Filling in on banks’ experience of the Covid-19 crisis were Daniel Schmand – Deutsche Bank’s Global Head of Trade Finance & Lending, Head of Corporate Bank, EMEIA and Chairman of the ICC Banking Commission – and James Binns, Global Head of Trade & Working Capital at Barclays.

Moving tens of thousands of employees to a work-from-home model doesn’t come without its challenges, they noted – especially when it has to take place in a relatively short space of time. While some teams were already well equipped for the situation or working in offices with a pre-existing remote working culture, other teams needed to completely rethink their way of working.

“A big challenge came with our operations teams, particularly in India where they went into total lockdown over three days. Trying to equip all of those people with laptops, remote access, processors, and making sure we could continue to operate was a huge challenge but one I think we managed incredibly well,” says Binns.

Covid-19 has meant prioritising certain parts of the business – simplifying how it operates to ensure a high standard of delivery. “You need to be agile. You need to look at your processes. Now is the time to review,” explains Schmand. “We might find we want to keep some of the adjusted procedures and key operations,” he adds.

Adjusting procedures has not only been required at the bank level: international organisations have also had their part to play in ensuring the continuity of global trade flows. Schmand, who also serves as Chair of the ICC Banking Commission, recalled how the organisation came together at the start of the pandemic. “I think we reacted swiftly. Then, when we had new information available to us, we adjusted accordingly. I think that was well played by the members, who helped us put together [a series of papers] and give guidance to the broader community – on the banking, but also on the commercial and customer side of things.”

 

“In any industry, there will be relative winners and relative losers. You need to look at the historical financial strength of the company and the long-term perspective”

James Binns, Global Head of Trade & Working Capital, Barclays

Luke Templemann

Cash-flow-friendly financing

From the corporate perspective, meanwhile, there was initially concern that supply chains might shut down completely, and defaults would spike. To a large extent, thanks to fair mediation processes, this didn’t happen, but, while the banks have stayed open, volumes have nonetheless been affected by Covid-19, as have corporates’ choice of products.

“What we have seen is an already changing supply chain from far-shoring to near-shoring, and we have seen a different way of looking at working capital,” explains Schmand. Corporates are looking to manage their liquidity more professionally, using new tools and products available to them. In turn, there has been an increase in demand on the invoice and the supply side, as clients look at moving away from traditional ways of financing towards a more cash-flow-friendly structure. As such, there is huge demand for innovation – for new products and services to address this need for liquidity.

Binns, meanwhile, also sees opportunities in the post-Covid-19 world. “I think as we start to recover from Covid-19 and growth starts to come back, clearly there will be less liquidity than pre-Covid-19 and risk levels will be higher. Therefore, we need to position ourselves for increased demand in trade and supply chain products, ” he notes. What’s more, while some sectors, such as aviation or hospitality, have become more high-risk due to the pandemic, this does not mean banks should not support them going forward. “There are industries that will suffer more than others. But in any industry, there will be relative winners and relative losers. You need to look at the historical financial strength of the company and the long-term perspective,” says Binns.

 

“Complex global supply chains have largely been tuned for cost and speed. What the Covid-19 crisis revealed is how brittle they are”

Matthew Burton, EMEA Supply Chain Leader, EY

Luke Templemann

Rebuilding the industry

The current crisis is very different from that of 2008, with panellists agreeing that once demand begins reappearing, trade will quickly recover. How different the industry will look after the crisis is another matter – with changes from an operational and technological perspective set to stick or further develop to transform the entire trade ecosystem.

Societal attitudes are also set to heavily impact the industry – including the possibilities of increased working-from-home practices or changes in childcare preferences. These will undoubtedly help boost technological adoption across the industry, such as digital signatures and electronic documents. These changes will not happen overnight, however, and it is likely that for some time the industry will work in a hybrid mode – “straight through the printer, rather than straight-through-processing,” concludes Schmand.

More fundamental changes to the way enterprises interact with their customers and supply base will also take place, Matthew Burton, EY EMEA Supply Chain Leader explains. “It is all very well keeping an eye on your own enterprise, but more companies and leaders are recognising early on that it won’t survive if their customers of supply base don’t as well.”

Deepening a company’s understanding of its supply chains and reassessing the geographic concentration of suppliers will become a major focus for many organisations post-Covid-19. “Complex global supply chains have largely been tuned for cost and speed. What the Covid-19 crisis revealed is how brittle they are,” says Burton. As a result, companies are having new conversations about how to balance cost efficiency and speed while improving resilience. This must be balanced with plans to keep existing business going and so will involve a three-step process for supply chains – protecting supply, restarting operations, and building resilience.

Visibility over the supplier base is the first priority in achieving this objective – supporting them through the crisis, not only for the benefit of the buyer, but the supplier as well. Next, operational decisions will need to be made as lockdowns lift. What production to restart first? How to implement new health and safety protocols as this ramps up? Finally, and perhaps most importantly, the entire supply chain needs to be re-examined to increase resilience, assessing what changes might be needed in terms of footprint, integration and supplier networks.

 

Navigating uncertainty

These are not small tasks and will take a significant amount of time and effort to implement. Businesses should therefore be keen to ensure their plans are as effective and streamlined as possible. To this end, it makes sense to look to peers in regions that are further ahead on the Covid-19 curve. What can we learn from those regions where the crisis seems to have dissipated and where these changes are already being considered? The final section of the webcast – led by Ajay Sharma, Regional Head of Global Trade & Receivables Finance, Asia-Pacific at HSBC and Andrew Gilder, EY Asia-Pacific Banking & Capital Markets Leader – aimed to address this point.

Technology again was at the heart of the discussion, with Sharma explaining that without the current level of technological expertise, the situation could have looked much different. “If this had happened five years ago, I think it would have been impossible [to cope during the crisis]. In Asia, we have seen an increase of 88% in terms of clients using digital channels.” This is something they are unlikely to reverse, he notes. “Our customers want us to go paperless.”

In terms of recovery, while initial transaction counts may have decreased, transaction volumes in Asia are returning quickly, production is ramping up and offices are opening again. And the transition to digital solutions and delivery looks likely to continue. While technologies such as optical character recognition (which help integrate paper documents into a digital workflow) are of interest, there is also a growing movement to digitise the origination. Rather than taking a piece of paper and tuning it digital, why not make it digital from the start?

 

The shape of things to come

Meanwhile, the wider economic recovery from the Covid-19 induced crisis has been a topic of much debate. What shape will the recovery take? Some argue it will be a U, V or L shaped recovery1. Optimists believe we may be in with a chance of a “Nike Swoosh”, with a strong resurgence resulting from pent-up demand.

Binns’ slightly more reserved hypothesis is that of a “bathtub” shaped recovery. “My feeling is that we are not far off [the bottom of the bathtub]. The question is how long will it take for us to get across the bath and get out the other side.”

Opinions relating to the shape of the curve also depend on the regional macroeconomic and geopolitical climate. “There are probably other dynamics at play in [Asia] with supply chains moving,” explains Gilder. “I get the sense in this part of the world there is slightly more confidence that the market will return faster than perhaps in Europe.”

The consensus is that recovery will be far from straightforward. “I think we were all hoping for a short, sharp recession but that is looking less likely,” says Burton. “The expectation is hopefully somewhere in between.” Should there be further outbreaks, however, the recovery could be bumpier than many might have hoped.

 

Fostering trust

All participants were agreed that the trade ecosystem is facing enormous amounts of change in a relatively short timeframe. EY’s Bedford remarked how the industry is “in for a wave of significant change around the trade ecosystem with technology playing a key role. It will happen more quickly than perhaps some of our audience think.”

Covid-19 will change and challenge most if not all industries. From a banking perspective, this presents huge opportunities to build out client relationships, fostering connections with customers by extending credit, or branching out further into an originate-to-distribute model. Rethinking supply chains and digitising end-to-end processes will revolutionise the sector for the better.

Whatever shape the economic recovery takes, the crisis will leave the trade finance industry with many lessons to learn and many opportunities to grasp. Now, it is up to the market participants to make the next move.

EY’s NextWave Global Trade Webcast – Covid-19: how global trade is being disrupted and redefined – was held on 3rd June in collaboration with ITFA and moderated by Sean Edwards, ITFA Chairman and Dai Bedford, EY Global Banking & Capital Markets Advisory and Global Trade NextWave Leader.

Panellists included: Daniel Schmand, Global Head of Trade Finance & Lending, Head of Corporate Bank, EMEA, Deutsche Bank & Chairman of the ICC Banking Commission; James Binns, Global Head of Trade & Working Capital, Barclays; Ajay Sharma, Regional Head of Global Trade & Receivables Finance, Asia-Pacific, HSBC; Andrew Gilder, Asia-Pacific Banking & Capital Markets Leader, EY; Matthew Burton, EMEA Supply Chain Leader, EY.

 

 

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 1 Something discussed in flow’s ‘Exiting the Covid ravine’ (5 June 2020)

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