Putting trade on the block

There are significant inconsistencies in how the industry is responding to digitisation in trade finance, according to the latest International Chamber of Commerce (ICC) Global Survey on Trade Finance, writes Heather McKenzie.

By Jon Watkins

Speaking at the ICC’s industry briefing at Sibos, Mark Evans, m
anaging director transaction banking at ANZ Banking Group, said while the industry is hearing that banks must be fast and nimble, the reality is different.

“We do need to be fast and nimble, but that is very challenging for banks,” he said. “Digitisation is a very different experience for banks that are regulated, operate in different industries and countries and also have a responsibility to ensure financial stability in every economy in which they operate.”

When asked where they felt future growth would come from in their trade business, 72% of the Survey respondents cited traditional trade finance instruments. “The majority of banks still invest in and rely on traditional trade instruments to support their growth, but five years out, the percentage drops to 5%. We expect that will be due to the impact of the technology and non-bank capital coming in to support trade flows.”

Only 17% of respondents expected distributed ledger technology (DLT) to have a material impact on their trade business growth, but again the trajectory looks better for the technology; 46% think the technology will have an impact within the next three to five years.

An important element in the ICC’s digitalisation efforts is helping financial institutions to onboard financial technology companies more rapidly. It can take up to 24 months to do so during which time some smaller companies can run out of money. The process of onboarding at many banks is not very streamlined, said Michael Vrontamatis, managing director at Standard Chartered. The ICC is investigating whether partnering with a standards institution could help to create guidelines for onboarding and thus accelerate the process.

Many of the themes discussed during the ICC update were also touched on the previous day in the Bankers Association for Finance and Trade (BAFT) Global Councils meeting, also held in Sydney. Delegates at this event heard that when it comes to innovation, a lot of work goes on behind the scenes before the ‘big bang’ of introducing pilots or systems occurs.

With regard to DLT, the audience heard that the structural issues in trade and trade finance required structural solutions. But questions remained about how a blockchain-based solution would be governed and managed. This has been something of a theme at Sibos, with the issue of decentralisation and governance discussed across different sessions.

Another issue across all industries is the number of suppliers of blockchain solutions – delegates heard that there could be rationalisation of solutions. However, speaking to Club@Sibos, Rob Palatnik, managing director and chief technology architect at DTCC, said: “At some point, different blockchains will have to be interoperable; that is something for the long-term. But there will be relationships between different chains.”

Shortly before Sibos, ANZ, Banco Santander, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered announced a joint initiative to build a digital Trade Information Network by the end of 2018. Once operational, it will become the first inclusive global multi-bank, multi-corporate network in trade finance.

The Network aims to address the unmet demand for financing earlier in the supply chain by enabling corporates to easily and securely communicate trade information directly with banks of their choice. In addition to the founding banks, more than 20 additional banks from around the world are participating in developing the Network and several corporates have expressed an interest in participating in pilots.

The Network has open architecture and standardised connectivity based on a governance model similar to Swift to achieve maximum adoption across the supply chain ecosystem. Corporates will use a simple one-time registration process which will allow them to connect with all banks on the Network.

CGI will be the technology provider and a pilot version of the Network is complete.

Rogier Schulpen, global head trade and working capital solutions, Banco Santander, said: “Cooperation between the main trade finance banks and improving transparency of our clients’ global supply chains is an obvious way to facilitate financing to SMEs around the world. Having a single platform that provides transactional data on underlying trade flows will not only enable financing but will also stimulate further innovation in the trade finance industry.”

John Ahearn, global head of trade, Citi Treasury and Trade Solutions, describes the project as “truly revolutionary. From the very beginning, we recognised the need to work together and answer the call from our clients to collaboratively design such a platform while leveraging our global network.”

Collaboration was a significant theme at the BAFT meeting. Across the industry, banks are working with their counterparts, with fintechs and also increasingly with regulators. One speaker said this would enable financial institutions to better serve not just their customers, but their customers’ customers. The B2B environment has morphed into a B2B2C one.

In a changing environment, transaction banking has a “great future”, delegates were told, but they had to be on their toes and recognise the need to change.