Sean Edwards: Surath, is there is a very strong linkage or symbiotic relationship between what we originate and what we distribute? We have got some wonderful payment instruments – the irrevocable payment undertaking for example in payables financing and the ICC is working on some new rules for this in digital form.
Surath Sengupta: There are three primary requirements to which we distribute; number one is to create additional trade capacity in a transaction; number two is create additional liquidity in a transaction and number three, which is probably the most important, is to manage the capital and returns on the transaction. So with those three lenses, it is important to have a specialised distribution secondary market team that works hand-in-hand with the origination team to make sure the transactions are well structured, more evenly structured and, if required, can be sold as well.
The structure is ultimately defined by the customer, and it is our responsibility to be able to advise the customers as far as possible. That said, I think the most important thing is that there is an increasing recognition within the bank that it cannot hold everything. Equally, we do not originate anything that we would not hold on our balance sheets. That is a very, very important point.
Sean Edwards: I will just throw this question out to all of you, leading on a little bit from what we have already discussed – what is the biggest opportunity for trade finance?
Minos: I see two trends emerging: one is trade finance for services like IT systems, and the other is sustainable cross-border interbank financing for trade requirements, such as supply chains.
Sean Edwards: Yes, I think green finance or responsible finance is certainly a trend that I am seeing.
Masakazu Hasegawa: One of our fastest growing portfolios is receivables finance and supply chain finance. That is an area where we can bring in more of these kind of techniques or things that we have developed in America and Europe, which is a huge market. This is a growing area and I think there could be more opportunities in the Asian market.
Daniel Schmand: We see the next big trend as being “pay as you use” finance. For example, you sell an engine or a car and its use is charged by the mile. So there is an opportunity to finance these micro-receivables. The inventory would not be placed on the balance sheet of the buyer and seller – but that of the bank.
Sean Edwards: You have heard it here first. Minos, do you have something to add to this?
Minos Gerakaris: It’s not about the individual business line but more about the theme – the one here being digitisation, using SmartTech and working with FinTech and embracing them rather than being afraid of them to take advantage of APIs, advances in OCR, document control, compliance regtech and electronic checking.
We use traditional insurance in the surety markets and optimise through portfolio plays to look at the overall portfolio of assets. This brings diversification to the traditional insurance markets where African assets have been typically underweight.
Sean Edwards: The question here is how we make trade finance assets attractive to non-bank investors such as hedge funds, money-market funds and so on.
Surath Sengupta: I am a big advocate of making trade finance more investable. What does that mean? There used to be a general thought process within major banks that if we allow other liquidity providers to come into this space they will “eat our lunch”. I think that this thought process has significantly evolved and is now seen as much more of a complementary liquidity source to what banks will provide from their own capital. What cannot be replicated is the infrastructure the banks have built, in some cases, over hundreds of years to originate, manage and service chain assets, to risk manage and operationally manage those trade assets. And I don’t think that can be easily replicated by any other liquidity providers, as it would prove too expensive.
These investors are, however, very interested because these asset classes are shorter, it has some decent easing in the current scenario and it’s real-economy assets. And as Minos was speaking to earlier, the reason why they aren’t already in this space is because trade finance is such a non-standard asset class. You have letters of credit and , you have supply chain finance, some people call it supply chain balance, some people call payables finance, some people call it something else, receivables is called various names and there are limited-recourse, non-recourse etc. It is so confusing for everyone to understand this. So the whole thing is how do we make it as standardised as possible? One of the ways, has been through securitisation, which is what most banks have done over the years. It’s a great way of accessing that liquidity pool, but it has its challenges as well.
What we are trying to do is standardise it as much as possible, but we need all banks and other industry bodies to take part in it and then create it in a format which investors understand and are able to invest in.
Sean Edwards: One of my concerns is we have all invested a lot of money as banks in fintechs and probably will invest more. Are we creating digital islands that we don’t manage to interconnect and what implications does that have on the sorts of products that we might create through that?
Minos Gerakaris: It can be very confusing as to whether there is interoperability between certain platforms and this underlies everything. I’m thinking it will be a slow process. So instead, we should focus on the client. If they want to sell something, then you speak to the buyer and ask, “what do they need?” and “how can we best provide a solution?”. This may be on one fintech network or another so banks cannot be prescriptive. Clients will trade with each other in the simplest way, and we are there to take away risk and provide the funding and rails. We also need to be faster in tokenising invoices. We need to be able to put invoices into a note and then be able to repackage and make it investable. We also need to fully understand the investor base as not everyone in the investor base will buy everything. For example, insurance companies want term assets because that matches their obligations – that’s different to banks and specialist trade funds. So you basically have to do a completely different repackaging if you address each investor base.
Investors buy what they need and whoever provides what investors easily can buy and digest will be the most successful.
Masakazu Hasegawa: SMBC is Member of R3 and Marco polo. The reason I am very interested in this space is because only a part of global trade flows has been backed by commercial banks like ourselves. The reason for this is the tremendous inefficiency. Usually it’s a small amount or a short tenor, which makes it very uneconomical for banks to invest.
But with blockchain technology, there are many opportunities that we can go into. For example, where the tenor is 20 days or 30 days. Where paper transfers take two weeks and the tenor is only ten days it doesn’t make sense for us to go into that market. But with the blockchain technology, we might be able to do it in two days, which completely opens new horizons for markets.
In the trade finance area, maybe with this efficient, secure technology, we might be able to identify a new opportunity in the existing market. That’s why we are putting so much effort into this.
Sean Edwards: Thanks, Masa. That’s very helpful for that second question – how do we make trade finance to SMEs? It’s partly operating costs, partly tenor. So it will enable us to take different risks.
Question from the floor: At the moment, at the European Union level, the CRR are being discussed and re-negotiated and one issue, for instance, in trade finance is the maturity flow. Will we still have that also in the new CRR coming out in 2020? Are banks doing advocacy work in order to convince the European regulators how important trade finance is?
Daniel Schmand: If you look at CRR II, or Basel IV – whatever you want to call it – it is actually reflecting the needs of trade finance and there are little pockets where you can do even better. The point we want to make is that if you make ECA financing so beneficial for banks, why don’t you look at ESG or green financing in the same way? We need to lobby in two ways. One is to get what is good for trade, but we should also not forget what is good for society. We need to lobby in a balanced manner and I think it is going in the right direction.