High Intensity: Beyond the hype, learning lessons from cross border payments for trade digitisation
TXF talks to Peter Jameson Managing Director, Co-Head EMEA Product Management, Global Transaction Services at Bank of America Merrill Lynch about the limits of digitisation in trade finance. Credit risk mitigation is key to effective trade finance, and real-time speed isn’t necessarily the be all and end all for trade. This interview is the first in a series of high-intensity briefings from industry experts.
TXF: What do you see for the future of cross-border payments? Is the trade space learning from the payments and retail space when it comes to the pace of adopting innovative solutions?
Peter Jameson (PJ): Trade finance depends on cross-border payments in order to operate. As that moves to real-time, whether through SWIFT gpi [global payments innovation] or real-time clearing systems, trade will benefit simply because it will streamline the speed of disbursement. However, we have to recognise that trade is not just about payments.
What underpins trade is credit risk mitigation. The complex legal and regulatory jurisdictions and the fact that as banks, we’re taking risk for our clients, mean that it’s not realistic for all that to move to real-time in the same way as payments. There are certain things we can do through digitisation and other initiatives to try and speed that up – but essentially, there are very well understood reasons why we need a more considered approach to trade transactions.
Our learning from the retail space comes from the phenomenal trend around mobile which facilitates real-time transactions as consumers want everything ‘now’. Again, that’s driving individual behaviour, but as yet, I don’t see this ‘immediacy’ permeating through to the large corporate trade finance space. Because of the complexity – the high value, multi-jurisdictional nature of corporate trade finance – I don’t think there is any demand for captains of ships and tax authorities in Africa for example, to have everything in real-time over mobile. I think that’s something that may come in the future, but it’s a long way off.
For this to happen, several stages in the trade process first need to become more agile, faster, more efficient, and by extension more mobile. I just think there’s always going to be, as we’ve seen in the past, a significant lead time between adoption of these tools between consumers in the retail space and it then trickling through to large corporate flows with more considerations and complexities. Factors such as the high value of payments, risk and fraud mitigation means that speed is not necessarily a top priority.
TXF: What are the biggest challenges your corporate clients face in terms of working capital management?
PJ: The challenges for corporates in working capital are reasonably straightforward. One general point is the issue of automating and streamlining operations to drive out any inefficiencies resulting from manual payment types. That’s something that many of our clients grapple with.
And it’s also where we come in with some pretty robust and global capabilities that help corporates to automate and hence become more efficient, for example moving from paper to electronic.
As it relates to working capital more broadly, a key challenge that we see facing our clients, is extending payment terms. In other words, how do you delay payments to your suppliers without putting undue pressure on those suppliers? That’s where a number of our supply chain finance solutions come in nicely - they help our clients whilst also providing additional flexibility to their suppliers.
There are other dimensions to that, but it boils down to helping clients with operational inefficiencies and optimising working capital through the supply chain.
TXF: How does BAML plan to keep up with the digitisation of the trade finance industry?
PJ: For us, our focus on digitation is front and centre to the ways in which we’re supporting our clients. A large proportion of what our clients do with us is now through a digitised electronic channel, or directly integrated with our client systems. That’s very meaningful because the transactions are electronic from the point of initiation.
To respond to some of the new digitisation technologies, we have been working with clients like Microsoft on blockchain proofs of concept to digitise trade flow for example. We’ve also been working with other banks – we did a proof of concept in Singapore [2016], looking again at how we digitise trade flows between banks and our respective customers.
There’s a lot of ‘hype’ out there about these new technologies and digitisation – much of that is extremely relevant. However, what we’ve been doing is going ‘back-to-basics’ – for example looking at optical character recognition, where the technology has moved on significantly; robotic opportunities and artificial intelligence. There are many ways that we are working to digitise our own processes too, as well as how streamlining our connections with clients.
TXF: What challenges do you face from challenger banks? How do they affect larger banks like yourselves, as well as your corporate clients?
PJ: Challenger Banks with a capital ‘C’ in the UK, which are only one part of our global audience, are more emergent in the retail space. As a large, global, multinational universal bank dealing with commercial and corporate clients, I don’t see Challenger Banks playing in our space at this stage.
However, challengers with a small ‘c’ are more pertinent in the trade arena. We’ve a close eye on which other banks are looking into developing certain trade products. Of course, the big trend over the last couple of years has been the emergence of fintechs, bringing the question of whether they are challengers or whether they are going to complement banks.
I do see Challenger Banks setting themselves up as very agile internet banks in the retail space. There is a question as to how their business models may evolve in the future, but I would argue that if you think about what they offer - largely online, efficient, low-touch banking - that’s arguably what we’ve already developed over the years with our large corporates. That is, very much online and automated. You could argue that we are doing for large corporates what Challenger Banks are doing today for individuals.
