Trade finance for all? Industry approaches to widening reach

Daniel Schmand of Deutsche Bank and the ICC Banking Commission and Sean Edwards of the International Trade & Forfaiting Association and SMBC talk to Trade Finance TV’s Clarissa Dann about trade finance access in a safe and sound environment, and facilitating trade flows

Given the new normal of uncertainty in trade, they discuss how trade will always find its way and financiers will go getting finance to those that need it most. They talk about how the secondary market has grown to include private credit insurance and plays a huge part in helping banks adjust their liquidity, despite being relatively “silent”.

The ICC Trade Register underlines the low default rate of trade finance, which helps support its credibility as an asset class. “We are at an inflection point of creating trade finance as its own asset class, and there is a lot of liquidity in the market that needs to be invested,” says Schmand. Edwards points out that the ICC trade finance gap estimate of US$1.5trn is not shrinking and it is getting harder to service SME with trade finance.

While both guests agreed that you need to control trade finance flows in a safe and sound way, the industry has to take responsibility of managing the non-financial risk of trade flows or lack of them as well as the financial ones. 

“Post acceptance finance is well catered for, but we really have a gap in pre-acceptance and pre-delivery,” says Schmand. He sees this is as the space where international banks, multilaterals and regional/local banks need to come together and agree a solution.

“The Trade Information Network (the Network), is a very encouraging first step it is completely open and, says Schmand, “We learned from fintechs that banks can become disenfranchised if networks are not open.”

Transcript of interview:

Clariss Dann Welcome to Trade Finance TV. This is your insight into the global trade climate for importers, exporters and the financiers. I’m Clarissa Dann.

In this episode, we have Daniel Schmand, chair of the ICC Banking Commission and Global Head of Trade Finance at Deutsche Bank, together with Sean Edwards, chair of the International Trade and Forfaiting Association and head of legal at SMB, in the studio here to talk about why trade finance is so important to the growth of world trade and economic well-being. And also what the industry is actually doing about ensuring it reaches those that need it most.

Daniel and Sean, thanks so much for coming in to the Trade Finance TV studios. It’s so lovely to see you here.

Sean Edwards Very pleased to be here.

Daniel Schmand Thank you so much.

Clarissa Dann Right. now that I’ve got you here. We’ve been hearing all about how the only thing in trade that is at all certain is uncertainty. So how is that all playing out in the demand for trade finance?

Daniel Schmand Well, let me take this one first. So I think it’s very important to have predictability and particularly in trade and to have a positive sentiment around what is going on. Yes, there is a lot of uncertainty playing around at the moment. People speak about the trade war and there is a big discussion between the US and China, and I think they need to come to terms. Having said that, there is a second important point; it’s a global economy and trade and trade flows, as long as there is underlying business, will find its way. And we as banks are a follower of those trade flows and their needs to be financed.

Clarissa Dann So we are following the business aren’t we, Sean?

Sean Edwards Yeah, we’re doing it globally and I think that’s the big thing. We’re all obsessed with Brexit and that’s a small part of the picture. We’re talking about global finance and that the challenge for us really is in trying to penetrate that finance into the parts of the globe where we haven’t done it so well in the past and that’s always the challenge for every bank.

Clarissa Dann Just coming on to this whole business of banks and how they finance trade; the relationship between the banks and the secondary market and what is actually sold on to actually help generate value, which is so important, isn’t it? Can you tell us a bit more about it mean how does it all work?

Sean Edwards That’s what really my association deals with, really is pushing out trade finance risk into all sorts of off-takers, if you like. So it’s evolved considerably from pure sales of legal title to the debt which could be very simply represented. And now, of course, we’ve got the huge growth of private credit insurance, which is a huge part of the market. But there’s still the traditional market, the bank-to-bank, sub-participation market. It’s a silent market in the sense it doesn’t get picked up by stats very often, but it’s a huge part of how banks adjust their liquidity and finance, themselves. And it’s also very scalable; you can move it up or down depending on your needs.

Clarissa Dann What do you think, Daniel?

Daniel Schmand I can confirm what John has said, but let me add a certain angle. Next to the bank-to-bank as well as the PRI market, what we see is a much larger demand from institutional investors to invest into the trade finance asset class. I think also the ICC, with the trade register, has greatly helped to show the low default ratios of that asset class. What I feel is that we are at this inflection point of really creating trade finance as its own asset class with very, very, very low default ratios, which is highly attractive to investors. As we still shouldn’t forget, there’s ample liquidity in the market and there’s still a lot of appetite and liquidity which needs to be invested.

Clarissa Dann Let’s just pick up that subject of liquidity. There’s a lot of liquidity in the market and the whole quantitative easing thing as that’s played out has contributed to that. But those poor old SMEs, they can’t get trade finance. That gap is still a monster 1.5 trillion. So what on earth are we going to do about it?

Sean Edwards Well, one of the things we’re going to try and do is to make it easier to push that trade finance out to those SMEs, because you’re right, the trade finance gap was 1.6 trillion and it’s still 1.5 and hasn’t really dropped. Why? There’s a lot of reasons for that, but one of them is that it’s very difficult to actually service those clients cost effectively, so I think that’s certainly where digitization has a very big part to play. It also deals with one of the big problems that you have with those sorts of clients, which is the KYC/AML aspect that you can link in to your digital platform, all those sorts of utilities, and that’s in a way which you haven’t been able to do before.

Daniel Schmand I think, John, you’re spot on, on that point. I think there is ample liquidity, as we pointed out earlier, so there needs to be something else. And I guess where we need to focus more on is: know your client, the famous KYC question. And even more important next to that is: know your transaction. Because once you know your client and you’ve successfully done your client adaption, you also need to fully control the flows and make sure you do that in a safe and sound environment, because the regulatory pressure, I guess for the right reason, is on avoiding money laundering and terrorist financing. So we have to live with that dilemma and SMEs need to come to a better place and we are also in that game again, the facilitator, next to the financial risk, also to help them to deal with the non-financial risk aspect of the trade flow.

Clarissa Dann And of course, the SMEs do slot into some of the supply chain finance platforms, and that helps get some access to liquidity. Do you want to tell us a bit more about those?

Daniel Schmand Well, let me take that one first. I think the point from the post acceptance finance is well catered. What we still have is a gap pre-acceptance or even pre-delivery, and that is where the trick is and nobody really found it yet. I think this is the space where banks, international ones, multilateral organizations, and in particular regional and local banks need to better cooperate rather than compete. I think there is a demand and we need to come together and find one solution. And I think the first major, major step to that one is the network – the trade information network. So the network and the banks coming together is critically important to address a true market demand and need.

Clarissa Dann And picking up on the network, and that was a wonderful example of the industry coming together, as was the definition of the supply chain finance term so we all knew what we were talking about. Is this a sign of a much more move-together, of finding solutions? Are you optimistic?

Sean Edwards I think it is, so you know, you start with the naming of parts because you need to speak the same language, but then rapidly, and Dan and I are both involved in that particular initiative that you’ve talked about, you then need to actually build proper tools and actually do something useful with those definitions that you’ve got which are really a dictionary.

Clarissa Dann The burning question on my mind, as well as quite a few others, it’s all about adoption. We have seen the most wonderful initiatives come and go because people haven’t used them. So how confident are you both that these fantastic things will be used, will be populated and will deliver the data?

Sean Edwards There’s a lot of consortia doing a lot of work at the moment. And when I say a lot, actually, that’s maybe not a good thing, I should rephrase that. There are a number of consortia with a lot of banks and that’s what we need. We need two or three or four groups which have got a large membership, especially geographically, to actually start offering something that is feasible.

Daniel Schmand Let me just come back to the very, very basics. I think with the network, if you look at the technology and what we’ve started with is the simplest common denominator, and what is so critical is that it’s an open network so everybody can join. And we’ve learned that from the FinTechs, we get disenfranchized if we are not open and provide a truly open network where everybody can join. Sure, we need to have certain rules, absolutely, but that is the trick. What it is at the end doesn’t matter actually, as long as it is open and it is catering for the needs, and it is not too sophisticated so actually fit for purpose.

Clarissa Dann Thanks. And the whole digitalization, how that’s going to work, is all about trust, isn’t it?

Daniel Schmand I have a very specific view on the digitization and block chain. Look, we have a distributed ledger, we have block-chains, it’s already been there for years. If it would be the Holy Grail, the one thing which makes the world better by tomorrow, it would have taken off big time. So I think we also need to fix a few fundamentals.

How do you solve a dispute resolution? What are the common standards and rules on the block-chain? And I think we need to get those fundamentals right. I’ve seen block-chain working in a closed ecosystem. On a national basis all on-market participants will agree; the true thing, like the Internet, it needs to be open and needs to have a global standard. And therefore the rule making, the underlying basis is critical. It’s not the technical play, it’s basically the rules which are critically important, so how do you do dispute resolution on the block-chain?

Clarissa Dann But how confident do you feel you’re going to be doing any more business next year?

Daniel Schmand That’s the one-million-question and every bank is going through the budget season, so look, there for me, three fundamental things is: I think we need to see how single economies, currencies and commodity prices go. That’s a driver.

Then we have the geopolitical uncertainty, and I would include that the trade wars, and then I would say it’s a bit the overall sentiment, and we talked about that earlier. I think that the more positive all three of them develop, the more positive it is for trade. And it is the consumer sentiment and confidence, which at the end drives everything. We have Brexit, we have the yellow vests in France, we have the doubts about Italy, I think it needs to come to an end. I think the European Commission also needs to, or the European community needs to play a much stronger role in that area of uncertainty and then the rest will follow.

But that is more a political question, whereas we as banks are more a follower. We can then within the trade volumes which are there, try to make it easier, make it more predictable, find new techniques using digital, but the underlying flows and the confidence needs to be in the market, and that is a political question, not so much a financing question.

Clarissa Dann Well, let’s just see how it all unravels. Daniel and Sean, thanks for coming in to the studio.

Daniel Schmand Thank you so much for the lovely conversation

Clarissa Dann I’d like to thank Dr. Rebecca Harding, Daniel Schmand and Sean Edwards for their insights into the trade finance markets in 2019. And, of course, to all of you for watching.

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Published on January 28, 2019

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