Trade finance yesterday, today and what is driving tomorrow

Clarissa Dann: Welcome to Trade Finance TV. I’m your presenter, Clarissa Dan, and I’m very excited to be back in a real studio. So isn’t it wonderful? I’d like to welcome our very special guests Deutsche Bank’s Russell Brown and DNB Bank’s Peter Sargeant.

Russell Brown: My pleasure to be here.

Peter Sargeant: My pleasure as well.

Clarissa Dann: Now, you two have worked together before, haven’t you?

Russell Brown: Yeah. Peter and I, as you know, are veterans of the trade finance scene. So I think the first transaction that we worked on together was back in the late nineties. It was with one of our mutual telecom companies at the time, and the deal was fairly straightforward in the product side. It was a guarantee that they needed issued into an Asian country and a relatively substantial amount.

But what was quite unique about it was it was actually a club deal that we did, which instead of participating into the guarantee each bank, there was four banks that took an equal share. It was totally disclosed. Markets probably changed since then and I think there’s different reasons why it’s changed, but I think one’s probably around the regulations such as the capital allocation and the cost of capital. Look, I think now you would see banks leading, originating and distributing that transaction.

Peter Sargeant: It was an interesting deal. It was one of those ones with a big company where all the banks were well known to the company and the beauty of it was its absolute transparency. Whereas you look today at a deal where you take as little as you can get away with and distribute the risk into the secondary market. At that particular time, four big banks, $50 million apiece. And everybody was transparent to all the customers.

Clarissa Dann: Let’s come back to the point you both made about the move to originate, to distribute. But isn’t the pendulum is coming back again. You’ve got balance sheets getting bigger and banks are actually looking to lend more?

Peter Sargeant: Yes, but this is quite simple. There is a huge trade gap. We’re talk about that a little bit later, I think. But the banks generally at the moment don’t understand trade in the way that perhaps they would have done 20 or 30 years ago. So from that point of view, the bank I work for, a Norwegian bank has a significant sized balance sheet, but it is not using it in perhaps the way that Russell or I would have particularly have liked. And it’s because there’s a lack of understanding internally as to what it is we’re trying to do.

Russell Brown: What you’re seeing, especially at the moment, is banks want to build their assets up. So I think you’ll find it naturally. They want to take more of deals at the moment. Yeah. So look, has the pendulum swung back? We don’t know whether it will do or whether this is just market conditions at the moment because banks want to deploy their balance sheet.

Clarissa Dann: Yeah, they do.

Peter Sargeant: And I think one of the other big things that is different is everybody agrees that regulation of our business and regulation of international trade business generally is good. It can only be good. But regulatory nationalism isn’t. A good example would be that banks don’t have a level of consistency when it comes to allocation of capital in different products. So I would do a piece of business with a different capital allocation to Russell, to an American bank, for example, because the regulation by the national regulator isn’t consistent.

Clarissa Dann: That’s a very good point. I think we’ll move swiftly on as to generally how you’ve seen trade finance evolve over the decades, living the big changes apart from the ones of course, you just talked about.

Peter Sargeant: International trade has been in existence for 300 years plus and it’s been essentially a paper driven business. So from our point of view, it was a very slow business to change. And what has driven change in the business has been the Internet and the way that banks use the Internet as a sales tool. And increasingly what will be important will be how banks use an automation of the back office.

Russell Brown: When I started, there wasn’t the kind of infrastructure that you see in banks now. It was a foreign department. You were handling the foreign payments and the letters of credit. Now we’ve got the front office, middle office, the back office, your first second line of defense operations. That’s made it a more robust business model and that’s important as well if we look at coming back to the point of regulation. Yeah.

Clarissa Dann: And trust.

Russell Brown: And trust. So that’s been a huge change.

Peter Sargeant: Yeah. I think one of the other things to say is that the banks have a much better understanding of customers needs. In the past we would go and we would say, okay, we want to help you with your sales of goods to China. So here’s a letter of credit in that you could use. These days we have a much clearer view of the liquidity of our customer. So we don’t start with a product. We start with a customer need. And the understanding of the treasury function inside a corporate is much better now.

Russell Brown: You’re finding the solution rather than selling the product. You’ve seen like the open accounts solution. They’ve become readily available. So you’ve probably seen the documentary business kind of slide down on volume because the banks are able to offer financing solutions. And look, technology plays a big part in enabling that as well.

Clarissa Dann: Let’s come back to the digitalization of trade finance and also the collective need to address the trade finance governance you also mentioned. We’ve seen a lot of worthy committees and meetings and gatherings and reports. How are we going to turn those into actually getting something done and getting that gap down?

Russell Brown: When it comes to digitalization, we would probably say we’ve had a kind of haphazard journey, I think for for trade finance, I would say. I think we’ve seen in COVID that’s definitely accelerated. Yeah, there’s a lot of country support. If you look at the G7 on their sort of technology plan around that. So definitely a lot of investment from the banks into technology and a lot of collaboration with the banks and non-banks and the FinTechs. So I think we’re definitely on the right track.

Look, it’s not easy trading. You may say, well, look, you see the payments industry, but payments is quite straightforward. Entering trade finance is all over the place with more parties involved. So I think we kind of criticize ourselves, which is probably fair in some way that we haven’t developed on the digital side as compared to others. But at the same time, I really do think now is the kickstart and we’ll see proof in the pudding in the next five years or whatever.

Peter Sargeant: I think if you look at where the trade gap is and where the gap lies is small to medium sized companies. For small, medium sized corporate, it’s very difficult to get trade and trade finance from banks. And what that’s doing is driving the smaller customers into new participants. So farmers and non-bank financial institutions. And I think banks need to readjust their outlook when it comes to smaller customers, because at the moment, candidly, they’re probably not meeting those customers needs.

Clarissa Dann: Do you think there is a greater role for the DFI as the development finance institutions to provide some comfort there?

Russell Brown: I do think there is and I don’t know if we’re going to touch on the non-financial risk element. I mean, that’s a huge part of trade finance. We’ve seen a lot of banks concerned around that side and withdrawing from emerging markets especially. And that’s where I do think the DFIs play a huge role. And I think we’ve seen that again, countries like they’ve sprung into action, which I think has been great. And I see that continuing as we come out of this.

Clarissa Dann: What is your message to the young professionals we actually talked to two years ago who will be doing your jobs in a decade or so?

Peter Sargeant: The first thing to say is there’s a huge opportunity here in this business and there’s a huge opportunity because there’s a bit of a gap between some of the more mature end of the market and those youngsters. A few years ago, a lot of people moved out of trade because it wasn’t seen as being sexy. They all disappeared off to FX and they’re now all cleaning windows or something like that as a result missing. But the important thing about this is that Russell and I and others of our vintage actually have to train coach, mentor, push these people, because we’ve got some great youngsters in our market. And what we need to do now and over the next five years is give them the benefit of the things we’ve seen, the things we’ve done well, the things we’ve done badly. And if we can do that, there is a huge opportunity in this market.

Russell Brown: I think we have very good policies now within banks to try and attract the junior talent. But my worry is a lot of why we’re experts is because we’ve done it for 20, 30 years and now they haven’t done it for that period because we’ve had this gap. And so we really need to try and cram as much as we can in to really give that information over. So I would agree there’s the talent there, but we’ve got to make it attractive for these guys as well.

Clarissa Dann: I think that’s the topic of the next show, possibly. But thank you so much for coming in today.

Peter Sargeant: Thank you very much.

Russell Brown: Thank you very much.

Clarissa Dann: I’d like to thank Russell and Peter for coming in to our studio today. I’m Clarissa Dan and this has been Trade Finance TV.

Published on November 1, 2021