The current, unprecedented circumstances have forced banks operating in global trade – an industry not necessarily renowned for being nimble – to adapt quickly.  So what changes are banks making to ensure the cogs of trade continue to turn? Joon Kim, Global Head of Trade Finance Product and Portfolio Management, BNY Mellon Treasury Services, explores.

Over the past few months, the global trade industry has faced a number of profound challenges. As countries continue their lock-down measures, or begin the long journey to ease them, value chains, logistics networks, spending and production in many areas remain heavily impeded. Against this backdrop,

Volumes of international trade have fallen significantly – with the World Trade Organisation predicting that global trade will fall by between 13% and 32% in 2020.[i]

But as the pandemic shifts us into a “business unusual” environment, what is being done to mitigate the impact on trade? For one, the trade finance industry has been forced to rapidly implement measures that move away from more traditional, paper-intensive practices. So, while in the short-term trade volumes may be impeded, an opportunity to create a new, more agile environment for the future has been created – one more willing to embrace digital change.

Risk appetites changing

The extraordinary circumstances of the last few months have called for an extraordinary response. Banks have rapidly set in motion their business continuity plans (BCPs) to curtail disruption, while also seeking to optimize the flow of trade finance transactions and protect their balance sheets. As the situation changes, and numerous nations begin easing their lock-down restrictions, these BCPs are being continuously evaluated and adapted to evolving conditions.

But what are the primary considerations in this rapidly-changing landscape? The likelihood of rating downgrades for various corporates and financial institutions, as well as the heightened chance of a recession in the jurisdictions worst hit, mean that risk profiles have increased across the board.

Combine this with the fact that the shifting conditions have created opportunities for fraud, and the need for additional due diligence and improved cybersecurity measures has become more critical than ever.

Consequently, many banks have adjusted their risk appetites and are more judicious in choosing counterparties, providing financing primarily to core clients with whom they have long, trusted relationships.

Creating the new digital norm

Amid the short-term challenges, there are some potentially long-term benefits. The trade finance industry has long sought a workable solution to bringing the heavily manual, paper intensive business into the digital age.

With airports operating at reduced capacity, courier services shutting down and end delivery addresses being closed for business, there are numerous logistical difficulties in getting crucial, physical trade documents to the necessary counterparties. What’s more, with original documents going back and forth multiple times among parties to a trade, it is critical to ensure that employees and clients are suitably shielded from potential risks.

To enable trade processes to flow effectively, concerted efforts are being made to find ways to migrate to digital formats and to reduce the use of paper. These efforts are driving the industry towards a common goal: the optimisation of transactions through digitalisation.

So far, considerable progress has been made.

For example, rather than putting pen to paper, trade finance distribution transactions can now be approved through e-signatures, while manual pickups are being reduced within export collections through the use of digitalised cover letters.

And while some paper-based elements are harder to digitise than others, particularly with regard to Letters of Credit, the current situation is changing attitudes – making the industry more willing to collaborate, advocate and drive digital adaptation across all aspects of trade finance.

The changes that are occurring now and the shift in attitudes they engender, are providing the industry with an opportunity to leverage technology to create a new norm. Once the world settles, rather than looking backwards, the industry can look forward to an era of more efficient, streamlined, value-added transactions.

[i] https://www.wto.org/english/news_e/pres20_e/pr855_e.htm

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Supply chains are a major talking point in the business world at the moment. Ongoing pressures on international trade, from struggling Brexit negotiations to the Trump-China trade war, have shone a spotlight on supply chain practices, particularly amongst smaller businesses who are more likely to feel the squeeze.

On a smaller scale, many businesses are re-evaluating how they trade internationally as a result of these macroeconomic pressures. Despite the challenges, businesses shouldn’t be discouraged. Organizations can aim to reduce friction within their own supply chains to deal with the impacts of new tariffs or customs regulations.

Certain types of businesses will place a focus on introducing leaner logistical practices. An efficient supply chain should pull, not push, and leaner logistics often goes hand-in-hand with reducing waste. These businesses will therefore look to manufacture only what is in demand or what has been ordered by customers, in order to avoid excessive stock build-up.

Others businesses might look at integrating different business units to improve overall performance – for example, a UK logistics specialist integrating with a European partner to ensure access to the wider European Union.

Assess international payments

All businesses will have a need to tighten up the way they pay international suppliers, disperse funds to foreign operations and repatriate their profits from overseas sales.

On the surface, disruptive new tariffs look like they spell trouble. But the incremental savings businesses can accumulate by getting their international payments and reducing the rates they pay for transactions overseas can mitigate impacts from a hike in tariffs.

In other words, a thorough assessment of their international payments will be crucial.

Removing barriers to global market entry

Cross-border businesses are starting to turn away from traditional payment providers and towards specialist fintech companies.

While these fintech companies are younger, they have spent years developing and investing in technology and practices to refine the process of moving money across borders in a frictionless manner. While challenging the incumbents in the payments sector simply used to mean running cheaper, quicker and easier operations, progress continues to be made.

Undoubtedly, the end goal is to make trading abroad smooth and easy for businesses of all sizes. But more recently, the focus switched from offering a price-centric proposition to eradicating the barriers to entry for overseas expansion.

Improving international payments

In the previous couple of years, there have been two main innovations in the payments sector that have been designed to improve the speed and efficiency of international payments.

In sectors such as shipping, there has been a lot of noise about the potential of blockchain technology. Its immutability and decentralised system would allow manufacturers, shipping agents, the end consumer and customs agents to use the same database to track goods across the world.

While the jury is still out on how effective it will prove in changing the process of moving money overseas, steps are being made to make the system more reliable. A payments network built on distributed ledger technology which is decentralised and impenetrable against fraud would provide all parties in a transaction with an incorruptible record of said transaction.

This would have significant impact on the payments sector moving forward, but in reality, a complete switch to blockchain would take years and would require a complete shift in the status quo of the industry.

Multi-currency platforms for smaller business

Another innovation that has come to the fore are multi-currency accounts. Historically, these were only available to large multinational companies with an international network and were subject to high monthly management fees.

However, fintech companies have been developing multi-currency platforms which serve as a viable option for smaller businesses. These platforms enable them to trade, invest and grow like a local company in a foreign country, without the need to pay for a significant number of boots on the ground.

Previously, businesses would have to use banks and maintain a presence abroad in order to open a foreign bank account. This was both time consuming and expensive for business owners. But a multi-currency platform allows a small business owner to open a bank account in different currencies, for example, USD and AUD, through a single platform.

Using a multi-currency platform, business owners don’t have to provide proof of residency or evidence of a local company entity. There’s no need for bricks and mortar headquarters, and no need to hire in-country staff to satisfy and manage the required market presence. A business’ presence in a country can now remain wholly digital.

Without these physical shackles, businesses can move their money from country’s currency to another for just a fraction of the price and hassle than under the archaic international banking stipulations of the past.

Seamless international payments

Ultimately, creating a trading environment where companies have access to their payment history across their supply chain through one platform will provide business owners with improved visibility.

International payments should be frictionless and not operate like a game of Mouse Trap. All parties would benefit from the seamless movement of money, as opposed to a convoluted mechanism reliant on idiosyncratic systems.

If anything positive came out of last decade’s financial crisis, it was the desire to develop new technology to create solutions that enable businesses to operate on a higher level than ever before. It was this desire that led to the establishment of a fully-fledged fintech industry.

For businesses that trade internationally and come under pressure from the decisions taken by those at the top, a focus on improving international payments can make a vital difference.

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