This year marks GTNews’ 20th anniversary. The industry has dramatically changed since the publication was first launched. The global trade landscape has undergone unprecedented change, with a multitude of industry developments and innovations taking place over the past two decades. BNY Mellon treasury services’ Dominic Broom – global head of trade business development – and Bana Akkad Azhari – head of relationship management for the Middle East and Africa (MEA) and the Commonwealth of Independent States (CIS) – discuss those that have had the greatest impact.
Undoubtedly, there has been an astonishing number of developments within transaction banking in the last 20 years. Briefly, how have you seen the industry change, and how has this impacted trade?
The diverse trade landscape we see today has been enabled by not only a rapid pace in emerging technology and increased regulation, but also the rapid development of world economies.
New geographies have played a major role in transforming the trade landscape, particularly in Asia – and to a slightly lesser degree, in Latin American markets – as global commerce has become more integrated.
When China joined the World Trade Organisation (WTO) in 2001, a revolution in world trade ensued, and since then, China has come to dominate world trade in terms of the volume of goods delivered. As China becomes a middle market economy – with its focus now shifting irrevocably towards the manufacturing of higher value goods – trade is evolving further still, with mass production techniques and the manufacturing of lower value goods moving on to new markets, such as Vietnam and Indonesia.
Technology has also played an immense role in paving the trade landscape we see today. Technology, particularly the internet, has enabled small and medium-sized enterprises (SMEs) to trade with each other over far greater distances – enabling a much higher level of inclusiveness than has ever been possible before.
Furthermore, the financing of trade was traditionally dominated by merchant banks, and by the 1990s, American, European and Japanese commercial banks. Now, this is not necessarily the case. New specialist institutions and market entrants have emerged, partly as a result of increased regulation and retrenched bank lending post-financial crisis, as well as emerging technological services that have brought new capabilities to the marketplace.
Bana Akkad Azhari:
It is also important to note that, while there has been a considerable amount of change over the preceding two decades, trade is very versatile by nature. And although we sometimes witness shifts in trade corridors, or in the types of goods that are traded – whether that be a diverted trade route or a shift from luxury goods to more basic goods – trade always finds a way.
For instance, the Arab Spring naturally impacted trade flows in and out of many MEA countries, however, trade didn’t stop, it just shifted to accommodate the circumstances.
You mentioned regulation. In what ways has this impacted trade?
Bana Akkad Azhari:
Regulation and compliance have become much more rigorous, especially since the turn of the millennium, and in response, transaction banks have certainly become more vigilant.
Standards of compliance have become increasingly sophisticated over the years, shifting from simple transaction profiling, to examining all aspects of a trade operation in greater detail. This means checking if the types of goods, the destination of recipient countries, and even the vessel, are legitimate – signifying an actual trade of goods – and compliant in all underlying parts.
Moreover, compliance has increased in terms of looking at the authenticity of documents, with respect to ensuring that there is a legitimate exchange of goods taking place, and that trade instruments are not being used as vehicles for illicit money laundering. This of course, has added to the costs and workload when performing any trade transaction – particularly the number of man hours necessary to review and approve a transaction.
Since the global financial crisis, enhanced requirements and metrics around the use of capital have evolved. New capital requirements, such as Basel III, for example, have increased pressure on banks to optimise return on capital thereby impacting the pricing of a transaction.
As a result, many banks have shifted their business models – cutting non-core businesses and clients – which is what is currently being referred to as de-risking. And given their typically lower credit rating, emerging economies that are heavily reliant on imports and trade have been impacted the most.
It is hoped, however, that technology will be able to play an important role in helping to alleviate some of the additional workload associated with regulation and compliance.
How has technology helped to enhance trade?
Technology has changed the industry beyond measure, particularly with respect to the physical supply chain. Containerisation, which first developed in the 1950s, has been completely revolutionised, thus further enhancing the speed and efficiency with which physical goods are traded. Technology now allows us to track containers, manage shipping lanes and develop logistic hubs around the world – capabilities that were not available 20 years ago.
However, the financial supply chain has been slower to adapt, and, although of a number of interesting technology developments have emerged, there hasn’t as yet been a ‘ground-breaking’ fintech solution in trade finance. This is partly due to the complexity of trade transactions, and the high level of interoperability required between ship owners, companies, banks, customs officials and road hauliers, for instance.
Certainly, the management of documentation remains a key sticking point for trade, and that is partly because the data sets have become more complex. On the financing side there is far greater KYC and regulatory-led analysis around the trading of goods than was the case 20 years ago – largely as a result of the financial crisis – in order to make sure that financial systems and trading systems remain robust and secure.
But technology has significantly helped improve standardisation and enable more efficient and effective data management, which in turn should drive down costs.
Bana Akkad Azhari:
The technology emerging around transparency and access to information is helping banks to equip their clients with the tools to manage their trade flows and trade receivables far more effectively than before.
With new technology capabilities coming to the fore, it is important that banks are able to provide solutions that meet the needs of their clients – and individual client needs differ across different countries and regions. That is why banks must be able to leverage data to gain insights into trends and behaviour, and a real deep understanding of their businesses. That is how banks can add real value to the client experience.
Indeed, the role of the correspondent bank is increasingly revolving around the management and harnessing of data.
Throughout the evolution of trade, correspondent banks have remained an anchor that support, and link, institutions and counterparties across the globe. So as the landscape continues to develop, the services of correspondents must adapt, to ensure banks can deliver optimised solutions to their clients and allow global trade opportunities to be grasped to the full.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.