Trade finance trends in a post-pandemic world
by Ben Poole
The impact of COVID-19 on global supply chains and the trade finance industry in general has created new trends and accelerated some existing ones for good measure. CTMfile's Ben Poole recently spoke with Baris Kalay, head of Trade and Supply Chain Finance for GTS EMEA at Bank of America, about the developments worth paying attention to in this space:
Ben Poole, CTMfile: What are the main trends you have seen impacting the supply chain and trade finance space since COVID was declared a pandemic in March last year?
Baris Kalay, Bank of America: There are four main headlines I'd highlight. Firstly, there has been an increased focus on working capital. Companies were trying to understand the impact on their payables, receivables, inventory, and pay, which naturally created a focus on working capital management.
Secondly, we have seen concerns around supply chain resilience. Our clients have had to ask themselves whether their suppliers will be able to make it through the health crisis and whether they have access to cash, for example.
The third topic is quite a familiar one across all of financial services - digitisation. This has impacted both our clients and how we do business – how we interact with our clients, and how we can move from a paper-based to an electronic platform world. The same is also true between our clients and their suppliers & buyers - digitisation has definitely sped up.
Finally, following the evolution in debt and loan capital markets, ESG is now becoming a core aspect in transactional banking and trade finance, with a huge focus on ESG linked supply chain finance.
BP: Have these trends fluctuated in importance throughout the pandemic?
BK: Absolutely. Right now the world is shifting again, certain economies are opening up. Globally, there is a more positive momentum, and more positive outlook. In the past six or seven months, we have experienced a strong period with onboarding new client SCF programmes.
In tandem, data is also showing us is that although economies are opening up, and we may be moving to the more macro economically positive territory, the issue of working capital still exists as there is a continued uncertain economic outlook.
There is a difference between how different geographies are dealing with the crisis and in which point in the cycle of the crisis they are in, with countries in different places in terms of the number of COVID cases and the level of opening up that they have achieved. Also, apart from COVID-19, geopolitical issues and economic risks continue, and when you consider the global nature of supply chains, supply chain resilience is certainly a concern.
At the same time, the focus on working capital still exists. There is no rush for cash like we saw at the start of the crisis, but working capital management is still at the top of the agenda, particularly when it comes to allowing suppliers to access working capital. The COVID-19 crisis emphasised to both treasurers and CFOs that supply chains are extremely important and if they are not taken care of, they can pose a risk for the business.
BP: On the digitisation point, some jurisdictions that traditionally have only used paper documents for certain areas of trade lifted these restrictions and permitted digital equivalents to keep things moving when the pandemic hit. Do you think these changes will revert back, or can they be here to stay?
BK: The traditional paper-based trade finance solutions - collections, letters of credit, letters of guarantee, for example - are at the heart of the discussion. Clients need digital solutions and the bank is always looking for opportunities to reduce paper and create efficiencies. There are also a number of technology providers in the market. One of the key components of the matter are the legal aspects. It is critical that during the digitisation process we also ensure that the electronic documents are enforceable in legal discussions. The countries that are able to safeguard these legalities will be ahead of the curve. Everybody is ready to progress digitisation and create more efficiencies with traditional trade, but the legal framework must also be considered.
BP: Digging a little deeper on ESG, everyone is keen to be seen to be promoting best practice across the three different strands of that, but how in practice does that stand up to a pandemic? Has there continued to be progress on addressing these issues?
BK: Our experience was that even at the height of the COVID-19 crisis, our clients were incredibly focused on ESG – it is part of supply chain best practice for corporates. If you are able to identify ESG-friendly suppliers, it gives you an idea about the quality of your supply chain. It also gives you an idea that suppliers who are not “ESG-friendly” may open your business up to future risks. Understanding this is very important. From day one we've seen our corporate clients focus on this, and we have worked with a number of them to establish facilities based on ESG metrics.
ESG is constantly evolving. Over the past couple of years, there is more focus on the 'S' in ESG than there has been before. Obviously the environmental side of ESG rightly receives a lot of attention, but the social and governance pillars are incredibly important to address at the same time, and we're seeing that happen more today.
BP: Are there any particular highlights you can mention in terms of developments with social inclusivity and diversity in the supply chain?
BK: Absolutely, BofA issued a US$2bn equality progress sustainability bond last year, and the good news for trade finance professionals in our bank was that supply chain was one of the functions approved to use the proceeds. We are working with a number of our clients to help them onboard minority business enterprises as suppliers to their programme, so that they can get access to this supply chain finance. I think that when banks like ourselves become active in this market, doing those deals and helping their buyers and suppliers, it can create a domino effect and other parts of the world – other companies and banks across the globe will start to follow.
Data plays an important role in this. The more capable that banks and corporates are in terms of analysing the data around ESG, the more intelligent decisions they will be able to make, from both a financing and an ESG perspective. This is enabled by some of the well-known new and emerging technologies, such as artificial intelligence, big data analysis, and perhaps blockchain, which may enable companies and banks to trace where goods are coming from. Utilising all of these technologies will enhance the buyers' view of their suppliers, and the banks' view of the supply chain finance landscape, and it will improve and strengthen the ESG metrics that we all use.
The pace of change in trade finance has increased after COVID 19 crisis, and is not likely to slow down. Increased focus on working capital management, efficient and secure use of data, digitisation, reducing paper, and having ESG-centred discussions in all aspects of trade finance, are here to stay and will be the anchor of trade financiers in the coming years.
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