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Sibos 2023, held this year in Toronto, allows industry stakeholders to come together to discuss industry trends and issues. 

At the conference, Trade Finance Global (TFG) spoke with trade industry leaders: Avanee Gokhale, Global Lead for Trade Strategy at Swift; Anirudha Panse, Managing Director – Head of Trade at First Abu Dhabi Bank; Marie-Laure Gastellu, Global Head of Trade at Societe Generale; Gwynne Master, Global Head of Working Capital Solutions at Lloyds Bank; Scott Stevenson, Senior Vice President, Trade at BAFT; and Tod Burwell, President & CEO at BAFT.

This roundtable discussion with the BAFT Global Trade Industry Council (GTIC) revolved around the macro trends in global trade and working capital, the results from the Asian Development Bank’s (ADB) 2022 Trade Finance Gaps, Growth and Jobs survey, correspondent banking and de-risking challenges, and the prospect of digitalisation.

Macro trends in global trade and working capital

In the ever-changing landscape of global trade and working capital, several macro trends and shifting priorities, which reflect the evolving challenges and opportunities facing trade finance professionals, are worth noting.

Firstly, there is a growing emphasis on understanding the intricacies of cross-border trade, as it directly impacts payments. 

Approximately 50% of cross-border payments are driven by trade, making it imperative to comprehend associated risks, business flows, and the diverse actors involved. 

This complexity is further compounded by the fragmented nature of the trade space, with multiple platforms, rulebooks, and processes spanning physical and financial supply chains across various jurisdictions and geographies.

While technology plays a significant role in streamlining these processes, it is not enough on its own. 

Gokhale said, “A key strategy from a Swift  perspective is to support a future-ready ecosystem that is anchored in standards and promotes interoperability and digitisation.”

In parallel, the landscape of working capital is experiencing notable shifts. 

Sustainability has become a core focus, with commitments to allocate substantial funds over the next decade. 

In regions like the Middle East, diversifying away from oil-based to knowledge-based economies and incorporating sustainability and inclusive financing are top priorities, reflecting a general shift in the market’s demands.

Panse said, “The market has become far more savvy now. A few years ago, most of the Middle Eastern corporates were very happy doing their trade financing on the back of a letter of credit, but that is changing more and more to open account.”

In regulatory matters, electronic trade documents and various financial crime regulations influence trade and working capital solutions. 

Collaboration, innovation, and adherence to standards are essential in addressing these regulatory changes effectively.

The emergence of environmental, social, and governance (ESG) regulations, in particular, underscores the need for clear standards, data capture, and reporting. 

Gastellu said, “As of today, it’s not clear what we have to report on as banks. We are all doing our own reporting, but we are really lacking industry standards ensuring that we all report according to the same criteria and we definitively need some clarification on that to drive transparency.”

Master added, “We do not want to see everybody inventing their own wheels. Just like AML/KYC, ESG carbon reporting presents a great opportunity to collaborate and establish clear regulatory guardrails.”

Industry players must collaborate with regulators, auditors, rating agencies, and investors to ensure meaningful progress in ESG compliance and measurement. 

Addressing the $2.5 trillion trade finance gap

The Asian Development Bank’s 2022 Trade Finance Gap, Growth, and Jobs survey, released last month, shows that the trade finance gap has widened to $2.5 trillion, up from its previous $1.7 trillion.

However, the widening nature of the gap does not change the nature of the roadmap to try and solve it.

Burwell said, “We looked at this question with the World Trade Board, and what we came up with was there were fundamentally five key building blocks to addressing it. 

One was digital infrastructure, one was data infrastructure, one was legal infrastructure, one was new funding sources, and then one was technical capacity.”

Digital infrastructure involves creating digital platforms and solutions that streamline trade processes, making it easier for businesses, especially small and medium-sized enterprises (SMEs), to participate in international trade. 

Panse said, “Banks’ mandate from their shareholders is to grow assets and increase revenues. Banks actually like the SME business given the returns on capital as well as the absolute NIMs this segment provides. Many banks like FAB are actively lending to SMEs and thus are actually helping address this gap. However, the problem comes in when you don’t have enough information about the SMEs”

This is where data infrastructure plays a vital role. 

Through enhanced data standards and interoperability, firms exchange information and documents seamlessly, building a data footprint that can help them get financing down the road. 

Standardisation efforts, led by organisations like the International Chamber of Commerce (ICC) and Swift, aim to improve data quality and accessibility for all participants, including SMEs.

Burwell added, “Large global banks tend not to be the ones best placed to go after some of these markets that are most starved. The large global banks oftentimes depend on the smaller local banks to do that level of origination. But there’s a gap in many of these smaller local banks with the technical capabilities and the data capabilities and the rest of that.”

Building technical capacity is a long-term strategy focusing on industry education and skill development. 

It includes training stakeholders who may not fully understand the complexities of trade finance, ensuring they can leverage digitisation and data-driven solutions effectively. 

This can be across all areas of the industry, from banks through to the smallest prospective trader.

Master said, “We started the journey, focusing on helping the little company, the SME, with their biggest pain points. Our focus was on education and process simplification. We began with the Lloyds Bank International Trade Portal, open to all companies in the UK, not just our own clients, and at no cost because we want businesses to learn and to experience a more friction-free trade journey. We then introduced digital solutions to make trade simpler, faster, safer, and more sustainable. At the end of the day, it’s  all about helping Britain trade to help Britain prosper.”

Correspondent banking and de-risking challenges

Trade finance confronts significant challenges, primarily linked to the declining number of correspondent banking relationships and the practice of de-risking. 

Stevenson said, “To a great extent, this is being driven by reputational risk. At one point in time, the concern was really more of a regulatory risk or a credit risk. But that’s really been taken off the table with the concern about sanctions, with the concern about counterparties, the issue of reputational risk.”

Unlike financial or credit risk, reputational damage can be enduring and challenging to recover from, making banks increasingly cautious about their trade activities.

The fear of sanctions and the complexity of international trade transactions contribute to derisking. 

Banks are reluctant to engage in transactions that might indirectly involve sanctioned entities or nations, and the intricate nature of global trade makes it challenging to ensure full compliance with sanctions rules.

Enhanced transparency is seen as a potential solution to address these challenges. 

However, sharing sensitive transaction data among banks raises privacy and ownership concerns since the data belongs to the participating banks. 

Gokhale said, “While a lot of data might be on Swift, we don’t own that data, it belongs to the banks, and we are not able to access or share it freely. This makes it a much bigger problem than Swift can tackle alone.”

Finding ways to share relevant data while upholding privacy and confidentiality is an ongoing dilemma. Some regions have seen collaborative networks among banks emerge. 

These networks aim to share information about trade transactions anonymously to build confidence and reduce perceived risks. 

Such initiatives can enhance access to trade finance, particularly for SMEs, and promote transparency, but are not a perfect solution.

Panse said, when asked about his views on Trade Risk Distribution, “Many Banks tend to hold assets than distributing them actively. They would only look to distribute the assets if there is mandate from their internal credit teams, or they are hitting their capacity or capital constraints internally. In other cases, the participant banks are not able to buy the offered assets as they may not have relationship with the buyer or are constrained by internal return hurdles.”

Digitalisation won’t succeed without standards

Trade digitalisation holds immense promise for addressing the trade finance gap, but it also requires a multi-faceted approach. Gastellu said, “While technology is key, I believe standardisation is even more important.”

Without clear standards, the benefits of technology adoption can be limited. 

Standardisation fosters interoperability, enabling various stakeholders to exchange trusted data seamlessly. 

This reduces the risk of errors and enhances transparency and efficiency across the trade finance ecosystem.

While technology plays a pivotal role, it’s not the sole solution, and it must go hand in hand with legal harmonisation and financial inclusion. 

Ensuring that digital transactions are legally recognised and hold the same weight as paper-based ones is crucial, and achieving this equality in the eyes of the law requires regulatory support and collaboration between governments, industry bodies, and financial institutions.

Financial inclusion is another key objective, especially in emerging markets where digitisation can significantly expand access to financial services. 

Stevenson said, “Look at Safaricom in Africa. They have over 100,000 farmers on their phones conducting banking and conducting market analysis, and the farmers are being lent to based on that. They’re putting the banks at risk because the banks don’t want to take these farmers on as clients, but Safaricom thinks this is a great business. There’s a whole technology gap that can be jumped in terms of bringing in more people into the financial systems.”

Bridging the financial inclusion gap requires collaboration between traditional financial institutions and innovative digital service providers.

The roundtable at Sibos 2023 in Toronto illuminated the complex issues that the global trade industry must navigate. 

Echoing the sentiments expressed during the Sibos plenary opening speech, Canada stands as a traditional gathering place for many nations, including the Mississaugas, Anishinaabe, Ojibwe tribes, and Wendat people. 

This spirit of gathering and collaboration serves as a metaphor for the industry’s future path. 

Just as Toronto embodied dynamism and diversity, the future of trade digitalisation hinges on creating an ecosystem where technology and regulation converge to enhance transparency, efficiency, and financial inclusion. 

In these uncertain times, the industry has the opportunity to coalesce into an economic force for good, fostering collaboration and partnership for the greater good.