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Season 1, Episode 29

Host: Mark Abrams, Head of Trade, Trade Finance Global

Featuring: Steve Lotito, Managing Director & Head of Trade Finance-North America, Transaction Banking at MUFG

Board of Directors, BAFT

TFG caught up with Steve Lotito, Managing Director & Head of Trade Finance-North America, Transaction Banking at MUFG. Steve is also in the Board of Directors of BAFT. There are many challenges and opportunities facing the trade finance business that requires daily attention to the most senior Business Heads. We talked about how the US players are dealing with such issues as new regulatory and compliance requirements, finding new pockets of growth and investing in new products in the open account / working capital space, competing and collaborating with FinTechs, managing their balance sheets, attracting and retaining talent and more.

Mark Abrams: I’m Mark Abrams, Head of Trade Finance Global. Today at Trade Finance Global are supporting BAFT Chicago or the 29th Annual Conference on International Trade. What a year it’s been for trade and transaction banking. There are many challenges and opportunities facing the trade finance business. They require the daily attention of the most senior business heads. We’re delighted to be joined by MUFG’s is Steve Lotito today to discuss how the banks are dealing with such issues around regulatory and compliance requirements, finding growth opportunities and optimising working capital.

MA: Hi, Steve, thanks for joining us at Trade Finance Talks. Steve no more than 30 seconds. Can you introduce yourself and tell us what you do at both BAFT and MUFG?

Steve Lotito: Sure. Thank you, Mark. And thank you for having me. Delighted to be doing my first podcast. Well as a BAFT member, I am a member of the Board of Directors and also a member of the Global Trade Industry Council. From a MUFG perspective, I am the Head of Trade for Transaction Banking, and I have responsibility for the North American market.

Key Themes & Trends for Transaction Banking in 2019

MA: 2019 has certainly been quite a year for transaction banking. As we heard at Sibos just a few weeks ago. From the bank perspective, what have been the key themes and trends and transaction banking? And what does this mean for your clients at MUFG?

SL: Yeah, great question Mark. I think over the last year, international growth from both a bank and client perspective has been a driving theme for us this year, as more and more clients look to expand their operations and grow their global footprint, we as the banks have to evolve as well, to meet this client demand. This means now more than ever, it’s become absolutely necessary for clients to work with banks that have the kind of international presence that MUFG does. What we can bring to the table is helping navigate these international markets that they are entering into. We’re finding that even middle market clients are now focusing much more internationally, whether it’s sourcing, setting up their own production facilities, or establishing foreign subsidiaries. Along with this increased focus on growth, has also come a higher focus on trading on open account terms and the need for associated financing. First a traditional Letter of Credit or standby LCs facilities that we’ve been doing for many, many years. Clients are becoming more sophisticated and looking for more techniques to improve their working capital versus working with their banks to just mitigate counterparty risk.

Growth Opportunities for Trade during a Period of Increasing Regulation

MA: So I guess the big question is where are the growth opportunities for global trade, given the increasing regulatory and compliance requirements; where are banks actually focusing their efforts?

SL: Compliance is a word that we know well in trade finance, and I think increased regulatory and compliance requirements go hand in hand, with growth in global trade. It’s definitely not something that comes as a surprise to us. We have a responsibility to our regulators, our shareholders and our clients to ensure that we are complying with all regulatory matters. We need to ensure that we are adhering to all local and international laws in the countries where we operate. There are still a significant number of growth opportunities, especially within the emerging markets and the underdeveloped countries. I think a lot of people focus so much on the large, multinational clients, they tend to forget about the smaller players in this space. It could be the factory in Bangladesh, the supplier in Vietnam, or the farmer in Brazil, there’s so much untapped potential to help these customers. And the impact on them is huge. When you’re able to provide financing to a small supplier, it can truly change the way they do business. Now they have a means to grow – the ability to buy more raw materials, and the potential to increase production. Think about the trickle-down effect of this, the ability to have an impact and move a family from poverty to middle class or providing the opportunity for entrepreneurs in Southeast Asia to provide jobs as they increase production in their factories. It’s actually quite gratifying when you can when you view it in this in this context, we should not lose focus on the good that trade finance those in the world.

Biggest Risks & Concerns in the Trade Finance Sector

MA: With continuing pressure to drive balance sheet optimization cost efficiency, mitigating risks around changing geopolitical situations, trade wars – what are their biggest concerns?

SL: Well, certainly over the last year, the biggest concern we’ve been hearing from our clients is around the trade wars and the corresponding tariffs. In fact, a lot of our clients have expressed worry about how tariffs might impact their business today, many are faced with the dilemma of moving away from existing suppliers, some of whom they built long-standing relationships with, and there’s a trusting relationship as well. Having to find new suppliers to fill this gap is a challenging endeavour for our clients. The risk and repercussions this shift could have on an existing supply chain are not insignificant, you’re talking about a major disruption to a company’s production that can be changed in quality, decreases in performance and of course, you see gaps and communication. So additionally as banks, we need to be prepared as these new corridors or these new trade corridors are established, essentially on two fronts. The first one is, again, and I go back to what I said previously, talking about how we help our clients navigate these new markets, and then two providing the appropriate financing and risk mitigation that our clients need.

FinTechs & Transactional Banking

MA: If we look at FinTech, which continues to promise new distribution techniques, digitization of trade assets, and potential collaboration opportunities, rather than competing with the banks, what’s your view on this? And what initiatives are banks getting involved in?

SL: This is an interesting question because the dynamics are certainly shifting. The relationship with banks in FinTech has completely transformed over the past few years, whereas banks were once reluctant to work with FinTechs in the past, we are now seeing the incredible shift in this dynamic where banks are often wholeheartedly embracing partnership with fintechs. I like to categorise them into two groups: you have the banks, which are completely fine relying on FinTechs to provide all of their technology platforms, so the Bank is simply providing the financing. Then you have banks which have their own internal technology platforms, but will also selectively work with certain Fintechs based on client demand. A lot of this transformation is driven by our client, the client’s desire for simplicity. They want to have a maybe one, two bank systems that they’re dealing that are primarily agnostic. They don’t want to rely on solely a bank’s platform. Okay, with an agnostic platform they’re able to reach out to all their banks, a lot of this transformation is driven by the client’s desire for simplicity, for one or two bank agnostic systems rather than a whole slew of different proprietary systems that they have to learn to integrate with their internal ERPs. There’s also been a change in mindset within the banking industry with regards to collaboration; whereas banks would be quite reluctant to share ideas or practice with one another, today we’re seeing a shift in this dynamic as banks work together to create things like the Trade Information Network which allows for greater visibility and facilitation for trade, suppliers and banks alike. In addition, I would like to mention the good work BAFT does in this regard. We work collectively with the banks to talk about what are the best practices, and we share those best practices because it’s for the wider good of the trade finance community.

BAFT 29th Annual Conference on International Trade

MA: So let’s take it to today and the next few days. What will you be discussing at BAFT this year?

SL: Mark this year, I am excited to be moderating a panel comprised of three fellow members of the Global Trade Industry Council, we will share with the audience what is on the minds of trade finance heads, whether it be compliance, cybersecurity, Fintechs as I just spoke to, the trade wars, and we would be of course remiss if we didn’t mention Brexit.

MA: As you mentioned earlier, you’re part of the BAFT Global Trade Industry Council which brings together many of the global heads of trade in the industry. What are the key initiatives and priorities of GTIC?

SL: GTIC as we call is comprised of the various heads of trade. And our mandate is to collectively work on creating standardisation within our business. So this would include product definitions, trade, documentation, and consistency amongst data. Additionally, we have been expanding our partnership with the ICC of late, to ensure we can leverage off the good work that both organisations are doing.

MA: So collaboration remains key for banks, Fintechs and trade practitioners. We’ve seen a number of initiatives from the Trade Information Network to newly formed ICC digital standards initiative. Which of these do you believe will truly drive bank to bank collaboration interoperability? And do you think this is enough to bridge the frequently cited trade finance gap?

SL: Well I started to touch upon this topic a little bit earlier, but we’ve definitely come a long way from where we were as a banking industry just 10 years ago. The collaboration is there but it still needs to be refined. It’s not enough for a few banks to create a consortium or a network, there first has to be a greater digitization of the trade industry, and then sufficient adoption of these networks before we can truly start to see the benefits. Furthermore, there will always be a certain level of trade finance gap, unless we collectively focused on the entire supply chain, including the tail end suppliers and smaller clients who have historically been overlooked by bigger banks. The potential is there, it’s just a matter of time before we can fully tap into it.

Emerging Leaders in Trade Finance

MA: So finally, and this is one for our younger listeners and emerging leaders; what piece of advice would you give to someone looking to pursue a career in the trade finance industry today?

SL: The biggest piece of advice that I would offer to anyone who asked is first be passionate about your career. You will be doing it for a long time and you want to get up every morning and look forward to going to work. Secondly, this is a great time to be starting a career in the trade. We are at the beginning of a real technological transformation, the digitization of trade, the various uses of blockchain. This is an exciting time to be joining the ranks of trade financiers. But I would also add that this is still a people business. I’ve developed relationships and people from around the world. I’ve enjoyed learning about new cultures, and I’ve enjoyed nurturing these relationships over the years. So be passionate, be open-minded to new cultures and really have a passion for the international aspect of our business.

MA: Great. Thanks very much for your time. Steve. Have a great few days and look forward to seeing you soon.