Banking & finance
Guest blog: Business unusual – Adapting to change and facilitating global trade finance
Ahead of the launch of the International Chamber of Commerce’s (ICC) Global Survey on Trade Finance, BNY Mellon’s Global Head of Trade Finance Product and Portfolio Management, Joon Kim, explains how banks are showcasing their resilience throughout the COVID-19 pandemic, in his guest blog for the world business organization.
As industries go, trade is not typically known for being nimble. Yet, the unprecedented circumstances of the COVID-19 pandemic are forcing the hand of those in global trade, and banks are adapting – and adapting quickly to ensure they can continue playing their fundamental role in enabling the wheels of trade to turn.
With value chains and logistics networks disrupted, and spending and production lines delayed as countries continue to enforce lockdown measures, exporters across the world are having to face and overcome profound operational challenges. The World Trade Organization (WTO) has predicted that world trade will fall by between 13% and 32% in 2020. China, for example, saw exports decline by 17.2% in the first two months of 2020. Interestingly though, China, as well as other Asia-Pacific countries, appear to be slowly trying to make a recovery and return to a degree of normality. According to a customs administration survey made in early March, nearly 81% of 2,552 companies involved in trade had resumed operations.
Navigating the “new normal”
For the foreseeable future, the trade industry is being forced to grapple with a somewhat alien world. For banks – the providers of trade finance, the very lifeblood of international trade – the exceptional circumstances have required a rapid response.
Banks have an obligation to protect their balance sheets – and with risk factors going up, extra due diligence and cybersecurity are paramount. Portfolio quality, credit risk assessment and return on capital – all essential elements in any trade finance transaction – have therefore become more important than ever when it comes to lending. Subsequently, the key focus for many banks today is supporting their core clients.
In order to do this, banks swiftly invoked their business continuity plans (BCPs), in some cases overnight, to limit disruption and help optimise the flow of trade finance transactions. BCPs must be continuously evaluated and adapted if banks are to be positioned to address the fast-moving global developments taking place. ICC recently published a guidance paper on the impact of COVID-19 on trade finance transactions issued subject to its rules to explain how to deal with paper documentation as multiple countries go into lockdown, which has been a valuable resource.
Indeed, with trade finance being such a manual, paper-driven business, navigating the challenges caused by the lockdown is particularly complex. This makes implementing methods to overcome logistical obstacles, including protecting employees, all the more critical to ensure trade can continue to flow.
Compared to many industries, trade is often slow when it comes to introducing new innovations and capabilities. But with paper proving a barrier to trade, there has been a tremendous focus across the industry to find ways to migrate to digital formats. Banks have had to examine every aspect of their paper trails and are working intensely to create and deliver solutions that allow the paper element to be reduced.
Considerable progress has been made in a number of areas and new methods are being adopted. For example, in the case of trade finance distribution, transactions are now being approved through e-signatures rather than wet ink signatures on printed documents. Elsewhere – with respect to export collections – clients are now providing digitised cover letters, eradicating the need for manual pickups. As the industry adapts, it is important that banks have regular dialogue with their clients and continue to increase the digital submission of documents.
Looking to the future
The pandemic has created an environment where trade finance participants have been forced to accept rapid changes, moving away from more traditional and familiar practices. This is driving more alignment and productivity to a common goal: optimising transactions through technology and accelerating the move to digital.
Of course, some paper-based elements are easier to digitise than others. On the letters of credit side, while there have been efforts to introduce electronic channels, participants still tend to abide by Uniform Customs and Practice for Documentary Credits (UCP 600), which requires original documents. The industry will need to work together to advocate and drive adaptation towards the electronic channel, electronic UCP.
There are undoubtedly significant hurdles to overcome in the shorter term. But once the world settles, together, we have the opportunity to harness technology to create a new norm – and propel trade finance into a new era of more efficient, streamlined, value-added transactions.
*Disclaimer: The views expressed herein are those of the author only and may not reflect the views of BNY Mellon or ICC. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.