Trading Up: Ringing the Changes in Trade Finance

These are heady days for the trade finance industry. An area of business that has gone largely unchanged for centuries, new technologies and market participants are now altering the face of trade finance – posing fresh challenges but also opening up a range of opportunities for corporates. Eleanor Hill, Editor, TMI, speaks with Bruno Francois, Deputy Global Head of Trade Finance at BNP Paribas, to find out more.

Eleanor Hill (EH): Which macroeconomic factors are having the most significant impact on trade finance today?

Bruno Francois (BF): The prospect of a trade war is having a significant influence on global trade dynamics. Despite this, or perhaps because of it, trade finance is performing decently as many companies have started to take action to mitigate risks when the economic environment is becoming more complex. Some changes in behaviour have been seen in the ways companies are sourcing with a trend to bring part of its sourcing and manufacturing closer to their home markets. As such, we are seeing a significant rise in intra-European trade, which is positive for the continent and the industry.

The uncertain macroeconomic environment is also creating a variety of risks for companies. When you have more risk, you look for solutions to mitigate those risks, which is good for the trade finance business. For the first time since 2012, we are seeing the letter of credit (LC) market growing again. So, trade finance is experiencing an uptick – and other factors such as new technologies and partnerships are feeding into that too.

EH: Speaking of new partnerships, how is the competitive trade finance landscape changing? And what does that mean for corporates?

BF: The whole ecosystem is changing. Corporates have always wanted to extend their payment terms, to pay their suppliers later without damaging their supply chain. This is where banks would traditionally step in with a financing solution. However, the banks were limited in how much trade finance they could provide, given the risks in the market. So, the much talked-about ‘trade finance gap’ began to appear.

Against this backdrop, we saw some new actors step into the game alongside the banks, such as transport companies, port authorities, fintechs, and even governments. They began entering the financing world in order to help keep supply chains moving. And this has been extremely positive from a corporate’s point of view – opening up more perspectives and increasing the fluidity of flow through digital initiatives.

In terms of the competitive dynamic, fintechs are not replacing the banks, rather they are complementing them in this evolving ecosystem. There is a lot more interaction in the market today. Banks have progressively learnt how to collaborate with new entrants to the market, and even with each other. There are numerous consortia – groups of 10 or 15 banks working together with fintechs and fully involving their clients to ensure that they are meeting corporate needs. The agile way of thinking and operating that fintechs have brought to the industry is also a positive thing, given how slow-moving trade finance has traditionally been in terms of innovation.

EH: In terms of specific innovations in the trade finance space, which do you think are particularly worth highlighting?

BF: The industry is currently full of buzzwords such as blockchain, artificial intelligence (AI), robotic process automation (RPA), and so on. These concepts can make the path towards a new, innovative trade finance landscape sound relatively easy. While these are certainly exciting technologies, the trade ecosystem is so complex that if you do not have international rules and standards to cover the application of such technologies, it will be difficult to move forward.

The electronic Bill of Lading (eBL) is an example I would use here – it is undoubtedly a great step forward, but currently there are only a few jurisdictions that will accept it. The industry needs international rules to ensure it is accepted globally, which is something we are looking at with the International Chamber of Commerce (ICC) and the other large institutions.

Here, I would highlight the Voltron initiative, of which BNP Paribas is a part. Voltron is a platform aimed at making the letter of credit process digital and more efficient. Built on R3’s blockchain framework, Corda, Voltron trials have enabled an end-to-end digital LC bringing transparency, fluidity and speed in the LC processing, which ultimately would enable costs to be reduced. We are excited to see what the future holds for Voltron.
Another interesting initiative is Marco Polo. Launched in 2017, Marco Polo is a trade finance platform built on an interoperable business network powered by open Application Programming Interfaces (APIs) and blockchain technology. For treasurers, the benefits include access to a wide range of funding providers and solutions to improve the working capital.

The final initiative I will mention is the Trade Information Network (TIN). This is more conceptual and, unlike Voltron and Marco Polo, TIN is not blockchain-based; rather it revolves around communication layers. TIN will be a means to exchange all relevant trade data in a secure environment. We believe that, without proper communication channels, new trade initiatives cannot work on a scale that serves the entire market.

EH: Finally, do you see a trend of corporates looking for more sustainable and responsible supply chains?

BF: The entire ecosystem is talking about this topic. All stakeholders in the supply chain – buyers, suppliers, banks, employers, shareholders – all of them want this. And I truly believe that you can succeed in this industry today only if your initiatives are sustainable.

Of course, in reality, there is still a lot of work to be done. Cost constraints are a significant factor, as are logistics. For example, shipping containers from China to supply buyers in Germany is, in fact, the cheapest and the least polluting way of transporting goods, as you can put circa 14,000 containers on one boat. Perhaps one solution is the proximity of sourcing, with companies sourcing closer to home. And as I mentioned earlier, we are seeing some interesting developments whereby clients are moving their production back to Europe, so this is a trend to watch.

In terms of what banks can do in this regard, at BNP Paribas we have already decided to exit polluting sectors, and we have a strict corporate social responsibility (CSR) policy across the bank. We are also investing in solutions that encourage sustainable supply chain behaviour. For example, we have developed a product whereby suppliers that are following or meeting sustainability criteria can enjoy better financing terms than those who are falling short. This type of initiative is a first step, but in the medium- to long-term the industry has no choice but to take sustainability and CSR incredibly seriously and to integrate it into products, as well as regulations and standards.