Global Finance: Adversity Breeds Opportunity

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Via Global Finance

After a horrible 2020, transaction banking is poised for a rebound.

Optimism permeated discussions during the 2021 annual meeting in June of the Bankers Association for Finance and Trade (BAFT). More than 2,000 attendees from 66 countries actively discussed the status and future of trade finance during the four-day virtual event.

The opening and closing keynotes provided strong economic outlooks as bookends for the event. Economists from Bank of America (BofA) and HSBC estimated that the global GDP was on track to reach a 5% or 6% growth rate in the second half of the year.

Individual GDP growth will vary country by country, noted Brian Moynihan, chairman and CEO of BofA and the closing keynote.

According to Michael Roberts, CEO of HSBC USA and the opening keynote, there are some areas of weakness. “Brazil and India see some improvement despite their horrific experiences with Covid-19.” However, the markets with strong growth correlate with areas that have higher vaccination rates, he added.

Meanwhile, BofA economists predict that US GDP growth could reach as high as 7% in the second half of the year, after reaching a 5% growth rate in 2020. This would be a doubling, or even a tripling, of GDP growth for the US, which has seen its GDP growth fluctuate between approximately 2% and 3% for the past few decades.

According to Moynihan, much of the growth could be tied to unspent stimulus payments sitting in customer accounts. “We estimate that 65% to 75% of it is still in our customers’ accounts,” he said. “And there is still the possibility of even more stimulus.”

If businesses continue to face supply chain issues, it could constrain GDP growth, he added.

Knock-On Effects

Covid-19’s near shutdown of the global economy in 2020 changed the face of transaction banking by quickening technology adoption while eliminating many inefficiencies.

The pandemic forced every bank to digitalize its offerings, according to Moynihan: “If we did the Paycheck Protection Program via mail, we would never have gotten there.”

Digitalization went from a “nice to have” to a business imperative for most banks. For example, HSBC expects to digitalize 80% of its controls in the next eight to 12 months.

“Clients are not waiting around for banks to get their act together,” said HSBC’s Roberts. “That is why we are maniacally focused on this.”

According to panelist Andy Kollegger, group managing director and head of Corporate and Institutional Clients International at UBS, client companies also have raised the bar on the quality of the digital offerings they demand. “They don’t want to get weekly reports in stacks of papers,” he said. “They want to access online and real-time information. They don’t want to authenticate using a myriad of little machines using code. They want to authenticate online with a secure system.”

From the start of the pandemic lockdowns, client concerns over deposits and principal lessened while they pressured banks for more-granular monitoring of cash flows and improved forecasting capabilities. “Some days [the forecasting] was a day in advance and sometimes a week in advance,” said co-panelist Diane Reyes, group general manager, global head of Liquidity and Cash Management at HSBC. “Then it went quarterly, and then six months in advance.”

Return to Normality?

Tom Wolfe’s novel You Can’t Go Home Again might as well have been about transaction banking. The pre-Covid economy no longer exists and has been replaced with shortened and simplified supply chains since the start of the pandemic.

“Many businesses are moving from just-in-time strategies to  just-in-case strategies, which reduce the reliance on certain suppliers,” said panelist Michael Spiegel, global head of Transaction Banking at Standard Chartered Bank.

Such moves have introduced new markets and trade corridors, as more investments pour into markets like India, Bangladesh, Vietnam, Mexico and various Central and Eastern European countries, he added.

On a more personal level, banking heads are still mulling how to bring remote workers back into their offices. The conversation is no longer “if,” but “when” and “how.” For some, it will mean going back to the old way, perhaps with slight modifications. “At the end of the day, we are a ‘work from the office’ company,” said BofA’s Moynihan, while acknowledging that “we might have to redefine what that means.”

Moynihan believes the prolonged time away from the office has already adversely affected tens of thousands of employees the bank has hired since 2019. “The kids we hired in 2019 worked in the office for only a short time and those we hired in 2020 and 2021 have never been in the office,” he noted. That has hindered new employees in gaining the benefits of informal conversations with mentors and experienced colleagues. For Moynihan, at least, “to get the culture right and the risk management right means getting back to the office.”

Yet, some institutions found benefits from remote work, including increased productivity, and seek to leverage the new capacity. HSBC is among those expecting to take a hybrid approach, splitting employee schedules between working from the office and working remotely. “We can perform in a remote environment and have proven so,” said Roberts.

ESG Blooms

According to various conference speakers, one topic that the pandemic did not sidetrack, even temporarily, is the continued growth and interest in sustainable development and the investments that enable it. If anything, the pandemic seemed a reminder of rising risks to sustainability.

“I don’t know of a sector or a CEO who has not thought about it and is not addressing it,” said HSBC’s Roberts.

On April 21, 43 banks founded the Net-Zero Banking Alliance, whose current 53 members commit to aligning their investment portfolio with achievement of net-zero carbon emissions by 2050 in tandem with the United Nations’ Race to Zero initiative.

HSBC, a founding member of the Alliance, expects to reach zero emissions within its operations by 2030, he added.

UBS, also an Alliance member, signed the Principles for Responsible Investment of the Financial Stability Board’s Task Force for Climate-related Financial Disclosures and declared that sustainable investment was the default for discretionary accounts, said UBS’ Kollegger. “That is a big move for the world’s biggest wealth manager.”

BofA already discloses its metrics for sustainable investment using the environmental, sustainable and governance (ESG) reporting framework developed by the “Big Four” accounting firms and released in 2020.

Meanwhile, HSBC has expanded its ESG offerings beyond simply the asset side of its balance sheet.

“During Covid-19, we felt that clients should be able to participate on the depositor liability side of the bank’s balance sheet,” explained HSBC’s Reyes. “There are such things as green deposits” that enable clients to pledge their deposits toward offsetting green financing and permit them to claim credit in their corporate filings.

“We started hosting these offerings in three markets and will move into many more markets this year,” she added.

According to Moynihan, these initiatives are the only way the world will solve its most significant problems. Without incorporating sustainable investments within finance, he believes, there is not enough money to meet the United Nations’ 2015 Sustainable Development Goals, which he estimates would take $6 trillion annually. By using defined metrics, like those established by the World Economic Forum’s International Business Council and others, companies can deliver to their shareholders and society. “They are not mutually exclusive,” he concluded.

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Via World Economic Forum

Decentralized finance (DeFi) is emerging as a tool for smaller businesses in developing markets, particularly for remittances and small loans; the transaction banking industry is beginning to see DeFi’s potential to overhaul the inflexibility of present processes; uptake of DeFi in transaction banking could open up new capital opportunities for larger companies and increase liquidity for SMEs.

Decentralized finance had a resurgence last summer. Cryptocurrencies like bitcoin and ether are now becoming more widely accepted for payments and USD Coin (USDC) has made significant progress towards being an asset that will maintain its value without future depreciation.

At the same time, the blockchain technology that underlies cryptocurrency and its supporting financial infrastructure are on their way to offering a system of financial rails in parallel to – and connected with – traditional financial infrastructure.

Both Coinbase and Compound Treasury have released USDC-based loans that guarantee at least a 4% yield (far higher than traditional products of a similar risk), and smaller platforms are offering cross-border access to capital with rates that are far more variable but would be unavailable otherwise. So far, this growth in loan products has come from the retail sector: individuals holding and trading crypto-assets for personal use. Banks such as Morgan Stanley and US Bank now offer crypto-products for their wealth management clients. But what about businesses?

Since its inception, DeFi – literally decentralized finance or blockchain-based forms of finance that do not rely on centralized intermediaries such as banks – has been adopted to some extent by smaller businesses in developing markets whose needs are unmet by the traditional banking system. For example, some businesses use payment companies like BitPesa in Africa, Tranglo in ASEAN and the major DeFi exchanges to either make direct payments or convert payment amounts to USD-backed stablecoin for cross-border remittance.

The greater transaction banking industry now sees DeFi as a potentially significant growth engine and disruptive force. Transaction banking addresses the operational needs and day-to-day transactions of businesses and financial institutions. Usually, only companies who are top customers of banks are able to have ready access to these services, which focus on managing the liquidity of a company, cash flows, trade and supply chain finance and other instruments needed to facilitate domestic and international corporate transactions. In 2020, industry-wide transaction banking revenue reached $1 trillion.

According to Samantha Pelosi, SVP of Payments and Innovation at BAFT, the largest trade association for transaction banking: “The potential efficiency gains and democratization of finance associated with DeFi are attractive to traditional financial institutions. However, DeFi negates the need for relationships with trusted intermediaries, which makes the model disruptive and somewhat alien to these banks.”

Virtually all major international commercial banks have at least piloted the use of blockchain for transaction banking services – which remain slow and cumbersome – but none of these pilots have involved DeFi. Rather, they focus on making bank processes more efficient and replacing traditional financial instruments with standardized digital assets. That means the approval and execution of transactions still ultimately go through the framework of traditional banking or more established fintechs. For example, a business’ credit risk is assessed based on financial statements and only applies to that specific business, without the ability to distribute risk across its system. The infrastructure around client support is also quite extensive, which means clients cannot be serviced without a high threshold cost. These practices hamper capital opportunities for larger enterprises and freeze out SMEs.

DeFi platforms provide an alternative system, not simply a plug-in to existing banks. Their decentralized nature means transaction onboarding and market-based risk assessments are much easier to scale across a business’ wider system because access to relevant information is not dependent on centralized processing or a prior relationship. Prior to DeFi, a business would have to complete anti-money laundering and “know your customer” checks for every source of capital and convince their counterparts to onboard to the same transaction banking programmes. They also would not be able to present evidence of performance on their debt or payables outside of financial statements.

DeFi allows for the exchange of trustable data across a system, mitigating these barriers to business financial services. Until now, however, most companies did not seriously consider DeFi as a viable alternative to their bank’s services because of the volatility of crypto-assets, regulatory uncertainty and the immature technology involved. Even Tesla’s purchase of $1.5 billion in bitcoin was motivated by the direct financial value of bitcoin as an asset, not by its transaction banking needs.

While DeFi previously solved the complex requirements around portable digital ID for businesses and has a roadmap for providing access to financial performance track records in transaction banking, it completely lacks two crucial elements: a one-to-one exchange with fiat currency; and interoperability between different blockchains so that counterparties could freely interact with one another. The former is necessary for cryptocurrency to offer a stable store of value that can be used as currency and to have an easily accessible interface with the traditional financial system. Interoperability is crucial for transactions to occur at scale in the highly fragmented blockchain space.

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New BAFT whitepaper analyzes the state of trade digitization at the end of 2020, the progress made during the COVID-19 pandemic and highlights necessary actions to ensure continued advancement

WASHINGTON – BAFT, the leading global financial services association for international transaction banking, in collaboration with the International Chamber of Commerce (ICC) and the International Trade and Forfaiting Association (ITFA) today announced the publication of a new whitepaper, Progress on Trade Digitization 2021. The whitepaper analyzes the state of trade digitization at the end of 2020, highlights progress made during the COVID-19 pandemic and proposes additional changes to ensure digitization’s continued and sustainable advancement.

According to a 2020 ICC Annual Survey, 54% of respondents revealed they introduced new digital solutions to address difficulties posed by COVID-19. These digital initiatives took various forms, including mobile network providers reducing fees, governments raising contactless limits to reduce in-person cash transactions and increased daily and monthly limits for users.

“While these digital developments in the wake of COVID-19 were incredibly helpful, our ultimate goal is to make positive changes that are sustainable long-term,” said Stacey Facter, senior vice president, trade products, BAFT. “To do that requires a legal environment that allows for digital documents to scale, as well as a global adoption of the standards in place today and continued support for those still under development. These are critical factors in maintaining the forward momentum of digitization.”

“The arguments in favor of digitization have been accepted by the majority of the world’s biggest trading nations but implementation still remains a work in progress,” said Sean Edwards, chairman, ITFA. “Fortunately, we possess the tools and resources to make this happen and the pace of change can be very quick with the right support.”

The whitepaper highlights six countries as case studies in how governments can implement reforms that harmonize their domestic legal frameworks with UNCITRAL’S Model Law on Electronic Transferable Records.

It also discusses the need for cross-industry, cross-technology platform-based standards to improve the effectiveness and efficiency of digital trade. The paper offers examples of standards available today and encourages stakeholders to consider how they can leverage them. For those interested in going a step further, the paper suggests participating in the creation of global standards through the DSI.

To read Progress on Trade Digitization 2021, click here.

BAFT Media Contact:
Blair Bernstein
Director, Public Relations
[email protected]
+ 1 (202) 663-5468

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New report provides guidance and information on LIBOR transition for trade finance industry

WASHINGTON — BAFT, the leading global financial services association for international transaction banking, today announced the publication of the first edition of LIBOR Transition: Impact on Trade Finance – Frequently Asked Questions Guide to inform and respond to frequently asked questions related to LIBOR transition for U.S. Dollar and UK Pound Sterling.

Trade is essential to GDP growth and supports commercial flows and supply chain sustainability globally. In 2019, global trade flows totaled $18.1 trillion, with an estimated $9.77 trillion of that sum comprised of bank intermediated trade. USD LIBOR is the most widely used benchmark across the trade finance industry globally. As the market prepares to transition away from LIBOR to Risk Free Rates (RFRs) by the end of 2021, BAFT member institutions have been working steadily to prepare for the change.

“This frequently asked questions guide provides timely information for trade finance practitioners who are preparing for the transition away from LIBOR,” said Diana Rodriguez, vice president, international policy at BAFT. “The trade finance business has long stressed the imperative for a forward-looking term rate to ensure the uninterrupted provision of financing to support cross border trade. We were pleased to see the development of Term SONIA in the UK which forged a clear path for the industry to transition. In the U.S., we are awaiting and closely tracking the ARRC’s plans to formally endorse a SOFR Term Rate and are evaluating the viability of other term rates solutions for the U.S. Dollar.”

The BAFT guide is the culmination of several months of analysis by the BAFT IBOR Transition Working Group, as well as active engagement with vendors providing term rate solutions for the U.S. Dollar. Trade finance practitioners are encouraged to work internally with LIBOR transition teams to review documentation carefully to determine what elements of the portfolio and services reference LIBOR or other IBORs that will cease and what fallbacks would apply when the rate becomes unavailable. This resource will be updated regularly as new official sector guidance emerges and to reflect emerging BAFT working group best practices. Future iterations of this guide will consider transition priorities for other important currencies for the trade finance business.

To read the LIBOR Transition: Impact on Trade Finance – Frequently Asked Questions Guide, click here.

Read the full guide here.

BAFT Media Contact:
Blair Bernstein
Director, Public Relations
[email protected]
+ 1 (202) 663-5468

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Via TXF News

One hundred years of an international trade body was a virtual party not to be missed. TXF spoke to Tod Burwell in the wake of the Bankers Association for Finance and Trade’s (BAFT) centennial celebration to find out what has been the secret of the trade organisation’s longevity, how it has helped moved international trade in a positive way, and what excites the organisation’s President and CEO about the future.

Interestingly, in the Articles of Association of BAFT in 1921, it was established to provide a medium by which its members may interchange opinions and establish uniform systems for the conduct of foreign business, “to urge the passage of wise and useful legislation and to oppose the enactment of prejudicial laws’ and to aid the development and maintenance of foreign trade.” That was back when BAFT was the Bankers Association of Foreign Trade, and it was purely a US organisation. It’s been fully global for a long time now, but those goals remain.

TXF: What’s the recipe for surviving 100 years and helping finance a century of global change?

Tod Burwell (TB): At the association’s 100th anniversary celebration I sat down with some of the chairs from the past 25 years who shared the issues they faced at the time and what BAFT did. What struck me was that there were always significant issues and significant challenges, whether that was 9/11, a debt crisis, the global financial crisis, or some other issue that was affecting the entire industry.

And as chair of the industry association, the challenge was how do we rise to the occasion to help support members. That remains what powers and motivates all of us as a staff, as a board and as an industry. The balance of the centenary conference was forward-looking – although we did cover BAFT’s history – there was a sense of being in the new century.

The economic axes of the world have been shifting, as has geopolitics. The pandemic has really accelerated some of the trends that were taking place before, whether it’s digitization, the implications of changing trade lanes, digital currency, etc. When I think about our role, we have to remain keen to the problems and challenges that our members are facing and the way we provide tools that will help them transition.

TXF: Are banks still the chameleons you characterised them as being in 2019 [before the pandemic]?

TB: The theme this year was more about the network and the importance of the network in connectivity. That was in a lot of ways brought on by the pandemic. When we talk about change, the first overriding theme is how we used to work before, forget it! That’s not how we will work going forward. Everyone has had to adjust how they how they go about their business, and their daily lives. CEOs and regional CEOs at our conference talked about how organizations are adapting for the next 10 to 20 years, whether that’s having hybrid work arrangements or how they are truly committing to diversifying the workforce.

Sustainability has been a topic for the past couple of years, but it’s become much more urgent now. And if you think about the workforce and the next generation of leaders, it’s part of their DNA. The expectation is that organizations are going to have to be environmentally and socially conscious and they’re going to have to be inclusive and diverse. And if you’re not, then you’re not going to be able to get the talent to drive your business. It wasn’t explicitly said, but the sense that I was getting is that organizations are changing because the people in them are changing.

TXF: One of secrets of evolution that has been important for BAFT is bringing up the next generation of trade bankers to hand on the baton through the Future Leaders program – can you tell us more?

TB: This has been one my personal favourite endeavours since I’ve been at BAFT and I’m super proud of having been part of this. It’s powerfully important that we as an industry prepare for the transition of leadership. We had our sixth class of Future Leaders just complete five projects and we’re a month away from preparing for our seventh cohort. We’ve already had the opportunity of seeing some of our Future Leaders becoming heads of transaction banking, or becoming members of our board of directors and to go on to do great things.

I sit on the board of an executive education program and we were discussing the curriculum for the next group of executive leadership development. The topics that were being discussed were exactly the topics that BAFT Future Leaders just spent 16 weeks looking into. It will be interesting to hear the takeaways from the executive leadership on those same topics and be able to compare and contrast with the findings of the BAFT Future Leaders class of 2021. We’re excited about continuing this program. This year was our largest class, with participants from several new countries. It continues to grow and we look forward to taking it to the next level.

TXF: You mentioned environment, social and governance (ESG) and diversity and change which have been themes of the event and how to secure for the next 100 years. How is the ‘S’ – social – working together with the other elements of ESG in BAFT?

TB: Initially, when environmental issues and climate change started to come into the banking sector the focus was really on green bonds and how does a bank finance and enhance certain sectors versus others. Over the past year or so the transaction banking industry has found ways to better service their clients because their clients have taken on ESG much more assertively, much more aggressively in some cases.

European regulators have been one of the early ones to lay out some benchmarks for the industry, but it’s been the private sector that has really driven this much more so than government policy over the past couple of years. The banks have found that they need to be very active and capable to serve the interests of their clients.

One bank CEO told me that around 70% of their clients have some sort of ESG initiative and that becomes part of their regular conversations. The shift has now started to move from the E to the S. And I connect this in some ways with the growing emphasis on DE&I [Diversity, Equity and Inclusion] as well. But it’s got a very regional or local flavour to it because the role for organizations in society depends on which society you’re talking about. One of the Future Leaders projects looked at sustainable finance, and another looked at DE&I. These are global issues, but the takeaway was that the needs of the market and the focus of the market varies drastically by localaity. And so not just the environmental piece, but the social construct and the role of the intermediaries [in both].

TXF: We’ve talked about ESG but in terms of also digitization of trade, central bank currencies, Libor transition, Basel III, the future of payments, all topics that came up in the Centenary conference, any highlights you’re particularly looking forward to?

TB: Everything that you mentioned is something that we have an active workstream on. So there’s no shortage of problems to solve! The issues around Libor and Basel III, prudential issues I look on as a core, steady state of things we need to do and focus on. Where the energy and the excitement will be in the next couple of years is clearly going to be around digitization, both in trade digitization as well as the future of payments and the role of digital currencies.

I reflect back on a lunch at SIBOS 2019 with some members of a central bank. I posed the question around digital currency and whether it was in the interest of central banks to really advance and being much more aggressive and assertive on the topic, as opposed to trying to stop the trend. At that time, there was a lot of pushback, scepticism, and a lot of uncertainty that digital currencies were in some cases being used for things that were not healthy for the overall financial system.

Two years on, we’re in a very different place. There are 60 or 70 different central banks around the world who have some projects to implement or advance digital currencies in their markets. That has the potential to fundamentally change how people transact. It has the potential to create a lot more inclusivity in markets where the underbanked are really challenged. It will also force banks to accelerate some of the innovations that they’ve been working on. So I am most excited in the next couple of years about the changes that will come from digitization in trade and flows.

BAFT’s virtual audience seemed to share some of Burwell’s enthusiasm for central bank currencies – asked whether they thought ‘do we need a central bank digital currency?’ Only 17% said ‘no’, nearly half (46%), said ‘maybe’ and fully 37% said a definitive ‘yes’. Watch this space.

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Officially announced at BAFT’s 100th Anniversary celebration, BAFT is pleased to recognize the following individuals for their tireless commitment and contribution to the association.

WASHINGTON – In an endeavor to publicly acknowledge individuals from member organizations who have volunteered their time and worked tirelessly with the association throughout the previous calendar year; BAFT annually awards select members with the BAFT Ambassador of the Year Award.

Ambassadors of the Year, are individuals nominated by BAFT staff. Potential recipients are chosen by the BAFT Ambassador of the Year Committee following nomination submissions from BAFT staff. Awardees are then selected from the list of potential nominees following a weighted voting process.

Officially announced at BAFT’s 2021 Virtual Global Annual Meeting on June 9, BAFT is pleased to recognize the following individuals for their invaluable assistance provided to the association throughout the past year and for helping to continually drive the mission and objectives of the association forward. 

  • Jeremiah Glock, Vice President & Trade Advisor, Citi
  • Rebecca Liao, Co-Founder, Skuchain
  • Henry Pfeiffer, Executive Director, Global Trade Product Management, J.P. Morgan
  • Barry Tooker, Chief Product Officer & Global Head of Product Management, iSoftware4Banks

We would like to thank the awardees for their time and commitment. Each has contributed substantially to an array of BAFT priorities including trade finance, payments, LIBOR and distributed ledger technology. Recipients’ awards will be mailed to them in lieu of an official awardee ceremony.

About BAFT
BAFT is the leading international financial services association whose membership includes large global and regional banks, service providers, and fintech companies headquartered around the world. BAFT provides advocacy, thought leadership, education, and a global forum for its members in transaction banking, including international trade finance and payments. For nearly a century, BAFT has expanded markets, shaped policy, developed business solutions, and preserved the safety and soundness of the global financial system. Learn more at www.baft.org.

BAFT Media Contact:
Blair Bernstein
[email protected]
+ 1 (202) 663-5468

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