By David Hennah, Head of Trade and Supply Chain Finance, Finastra
In recent years the trade agenda has seemingly been dominated by endless debates on compliance and regulation. There can be little doubt, however, that the 2010s will ultimately go down in history as the decade of digitisation. The digital universe has finally descended upon us, bringing with it brontobytes of big data and billions of distributed devices. But what does it mean to banks and what does it mean for the business of trade finance?
In light of the cosmic developments in new technology, many banks have come to recognise the competitive constraints of existing infrastructure and are ready to respond to the compelling case for business transformation. Many leading institutions have legacy applications that are both monolithic and siloed, resulting in unacceptably low levels of interoperability. Such technologies are not only expensive to enhance and maintain but are also inevitably approaching end of life.
Whilst it is acknowledged that trade is a particularly difficult business to digitise due to the number of participants and documents across the supply chain, the opportunity to translate documents to data and to transform business processing from analogue to digital is huge. With digitisation comes the ability to extend connectivity across the trade ecosystem. This is of vital importance in the face of ever more complex corporate value chains and the fragmented technology landscape that persists across trade, supply chain finance and trade lending.
Banks today need to deploy market leading technologies on a modern architecture so as to adapt to digital disruption and respond effectively to changing customer needs with increased agility.
Some key areas banks will need to focus on include:
For generations the business of trade finance has been dominated by paper-based processing, from bills of lading to warehouse warrants; from bills of exchange to promissory notes. Today, there is a widespread recognition of the business benefits and cost efficiencies associated not only with digitised document preparation but eventually the removal of paper processing altogether.
Removing the paper pain points will significantly reduce the most common risks of delays and discrepancies as well as supporting the increased availability of structured data for business intelligence purposes. Empirical evidence has suggested that banks can save more than two hours per transaction by not handling paper, with further savings achieved through automated compliance checks.
The transition to electronic trade documents further supports the continuing move to open account and the increasing demand for supply chain finance (SCF). By its very nature, SCF must be digitised to make the business viable at any scale and underpin the common desire among corporates to optimise working capital by accelerating the cash conversion cycle.
To firmly place themselves at the centre of the trade ecosystem supporting corporate clients, banks must put in place an open ‘plug and play’ architecture that supports collaboration with technology platforms, system integrators, government agencies and other third partyservice providers.By adopting an open architecture, banks will obtain access to a new channel through which they can engage with the digital world. API-based open banking creates huge flexibility in the ways in which customers can interact with their financial services providers. This is a transformational change enabling more efficient integration and better use of infrastructure.
Business intelligence and predictive analytics
In the digital world, data is the new collateral. Banks need to leverage big data in order to better understand operational, market, industry and customer risks,opening up new opportunities for growth and enabling more efficient use of regulatory capital.
As banking in general becomes more and more commoditised, the mining of big data represents a huge opportunity for banks to stand out from the competition. Big data may be seen as a pot of gold and every transaction that lies within is a golden nugget of information that can be dissected and analysed in order to enhance almost every aspect of service levels.
The evolving art of predictive analytics will enable banks ultimately to better manage their relationships, revenues and risks.The bank will also be able to improve customer self-help through greater access to data whereby corporates can interface to their own ERP systems and run predictive data analytics across their working capital needs.
Artificial intelligence, machine learning and natural language processing
These days, the use of standard optical character recognition (OCR) to read text from trade documents has become commonplace.
As we move forward with the adoption of next generation technologies such as artificial intelligenceand cognitive computing,so too will opportunities to enhance both the efficiency and productivity of performing operationally intensive tasks, such as document processing and compliance checking.
The adoption of machine learning and natural language processing techniques enables the automation of a complex web of cognitive processes associated with due diligence. Its application will eventually benefit multiple aspects of international trade, including the more efficient management of supply chains, contracts and regulatory compliance, ultimately opening up new opportunities for easier access to finance.
Smart contracts and smart objects
No article on the subject of digitisation would be complete without some reference to the potential impact of Distributed Ledger Technology (DLT), more popularly known as ‘blockchain’. While the full business benefits of blockchain are yet to be validated, blockchain theory has attracted widespread interest, resulting in a tidal wave of laboratory-based proof of concept use cases. The ability to industrialise such solutions and bring them to market might remain constrained for some time by the continuing absence of a common set of rules and standards.
Arguably the most compelling use cases associated with blockchain are those that promote the use of smart contracts to generate instructions for downstream processes, such as payments or the transfer of collateral, provided the reference conditions have been met.
Smart contracts contain pre-written logic that can be stored or replicated on a distributed ledger platform and executed by a network of computers connected to the blockchain. Smart contracts reduce operational risk by the automation of workflow. They can be used to help with e.g. automatic uploads of purchase orders for financing and the translation of data for document preparation or paperless trade. They can also potentially be extended into artificial intelligence.
Beyond smart contracts, there is much interest now in the evolution of track and trace devices that enable us to monitor the location and condition of smart objects in transit, hence reducing the operational risks commonly associated with the transportation of goods.The ability to extend this technology further still – e.g. back into the supply chain – in order to guarantee the provenance of goods at source in support of sustainable trade, has further captured the imagination of thought leaders.
Rules and standards
It is true that, as an industry, we still lack a degree of certainty around common rules and standards. The absence of clear definitions is a barrier to interoperability and a constraint on connectivity. Collaboration is key to overcoming the obstacles.
Most recently, the International Chamber of Commerce (ICC) Banking Commission announced the creation of a working group on digitisation. Among its aims will be the evaluation of ICC rules such as the eUCP to ensure that these are both practical and e-compliant, enabling banks to accept data in place of documents.
A+B+C = D
Smart trade demands smart trade finance.
As we approach the next decade of digitisation, intelligent trade will not only rely on a combination of smart contracts and smart objects, artificial intelligence and business intelligence but also significantly draw upon the combined powers of:
- API-based open architecture;
- Big data; and
- Cognitive computing
This A+B+C approach will ultimately come to represent the true fabric of (d) – the Digital Trade Bank of the 21st century.
Economic recovery likely to prove a ‘stuttering’ affair
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.
As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.
Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.
We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.
Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.
Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.
China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.
Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund. As is almost always the case, a messy compromise will probably end up being hammered out.
An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.
Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.
European trading firms begin coming to terms with the new normal
By Terry Ewin, Vice President EMEA, IPC
In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.
The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.
We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.
Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.
In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.
Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.
Currently, many European trading firms are taking what could be described as a two-pronged approach.
The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.
The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.
It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.
Currency movements and more: How Covid-19 has affected the financial markets
The COVID-19 pandemic has been more than a health crisis. With people forced to stay indoors and all but the most essential services stopped for multiple weeks, economies have suffered and financial markets have crashed. Perhaps the most public and spectacular fall from grace during the early stages of the pandemic was oil. With travel bans in place around the world and no one filling up at the pumps, the price of oil plummeted.
Prior to global lockdowns, US oil prices were trading at $18 per barrel. By mid-April, the value had dropped to -$38. The crash was not only a shocking demonstrating of COVID-19’s impact but the first time crude oil’s price had fallen below zero. A rebound was inevitable, and many traders were quick to take long positions, which meant futures prices remained high. However, with stocks piling up and demand sinking, trading prices suffered. Unsurprisingly, it’s not the only market that’s taken a knock since COVID-19 struck.
Financial Markets Fluctuate During Pandemic
Shares in major companies have dipped. The Institute for Fiscal Studies compiled a round-up of price movements for industries listed by the London Stock Exchange. Tourism and Leisure have seen share prices drop by more than 20%. Major airlines, including BA, EasyJet and Ryanair have all been forced to make redundancies in the wake of falling share prices. The automotive industry has also taken a knock, as have retailers, mining and the media. However, in among the dark, there have been some patches of light.
The forex market has been a mixed bag. As it always is, the US dollar has remained a strong investment option. With emerging markets feeling the strain, traders have poured their money into traditionally strong currency pairs like EUR/USD. Looking at the data, IG’s EUR/USD price charts show a sharp drop in mid-March from 1.14 to 1.07. However, after the initial shock of COVID-19 lockdowns, the currency pair has steadily increased in value back up to 1.12 (June 25, 2020). The dominance of the dollar has been seen as a cause for concern among some financial experts. In essence, the crisis has highlighted the world’s reliance on it.
Currency Movements Divide Economies
In any walk of life, a single point of authority is dangerous. Indeed, if reliance turns into overreliance, it can cause a supply issue (not enough dollars to go around. More significantly, it could cause a power shift that gives the US too much control over economic policies in other countries. Fortunately, other currencies have performed well during the pandemic. Alongside USD and EUR, the GBP has also shown a degree of strength throughout the crisis. However, these positive movements haven’t been shared by all currencies.
The South African rand took a 32% hit during the early stages of the pandemic, while the Mexican peso and Brazilian real dropped 24% and 23%, respectively. Like the forex market, other sectors have experienced contrasting fortunes. Yes, shares in airlines and automotive manufacturers have fallen, but food and drug retailers have seen stocks rise. In fact, at one point, orange juice was the top performer across multiple indices. With the health benefits of vitamin C a hot topic, futures prices for orange juice jump up by 30%. The sudden surge had analysts predicting 60% gains as we move into a post-COVID-19 world.
Looking Towards the Future through Financial Markets
The future is always unknown and, due to COVID-19, it’s more uncertain than ever. However, the financial markets do provide an indication of how things may change. The performance of USD and EUR in the forex markets suggest there could be a lot more trade deals negotiated between the US and Europe. The surge in orange juice futures suggest that health and wellness will become a much more important part of our lives. Even though it was already a multi-billion-dollar industry, the realisation that a virus can alter the face of humanity has given more people pause for thought.
Then, of course, there’s the move towards remote working and socially distance entertainment. From Zoom to Slack, more people will be working and playing from home in the coming years. The world is always changing, but recent have events have made us appreciate this fact more than ever. The financial markets aren’t a crystal ball, but they can offer a glimpse into what we can expect in a post-COVID-19 world.
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