BNY Mellon’s global trade finance product head Joon Kim, and head of treasury services in Asia Pacific, Arnon Goldstein, discuss the prospects of a recovery in trade and commercial payment volumes, the importance of engendering robust business continuity planning in the corresponding banking network and how the bank is digitising to support its FI clients.
While global trade volumes have been down significantly in 2020, Joon Kim, the global head of trade finance product and portfolio management at BNY Mellon, sees “a cautious sense of optimism and recovery” by the latter part of the fourth quarter of this year and the beginning of next, at the macro-level.
In Asia Pacific, Arnon Goldstein, the bank’s head of treasury services for the region, observed overall decline in payment volumes, underlining weakness in clients’ demand, but an increase in liquidity, especially in local currency and dollar liquidity as lending demand has been depressed. However, any rebound in volume will be uneven as some economies continue to grapple with the COVID-19 pandemic.
The disruption to traditional supply chains and logistics has precipitated the need to strengthen business continuity planning to increase institutions operational resiliency and ability to operate remotely. Processes have to be streamlined and enhanced to incorporate alternative digital solutions, such as e-signature and biometric-enabled authentication and authorisation, to replace traditional manual ones. The bank is pivoting to digital alternatives, such as web-based meeting, and digitising more of its internal as well as clients’ processes in order to facilitate client transactions and increase efficiency.
The following is the full edited transcript of the interview:
Foo Boon Ping (FBP): How has the pandemic affected trade flows, volumes, and cash and treasury services?
Joon Kim (JK): Trade disruption has created a significant impact. Latter part of February, all the way up to June, the overall volume in trade has been significantly down. All the banks are facing similar situations. Then we do see a sense of optimism and recovery. And we believe by the latter part of the fourth quarter, and beginning part of next year, we do expect the volume to get back to some degree, level, not to the pre COVID level, but we do see a sense of an optimism from when we reviewed the volume, So that's really at the macro level.
Arnon Goldstein (AG): The region is experiencing this first full regional recession in many decades. The latest data from ADB projected a contraction of close to 1% this year, and somewhat of a rebound is projected for next year. And that's in line with my general thoughts on this. What we're seeing from a payment perspective is exactly the same thing, lower volumes overall, which reflect underlying client decline in volumes. And that's without exception across the region. The flip side to that is there is a kind of an increase in liquidity to some extent sloshing around local currency liquidity, dollar liquidity because lending demands has been depressed which is indicative of the current situation that we see right now.
FBP: And how do you see outlook for 2021?
JK: There are so many uncertainties. But compared to the pandemic peak in March versus today there is a sense of, degree of optimism. So we do expect the volumes to pick up. APAC is a critical region for the overall trade supply chain. But we should expect to see a certain degree of a trend where world trade is dependent on having the partnerships, but when certain regions or countries are going to a situation where the supply chain disruption takes place, people have recognised that there are perhaps too many dependencies, and therefore you need to have a very robust business continuity plan, not only from the operational perspective, as well as how we do and continue to facilitate transactions for clients. But if there is a second wave as an example in China that occurs, and what is the alternative way for creating a business continuity plan? Many banks are thinking about creating more of the domestic supply chain logistics as well as having other countries to be part of so that you don't have to exclusively depend on one particular country per se. There's got to be a continuous new way of reviewing or doing transactions. Many banks are segregating ecommerce, retail versus traditional retail. So ecommerce retail has done a fantastic job and they're growing like crazy. Yet at the same time, if you are a traditional retail store, where people going to the stores, they are the ones who probably suffered the most. Within the industry verticals, people are looking at dissecting the industry vertical even further. And I think That's part of the new outlook that we have to look at to see if there's such an event that occurs again, who is impacted the most within that dissecting into the sub segments.
JK: Obviously, APAC is a critical region for trade, not only for us on a global trade basis. So it's a strategic regions between strategic countries. And having the countries in overall Asia recovering quickly, is going to be extremely beneficial to the world of trade, how we can facilitate transactions for the client. This is a positive news. We're beginning to get a sense of a degree of activities being picked up. And that is our hope. And one interesting thing about something like this is if you think about it, typically when the overall economy, low interest rate environment with the pandemic, downgrades of corporate and the financial institutions, you typically expect traditional trade LC (letter of credit) transactions to pick up and the open account transactions to go down. But this was an unprecedent time where the overall disruption is so big, even though there is a lesser volume everywhere, whether it's traditional trade and the supply chain. But obviously, APAC is a critical region. And that's a strategic location for us as well.
AG: From a global perspective is definitely relevant region to region, as well as in APAC, and APAC is one of those growth engines, and always has been. From a payment perspective, has also been a material contraction, roughly 8% contraction year on year on commercial payments, that hurts the region and hurts the underlying economies. From a outlook perspective, it's positive, because the underlying demographic trends, population growth, etc, GDP growth, are projected to rebound to some extent next year. In the large economies, North Asia, China, is one of those, which we're already seeing that impact right now. So generally, I'm cautiously optimistic as an outlook perspective from Asia. We are still in the midst of some economies, some geographies are returning to a more normal situation. But some, like India, Philippines, Indonesia, are right in the thick of the COVID battle. It would be best if we can all get through that, and for economies to get back to a more normal situation.
JK: We take the concept of business continuity plan for granted at times. But this is where business continuity plan has become a very important component. I'll give you an example, trade transactions does involve a lot of original documents. The bank is not picking up the original documents are there is the delivery, logistics issue with the courier office which never we thought about last year. That's still going to create a little bit of a challenge. And that's why banks are focusing on digitising as much of these things as possible going forward.
FBP: How much of a catalyst is COVID-19 for that to move?
JK: One of the analogies I would use is, my wife tells me that if there were tests every day, the kids will study every day. So I think what this has done is we took it for granted. Digitalisation is important. Everybody was talking about it from a conceptual perspective and high level. But given the fact that we are really facing a situation where the logistics of original documents being communicated between the counterparties has become really difficult. We had to act. So digitalisation has become extremely important. So, I would say there are two components. The corporate and FIs versus a retail consumer base. The technology advancement on the latter part is so much more advanced and, global financial institutions or the corporate side. So I think there are two things that we are looking at. One is, what can we do internally, that we can create an efficiency? And the second component is what are the things that we can digitise with our clients. So on the client side, easy as now, signing agreements, and doing transactions utilising the e-signature is something that we really didn't, because everybody wanted to put a chop, they wanted to see the original paper, they want to design something. But now almost all the transactional agreements that we do with our financial institutions have become vis a vis the e-signature, that's going to become a norm. And everybody's trying to push towards that way. And we'll work with the industry such as ICC and BAFT and other organisations to see how we can create a more streamlined process on the digitisation side, and on the operational or internal side, what can we do? So we had plenty of issues where the ops could not be in the office. So everybody was working from home, paper cannot be picked up. There was no way for us to retrieve so we had to work with the client as well as internally to digitise everything so that people can actually work and create and continue to serve, the client experience. So, there are two components in some way. One is operational efficiency and digitising it internally, there's something that we can control. The latter part is continue to work with the clients to create a better efficiency, vis a vis digitalisation and possibly eliminating the paper as much as we know.
We've gone through the certain due diligence and there are strategic partners for us. There are so many fintech companies working with the financial institution. So we talked about that a bit on the traditional trade finance side where trying to digitise, eliminating paper. But even if you look at the supply chain, or the receivable financing on the open account space today, how are they done? Each bank creates its own bilateral programmes. And if they want to distribute assets, they do it on a bilateral basis, there is still a lot of spreadsheets that have to be exchanged back and forth. And really the fintech idea is to how you create some degrees of an open account interoperability process where the client who is actually borrowing doesn't necessarily have to login to 70 different systems depending on what programmes that they have with each bank. So the idea here is for banks to have a common platform, common alignment, common knowledge. So that the client experience as well as the improvement in the efficiency of executing transactions on the open accounts become better. If you think about something like two years ago, API. Everybody says, “That looks important, but I don't know how that’s applicable.” But now we're beginning to have the realisation of what that means. If a bank cannot hold all of its balance sheet, but we want to sell or distribute, or if we want to buy depending on where you are. Today, what we do is we have to go to each individual bank to create some sort of arrangement. But the API structure becomes very important so that if somebody is selling the asset, we go into their API, we know what's over there, and we can select, pick the assets, and vice versa. If we were to distribute something, they come into our API, and we'll get one of the assets that we have. There is a plenty of efficiency in place and fintech companies becoming much more collaborative versus two and a half years ago, when we met at SIBOS in Asia. The common theme at that time was does fiintech take over the banks? Are they competitors? Is there a threat there? There are certain aspects of that. But I think there is a lot more collaboration going on with the fintech companies and they're beginning to recognise that as well.
AG: From a broad business perspective we see in Asia a reassessment, maybe COVID was a catalyst to that. Who you choose as a partner is really important. I mean, you want to make sure that your partner, whether it's a correspondent bank, or a trade services providing bank, that they're well have redundancy that they have good resiliency, they have good risk and controls, and most importantly, can handle your business remotely. And for a bank like us, it is all seamless, not every fintech can survive this period of constrained capital, more controlled lending, it's not so easy to be one of those entities right now. So, I mean, we've seen that reassessment ongoing right now.
JK: The concept of trade correspondent banking is becoming much more important. As a result of the pandemic, many banks have realised that “I can't do this, I cannot self-drive this car”, I do need a correspondent bank who has a robust business continuity plan and different types of solutions, whether it's digital or paper, different types of options that the banks can provide. I think the concept of correspondent banking and historically in the past has been on the payment side. But traditional trade correspondent banking relationship is one of the common things that we get to see.
AG: It's not so much whether we collaborate or not. I think the issue right now is our client base, which is largely banks and some institutions in the region, are themselves going through a reassessment. It is not some elements of an organisation may use a WireCard or some other fintechs, they're going to look. You're definitely going to look at other aspects beyond the cost. Banks are well capitalised, there’s longevity of service, track record, credit ratings, etc. It's a different ballgame altogether when you're talking with a bank, and I think what we're seeing, there's a reassessment of that approach. Banks like ourselves are very much up to speed when it comes to an API discussion or any of the other offerings that some of the fintechs may offer,
And the risk and controls, redundancy, resiliency, these are so critical right now. And COVID is just one of those events that may cause that review.
JK: I think by and large, all across the board, the compliance, the possibility of money laundering when there is a pandemic, there is going to be a much greater emphasis as to the validation of the transaction that the service provider provides. And I think it's not going away. If anything, we will have to do more to that. So as we digitise there is always a greater possibility of more fraud taking place. And it's something that we just have to be aware.
FBP: In terms of supporting FI clients during this time, in terms of automation, digitisation, cross-border payments, using GPI for example. How is that progressing?
AG: It's timely that we have a good ebanking platform. Banks know if they haven't invested in that, their clients are left hanging. So it's really critical that your provider is well established from whether it's GPI or API, whatever you have, to make sure that you're up to speed from the expectation of the client base. Specific to a COVID situation., how's does it relate? We have to pivot. The fact that we're having this conversation over a video link. This is exactly how we have to pivot to the kind of support that we would be giving with our clients. We are no longer flying in, but we're conducting meetings just like this with our clients, and rolling out new products and services without any delay, without any hitch and providing those underlying whether it's payments or trade, those underlying payments and trade services to our clients and leveraging technology to do that.
JK: The client engagement and identifying what they're looking for, we've done a good job, in our opinion. To your point about the OCR, AI, the ML, the machine learning aspectst. If you look at the paper documents, what we're doing is trying to create efficiency within our own internal network. So as simple as an export bill collection, where the bank, our correspondent bank in Asia is trying to come in for their clients. Paper is converted into digital, populates into a field goes into our compliance filter system to check whether we have any particular issue with that transaction. These are the types of critical technology investments that we need to make so that we can create a better efficiency and at the same time, at the end of the day, creating a better client experience with our clients.
BP: Thank you.