Digital Transformation of Treasury, Episode 6

KAREN: [INAUDIBLE] James. Thanks for joining me today. I'm looking forward to our conversation, a continuation in our series on the digital transformation of treasury. This conversation, though, about trade and supply chain finance. So thanks so much for making the time.

JAMES: No, thanks, Karen. It's a pleasure to be here.

KAREN: All right. So let's dig in. Clearly, the pandemic has caused a lot of different actions and reactions on the part of every sector of our economy, certainly every business. And no one really could have ever seen this coming. But to start the conversation, I guess I'm curious to know whether there are any lessons from the 2008 financial crisis that you think are relevant for addressing some of the trade and supply chain finance pressures that corporates are now facing.

JAMES: All right. Thanks, Karen. Yeah, I mean, I think there's certainly a common link between what we've seen in the last call at three months, four months relative to the 2008 crash. Clearly 2008 was very much a different animal with a run on liquidity that precipitated a withdrawing of credit kind of across the developed world and then in effect triggered this severe contraction in economic activity.

Now, this time of course, we're facing rolling lock downs, and just complete disruption in economic activity. So we're sort of jumping right to very high levels of unemployment and reduced economic activity. I think the key lesson learned from 2008 is that banks at kind of the core of the economy and is a central source of liquidity. You need to be well capitalized.

And so I think a lot of the efforts, particularly among US banks, to address capital buffers, has proven to be critical this go around. And I think if you look within the trade finance landscape, I think in 2008 we saw a dramatic increase in the use of traditional trade service products as a form of risk mitigation as that credit sort of was pulled out, particularly within the emerging market.

And this time around, we haven't really seen a similar impact in a similar shift with greater utilization of traditional trade service products. And what we have seen rather is the number of sort of off balance sheet financing, such as supply chain and accounts receivable financing under uncommitted facilities hold up very well. And so I think that the ability of the banks to have the buffers to withstand dramatic increases in loan loss reserves, particularly at the end of the first quarter, really had no impact on the ability of banks to service their clients.

And so that, or at least it would be in the case of JP Morgan, that fortress balance sheet has proven to be critical to maintain those lines, which in turn, these uncommitted facilities are in turn critical sources of working capital for our clients. And so the resiliency has certainly been there.

KAREN: One of the things that we kept reading about during the start of the lock downs and kind of the panic, because of the unknown of the duration of the pandemic or corporates drawing down their lines of credit to bolster their balance sheets. And obviously, the ability for banks to be able to make that available and still have their own liquidity and capital reserves preserved is certainly an outcome of the 2008 crisis and what banks have done since then.

But are you-- despite that, are you still seeing pressures on the part of corporates to try to manage cash flow and liquidity within their organizations? And if so, who seems to be most distressed?

JAMES: Yes, so I think you certainly saw, particularly in the end of March, the significant run on drawing of committed and uncommitted facilities. And I think what you saw was this unprecedented amount of both fiscal but probably more importantly monetary stimulus that was able to offset sort of the mini run that we saw for over a three or four week period on liquidity in the capital markets, which then led to a shift where actually conditions for raising capital became highly favorable.

So if you look at kind of the year to date period, there's over two trillion and counting of, in terms of dollar terms, corporate bond issuance, which is at a record level. So what that is-- what that means is that corporates are actually now sitting from a liquidity perspective in very good shape, very much long cash balances. And what we've seen is that clearly there's much more of a focus on how corporates that are in a very strong position can service both their customers.

So depending on who they're selling into and what industry they're in, we've seen a number of clients who are getting particularly anywhere where there's a consumer nexus request for deferrals, and just kind of the rolling shock of the lock downs made it very difficult for certain distributors to sell products. And so those corporates are able to use cash and those liquidity buffers to grant deferrals.

I think critically on the other side with their vendors, it's sort of a similar impact, where corporates have been able to work with vendors, utilize whether it's supply chain finance, or just through kind of early extinguishment of payables, they have been able to inject cash into their supply chains for vendors that are more stressed. So you've kind of seen this sort of symbiotic relationship across the supply chain where corporates are clearly helping each other out and managing through the crisis.

I think clearly there are some industries that anything kind of more service oriented, of course aviation or anything travel leisure related, they're struggling much more mightily. And it is a kind of continuing challenge. But for most of the sort of the traditional economy and throughout most of the industrial world, there's been an adjustment and a stabilization that's been great to see.

KAREN: Where are you seeing corporates working to free up trapped working capital? I mean, are there innovations? Are there new things? You mentioned a few things. But where are you seeing some of the emphasis on trying to release working capital that may be hung up for any variety of reasons?

JAMES: So we definitely seen an uptick in demand for off balance sheet financing. So I think I touched on supply chain finance earlier. I think that's a product or an offering and solution that's been growing pretty rapidly over the last decade and coming out of the 2008 financial crisis, where corporates recognize that in order to maintain their own operations, they needed to maintain liquidity through their supply chain and into their supply base.

And what we've seen with this recent economic stress is that those that did not have active programs are now looking at it very aggressively. And I think we, J. P Morgan, we announced a partnership in late April with Talia, and then subsequently a strategic investment to sort of reshape our own supply chain finance offering.

And we've seen a very favorable response within the market. And again, a lot of inbound queries about the solution, just on the basis that, again, some of these corporates are long cash. They're looking for ways to quickly execute programs, quickly inject liquidity into the supply chain, and having solutions that are built for that rapid execution and kind of superior user experience have been critical to our own offering.

KAREN: Do you have a sense, James-- I mean, I guess the uncertainty of the pandemic is such that at least here in the US we kind of thought we were over a hump. We're not really over the hump in a lot of states. And so it's very much a roller coaster in terms of economic outlook and all the things from the macro economic perspective that may or may not have been.

As you think about corporates and their cash position and their ability to kind of sustain a supply chain, there are businesses on the other side who may not have been as healthy in good times as perhaps they needed to have a viable business who now may be just hanging by a thread. How are you-- how do you see corporates and how do you help the supply chain kind of reconcile what needs to happen to sustain the supply chain, while also trying to sort out where those investments may be actually helpful and constructive long long?

JAMES: So I think a couple of points. As I kind of touched on earlier, I think companies are certainly proactively engaging with their suppliers to have a strong view on and a clear view on their own liquidity position. And I think, again, we've seen-- in the short run we've seen kind of extraordinary efforts to do things such as accelerating payments, and in effect lending into their supply chain, which economic activity remains depressed.

There needs to be a longer term more viable solution to maintain that liquidity, because as corporates, as their business operations start to normalize, they're not going to look to keep their suppliers on very short payment terms. They will look to resize their own working capital position over time. So solutions such as supply chain finance will be critical to doing that.

I think the other thing to consider here is that clearly companies were very focused, particularly in the last five years, around optimizing margins. So things such as just in time delivery, which is a concept that's been around for quite some time, became such a refined process that companies and logistic chains had adjusted to a level where just in time was a delivery method that was adopted by most of the corporate world.

And what I think a lot of corporates found with the rolling lock downs was that there is a downside to that strategy. So not having the inventory to produce goods is highly problematic. And I think what we're going-- it's early days, but I think we will see a shift, a kind of a rollback of that approach, so you will see companies that will have to manage with higher inventory levels as they look to sort of manage their own downside risk.

And clearly, as you touched on, we're not out of the woods in terms of where we are in the pandemic and the likelihood for still continued lock downs to occur in different markets across the world. And so I think companies are reacting very quickly to build stocks and maintain a certain buffer. And again, that that needs to be financed.

So it is creating pressure on working capital that still kind of continues to need to be sized appropriately. And that we'll see kind of ultimately coming out of this, whenever we do come out of it, what the permanent impact will be. But my sense is that inventory will be back in vogue. And that may in and of itself spur certain financing solutions within the trade finance space to try to address those higher working capital requirements.

KAREN: I was going to ask you, what are some of the things that-- what are some of the biggest takeaways from where you sit, in terms of innovating products and solutions as we sort of refashion business and businesses refashion their own supply chains? You mentioned partnerships with fintechs, but what are some of the other things that you're re-examining and thinking about as we continue to work our way through this?

JAMES: I mean, I think the continued focus on off-balance sheet financing solutions as a source of liquidity, will very much still continue to be our own focus. I do believe that there will be an increased demand around inventory financing. And that's something that J. P. Morgan we're looking at very closely. Clearly for supply chain finance, which at this point is relatively mature, the focus has to be on the quality of the platform, the speed of execution in order to drive increased adoption.

And the receivables side, we're very much focused on looking at what are more bespoke structured portfolio financing solutions for our clients to unlock liquidity, they may not know existed. Clearly factoring in just straight receivables financing has been around for a very long time. But we're looking to work with our clients more so creative portfolio solutions that would allow them to sell receivables that previously they had to had maintain on balance sheet.

KAREN: What's interesting about what you said about corporates being open to really supporting the supply chain by offering opportunities to accelerate [INAUDIBLE]-- it's a very different environment, because liquidity works on both sides of the transaction. People always want to, whether you're a buyer or a supplier, maximize their own cash positions. And it seems like the pandemic has, at least in the short term, changed the dynamics of those buyer supplier relationships.

JAMES: Agreed. I mean, I think what we've seen is that you've got a subset of corporates that are in very strong shape from sort of a balance sheet and market position. So over the last 10 years, we still see continued consolidation within many of the major industries that comprise our client base.

And what that means is that over time, we tend to see this strength within the corporate side held within a smaller number of players. And so depending on your industry, if you're one of the key participants and you're benefiting from the size and scope of your operations, and therefore the strength of your balance sheet, you're in a position to work with either your customers or your suppliers to provide that support.

And clearly within the supply chain, within the supplier base, you're typically dealing with much smaller not as well capitalized corporates that are operating in emerging markets with typically very short term financing and much lower levels of liquidity. So they therefore become heavily reliant on those strong corporates that are in sort of the commanding position within the economy.

And again, I think if you look back at the last few months, they have very much worked hand in hand to ensure the liquidity, as there the goods continue to flow, and customers can ultimately be served.

KAREN: We've certainly learned a lot over the last 3 and 1/2 months going on 4 months. It's been the slowest fastest year, I think, we've ever lived.

JAMES: Yeah, I agree. I think in our calendar it feels like it's about March 92nd, which is [INAUDIBLE]. One day rolls into the next. But I think as we've adjusted to this remote operating environment, one key observation is that if anything, and I think this is true not just on the banking side, but also across our client base, if anything productivity has actually increased in the short run, which is, it's unclear how sustainable that will be. But we've all been able to collectively manage through it.

KAREN: Are there pockets across the spectrum-- obviously nothing specific in terms of names --but just thinking about pockets where you have concerns across the portfolio where you're seeing not just weakness but perhaps sustained weakness. I mean, I was struck by the CEO of Delta Airlines the other day, who as part of their earnings made the comment he's not sure whether business travel will ever get back to 2019 levels.

And you start to think about some of the systemic changes that, as we work remotely and adapt to different ways of doing things, whether it's business travel or buying goods and services from the store versus online, strikes me that there are some fundamental shifts that may be more than just temporary.

JAMES: I agree. I mean, I think our view is that it's early to call, sort of have a view as to on the other side of the pandemic what the new normal looks like. I think clearly sectors such as travel and leisure, and including airlines, have almost no visibility as to when the recovery may occur.

But I think from our view, it's probably too early to say that this becomes a permanent trend, that travel won't return. I think we clearly see shifts within the consumer landscape away from kind of in-store experiences to delivery with the likes of Amazon. I think that's a trend that was identifiable before the pandemic.

And I think that the pandemic has just proven that that operating model is here to stay, and that that trend will continue to accelerate. So I think certainly brick and mortar, retail and other certain forms of distribution, that we've all gotten by without, their medium term outlook probably will remain challenged, and may not just snap back on the other side of the pandemic.

But I think, again, from our perspective, we're not really calling any permanent trends on in terms of some of the travel leisure and services sectors that have been effectively shut down in the last three months.

KAREN: Yeah, no, I agree. Things will come back. It's just a matter of the timeline. A final thought, as we as we wrap the conversation. Are you seeing perhaps now new opportunities for kind of the financial supply chains, if you will, and looking at the physical supply chains kind of coming together in more of an integrated viewer across the corporate organization, and therefore your role in helping to look at not just cash on the balance sheet but what may be going on across the supply chain and where financing options may, in fact, help bolster liquidity on either end of the transaction?

I'm just curious to get a sense of how you're looking at sort of trade and treasury coming together as a result of what we're all, again, trying to deal with at the corporate level?

JAMES: I think one area we've seen some innovation and will continue to see more is around the use of data analytics. And the actual forms of financing fundamentally, whether it's purchase of receivable, or on-balance-sheet loan, those aren't really changing. What is changing is how they're deployed, the platforms and the technology that's used to manage those financings.

And I think that the next logical leg is that use of data analytics and kind of the use of these technology platforms to help corporates with things such as cash flow forecasting and giving them greater insight and visibility into their own supply chain or on the receivables side into their customer base. So I think that over the next few years is going to be a significant opportunity within the trade finance space.

KAREN: James, it was great to catch up. I really enjoyed the conversation. Sounds like there's lots of opportunity for innovation and lots of hope across the supply chain, which is nice to know.

JAMES: Yeah, no. Very much appreciate your time, Karen. It's been great to speak.

KAREN: Thanks so much. Bye-bye now. Have a good day. Stay well.

JAMES: You too.

KAREN: Bye-bye. 


  • There had been a dramatic increase in the use of traditional trade services as a form of risk mitigation during  the 2008 financial crisis
  • With trade flows disrupted by the global pandemic, corporate treasurers have turned to supply chain finance solutions and receivables financing to help support their suppliers by accelerating payment terms while managing cash flow and liquidity within their own organization.
  • As demand for off-balance sheet financing grows, the need for innovative solutions to quickly inject working capital in the supply chain is reshaping the industry. To address those needs, J.P. Morgan and Taulia Inc. recently formed a strategic alliance to create an end-to-end digital supply chain finance solution offering flexible early payment terms to suppliers of all sizes.  
  • The post-crisis environment will likely create opportunities for other trade finance solutions such as long-term accelerations of supplier payment terms or more permanent supply chain financing arrangements.
  • The continued interest in digital platforms presents both buyers and suppliers with new opportunities to use data and analytics to support more accurate cash flow forecasting as well as streamline supply chain payments, invoices and other paper-based processes.


James Fraser

Global Head of Trade and Working Capital, J.P. Morgan Payments


James Fraser joined J.P. Morgan Chase within the Global Trade organization in July 2019, as the Global Head for Structured Solutions. James joined JPMorgan from Citigroup, where he spent 14 years, most recently serving as a Managing Director and North American Trade Head for the Treasury and Trade Solutions Group. In addition to his responsibility for the strategic direction and continued growth of the franchise, James designed and executed the complete organizational restructuring of Trade’s coverage model, collapsing client facing functions across four trade product pillars to a singular team aligned by industry.

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