J.P. Morgan Global Product Lead for Documentary Trade
J.P. Morgan Executive Director of Global Trade Financial Institutions Group
Westpac Senior Trade Finance Executive
The coronavirus pandemic triggered the biggest challenges to Global Trade in a generation. A push towards sustainable business practices, digitalization and risk management offers opportunities to get back on track.
Manufacturing output, transportation supply chains and demand disruptions were multiplied by "massive systemic issues such as import bans, increased tariffs, and the rise of protectionism over the past couple years on top of that, owing to the collapse we saw in the first half of 2020," said George Fong, J.P. Morgan Global Product Lead for Documentary Trade.
Demand for commodities compounded the trade finance downturn and according to Fong, "when you look at commodities, 20% are being shipped to China. China–its demand for imports and commodities has reduced significantly–this led to a 20% reduction of commodity prices below last year."
SWIFT MT 400 and 700 messages offer payment advice under documentary collections and issuing a letter of credit. Trade finance volumes have shown a rebound as these messages increased 19% and 28% between June and November 2020. As the road to recovery begins, managing risk and controls will be vital.
The pandemic has amplified the need to manage environmental, social and governance (ESG) concerns for long-term success. "ESG has been on top of trade discussions among corporate banks, government, but because of COVID-19, you realize how connected we have become," said Jing Zhang, J.P. Morgan Executive Director of Global Trade Financial Institutions Group.
To accelerate sustainable growth, J.P. Morgan committed $200 billion and restricted lending to coal mining companies. “If it's an ESG-friendly project, you might be able to deploy longer tenor balance sheet at better pricing," Zhang said.
ESG will be an ongoing focus for resiliency and even considered a business fundamental. "Sometimes we walk away from companies because they are not in accordance with our ESG policies,” said Ian Rogers, Westpac Institutional Bank’s Senior Trade Finance Executive.
COVID-19 spurred a digital awakening as physical paper trails became harder to reconcile. To streamline processes and reduce friction, Fong highlighted efforts to "invest heavily in supporting the usage of digital signatures, simplifying document requirements and pushing the supply chain financing agenda where financing can be done electronically through an open account basis."
Technology enables seamless operations but there are still barriers to adoption. "Paperless trades have been in place since the year 2000 and since then, there have been one-off trades here and there," said Rogers, "but nobody has been able to get a steady stream of paperless transactions and it’s not because we do not possess the capability. It's the regulatory requirements that governments impose on people."
ESG has been on top of trade discussions among corporate banks, government, but because of COVID-19, you realize how connected we have become.
With uncertainty in the future, it is critical to better understand and mitigate risks. While blockchain offers transparency and insights, Rogers said "there are still underlying requirements from a risk perspective that blockchain does not currently cover.”
Traditional methods to reduce exposure remain strong as "letters of credit offer incredible benefits for both exporters and importers. People have been saying the letter of credit is dying for the past 25 to 30 years. It's still here. It's coming back at this point in time because it is probably the best risk mitigation tool that companies have at this point," said Rogers.
Letters of credit issued by J.P. Morgan through digital channels increased by 8% in the nine months leading up to September 2020, according to Fong.
Banks and fintechs work together to address shifting needs and deliver transformative solutions. "From a J.P. Morgan perspective, we have the global footprint to facilitate international trade finance, but we also need the local expertise from our local partners. Talking to each other more will help achieve our strategic outcomes" said Zhang.
When modernizing systems around the world, Zhang stated "the challenge is digitalizing the long tail such as emerging markets. We need to reach regions such as Sri Lanka, India or the Middle East and work with their financial institutions to achieve digitalization."
By tackling digital challenges together, financial services organizations can help businesses thrive. Rogers said, "a lot of people look at fintechs as being competitors–I don't–I think fintechs actually work very well as partners in business.”
Recently, J.P. Morgan and Taulia designed an innovative supply chain finance solution to offer greater visibility and control over cash to help navigate volatility. These alliances will continue to revolutionize trade on a global scale.
Learn more about how to help futureproof your business with J.P. Morgan.
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