Exclusive: ‘Trading priorities’ – Joon Kim, BNY Mellon in “The Fintech Magazine”
BNY Mellon’s Joon Kim, Global Head of Trade Finance Product & Portfolio Management, considers the potential for AI and other digital technologies to transform the trade finance industry.
The Fintech Magazine: Have the defining characteristics of the lending industry, and particularly trade finance, changed as a result of the COVID-19 coronavirus pandemic?
Joon Kim: We were already in a low interest rate environment and didn’t think it could actually go lower, but we’re now seeing exactly that. Before COVID, overall trade finance volumes and international transactions were very active; it was a competitive landscape, the volumes were there and overall growth was very strong. COVID has changed a lot of things. As well as lower interest rates, the international business supply chain has gone down substantially and there is some geopolitical tension among countries. So, we are facing challenging times, to say the least.
Trade finance is still a very paper-intensive business. For two parties to complete a transaction, they require original documents, and that’s a manual process. Because the pandemic has everybody working from home and unable to retrieve, send and pick up these original documents, it has created a huge challenge that has really emphasised the importance of having a business continuity plan in case more, similar events occur.
In terms of supply chain, because one party, or one country, depends on the others, once there is disruption it becomes very difficult to complete transactions. That’s why there is now more emphasis on creating more of a supply chain landscape domestically so if supplier disruption takes place in one corridor, you have alternative options within the same country. There is going to be a lot of change and that’s part of the reason people are really focussing intensely on operational efficiencies.
TFM: We’re in an extended Sibos season this year – previous events have seen much talk of blockchain and distributed ledger technology (DLT) coming along as an alternative to paper-based trade finance processing, but that certainly hasn’t happened overnight. Why has this area been slower than others, when it comes to digital transformation, and will the pandemic accelerate adoption?
JK: The short answer is definitely yes, it should accelerate it. A few years ago, the fintechs all came in with initiatives focussed on payments, but then recognised that payments are pretty well automated and use a lot of technologies to settle incoming and outgoing amounts. Then they realised the area of trade finance was very labour- and paper-intensive. So now more fintechs are looking at solutions in this space, like digitising documents, etc.
When the fintechs first arrived, banks and other financial institutions saw them as competitors, but today it’s much more of a partnership. They work together to see how we can create the digital journey that everybody is looking for. A blockchain or distributed ledger technology (DLT) component is still a more experimental area because, as I said, there are multiple parties involved in trade finance and everybody has to be onboard in order for blockchain transactions to occur.
However, at the same time, there are a number of other innovations taking place within trade finance, utilising machine learning and optical character recognition (OCR), so that we can convert those paper documents into a digital format and the machines are able to process those transactions without manual intervention.
Those are some of the critical areas that many banks, including us, are looking at, and I think, in the long run, we are going to create a much more streamlined process, which will eventually enhance the client experience.
TFM: To use a Jeff Bezos term, it does seem like the flywheel is starting to turn and we’re becoming more efficient in how we’re using information. What does that actually mean for wholesale, corporate customers?
JK: There are a number of initiatives, using technology like OCR, artificial intelligence (AI) and machine learning, to better understand client behaviours. We ask questions like ‘why is this client not using a particular service?’ or ‘why is a client using this particular type of a service?’, and we do further analytics behind that to create solutions for the client experience.
While the technology being used for individual-to-individual transactions is faster, when you’re dealing with wholesale banking for large institutions and corporates, adapting to innovations in digital data becomes more challenging because they are used to certain ways of doing business. However, this is a key initiative for many of the banks I speak to.
What this actually means differs according to each client’s core objective. On the finance side, the data analytics is going to help optimise working capital. If a particular corporate client is paying out after they receive funds, they are optimising their working capital, but many banks are trying to understand the balance sheet perspective of the corporates, to see how they can improve working capital. On the processing side, it’s really about looking at their transactions – for example, if they are paying certain fees, the analytics could tell us that if they fix one common error, they will no longer have to pay those fees because transactions will occur in a straight-through format.
Once a bank is able to create the analytics and provide that kind of value proposition to a client, it creates a more positive experience on both sides, with better efficiency, a better cost structure and a boost to their bottom line. That’s the journey we are all trying to take because it allows us to have better engagement with clients and, when we enter a solutions structuring meeting, we can get into a more strategic discussion about what clients are looking for. This is where data analytics, and data digitisation become really, really critical.
TFM: In banking, 10 or 15 years ago, you had your own on-premise data farms and teams of developers. All of a sudden, banks are opening up and working much more as ecosystems. What is BNY Mellon’s position within this ecosystem, and what does this partnership mentality mean, on the trade finance side of things?
JK: We look at it at the high level. Everybody wants to become bank-agnostic, meaning clients do not want to use and log into multiple systems and segregate the different types of experience, depending on what platforms are being provided on a proprietary basis. They want to have a single login, to process all their transactions through multiple banks. This is where the fintechs come into play.
Rather than building their own platform, products and services from a client portal point of view, banks see no real reason to create something, not knowing whether it’s going to be applicable three or four years down the road. This is where collaborating with a fintech that creates its own consortium of many banks, sharing similar thoughts on what needs to be done, comes in.
Fintech collaboration has become very important, and banks are relying on technology specialists to build while they provide the services and enhance the client experience. If we don’t do that, and go back to the old legacy ways of corporates and banks doing transactions on a bilateral, paper-to-paper basis, that’s not sustainable for the future, which is where that collaborative effort with fintech companies becomes essential.
This leaves banks to focus on what we’re good at. If you look at the trade finance side, you have letters of credit, collections, etc, but while such traditional finance will still exist, many are moving into the open account space around supply chain, receivables and open account financing. Banks are in a position to provide various working capital solutions to large corporates, SMEs and mid-sized businesses, depending on their specialisms. This is where we can start creating solutions for those. Rather than focussing on features, functionality and technology, we can optimise our resources and focus on clients’ needs.
As a result of this unfortunate pandemic, people are recognising that innovation has to take place faster. While they might previously have taken the attitude ‘we’ll do it the way it is’, the need for business continuity plans, offices shutting down and people not having access to paper documents, has created alignment within the banking industry as to what’s needed for us to move to the next level.
So, the innovation in trade finance will continue to take place. Some of these innovations will be easier than others, so we do have to work with the various regulators to create a streamlined structure where everybody has an experience that is much better than today.
Five years from now, I think we will have a very different type of discussion about esignatures, digitising documents and sharing them among the banks, and then our hope is that the paper portion will be substantially reduced, creating much better efficiency and enhancing the client experience.