TRADE FINANCE, CASH MANAGEMENT
Five drivers of transaction banking’s direction
16 February 2023
How will ISO 20022, sustainability, digital currencies, sanctions and trade digitalisation shape the future of transaction banking? flow summarises the top five takeaways from the Bankers Association for Finance and Trade’s (BAFT) 2023 Europe Bank to Bank Forum
After the pandemic caused a three-year hiatus, some 200 delegates convened in London for BAFT’s 2023 Europe Bank to Bank Forum (BAFT Forum) in late January to discuss key issues facing the transaction banking industry.
In an opening panel session of day one, Marion Muehlberger, Senior Economist – Macro and European Policy, Research, Deutsche Bank, outlined four key macroeconomic questions that will only start being answered in the months ahead:
- Is Europe likely to avoid a recession?
- Are we entering an environment with structurally higher inflation?
- Are we embarked on a period of patchwork globalisation?
- Has the global green subsidy race just started?
These four trends formed what Muehlberger termed a "crossroads" – an intersection that set the context for the 14 panel sessions, keynotes or workshops hosted across the two-day event. Panellists and delegates explored a host of pertinent topics – from ISO 20022 and central bank digital currencies (CBDCs) to trade digitalisation and global sanctions.
1. Harmonising cross-border payments
Following several delays, the arrival of ISO 20022 is now imminent. On 20 March 2023 SWIFT goes live with the new global standard for cross-border payments and reporting (CBPR+) and starts the period of coexistence.1 The Bank of England (BoE), responsible for CHAPS Real-Time Gross-Settlement System (RTGS) – will migrate to ISO 20022 messaging on 19 June 2023.2 In short, cross-border payments globally, as well as high-value payments in Europe, will migrate to ISO 20022, which unsurprisingly was a key focus at this year’s BAFT forum.
“In 2018, we started a programme of continuous education efforts within the financial institution community to raise awareness, even in markets where the standard was not an immediate priority,” explained Marc Recker, Global Head of Product – Institutional Cash Management, Deutsche Bank.3
This education is set to be a process of continuous collective learning. Recker quipped that “you currently have experienced people in operations who, even if you were to wake them up at 2.00 am, can tell you exactly what an MT109 is – because it has been the standard for around 30 years.
“Today, I do not believe you could find someone with the same level of familiarity with the pacs.009 message,” he added. “Our knowledge of the new standard will develop as we begin to use it – and this will take time”.
“Our knowledge of the new standard will develop as we begin to use it – and this will take time.”
The panelists stressed the SWIFT message that market participants’ priority had to be a successful implementation, with the benefits arising from using rich and structured data functionality following on once this was nailed.
Worryingly, different message versions, market practice roles and business or payment models are emerging across jurisdictions due to local implementation guidelines, they noted. This has meant that the way in which ISO 20022 is being deployed across the globe is itself not harmonised – undercutting the standard’s potential.
The G20 cross-border payments programme aims to provide a solution. The programme is focused on enhancing the speed and transparency of cross-border payments, while also improving access and reducing costs. To achieve these ambitious goals, the project is split across 19 building blocks, with building block 14 looking to tackle the adoption of a harmonised ISO 20022 version for message formats.4
Panelists discussed how, over the past year, a joint task force has been working to develop harmonised user requirements for ISO 20022 in cross-border payments, likely to come into effect at the end of the interoperability period. This currently consists of 15 general requirements related to messaging fundamentals, transparency and the use of structured encoded data, as well as Committee on Payments and Market Infrastructure (CPMI) data models for a core set of ISO 20022 messages used in cross-border payments.
2. The weaponisation of sustainability
“Only one in every five dollars of trade finance is associated with a positive contribution towards sustainable goals”
Sustainability topped the agenda at the BAFT Forum, with some 90% of delegates stating that ESG was one of the top KPIs in their organisation. “The industry is committed to making trade as sustainable as possible. It creates jobs, boosts economic growth and fosters innovation,” explained Dr. Rebecca Harding, Independent Trade Economist. “But if you look at the numbers, only one in every five dollars of trade finance is associated with a positive contribution towards sustainable goals,” a point she made in the flow article ‘Trade’s sustainability challenge’
So, what exactly is being done to improve this? Sustainability reporting is now mandatory in the EU, the UK and California. At the same time, new regulations are being designed to promote a broader set of ESG objectives in the supply chain. While well-principled in their conceptualisation, they will intrinsically be difficult to enforce. What applies to, say, a large corporate or a developed economy could be less applicable to an SME or an emerging market.
This leads to the obvious question: “To what extent,” asked Harding, “are we imposing our values on emerging markets, or even on SMEs in developed markets, where these types of things are actually very difficult to measure and very difficult to implement?”
3. CBDCs: preventing disintermediation
On day two, the panel session “CBDC – Public Money in the Digital Age” tackled central bank digital currencies (CBDCs) – in particular, why they have become such an important topic for both central banks and financial institutions in Europe.
The potential benefits of CBDCs are also far reaching. By reducing the number of intermediaries involved, for example, they have the potential to make cross-border payments – whether retail or wholesale – faster, cheaper and safer (by eliminating settlement risk). For additional background on CBDCs, see the flow article ‘CBDCs what’s not to love?’
In Europe, there are some additional reasons why a CBDC is being considered. Payments in the euro area are dominated by service providers that based outside of Europe. While this has not introduced any significant challenges, the recent growth of geopolitical risks – including the evolving sanctions regime and supply chain disruptions – meant the panelists recognised the need for an option that both strengthens European payment autonomy and mitigates some of the inherent risks.
As payments is a network industry, there is an inbuilt tendency for monopolies. While this has not been the case in Europe generally, the panel explained that it can present very real risks if left entirely to the private market. The aim of the central bank, therefore, is not to interfere with the existing providers, but to put an alternative in place to help keep the system in check.
Introducing a CBDC in Europe also comes with a second consideration: the need to avoid bank disintermediation. In Europe – unlike the US and the UK, which have more advanced capital markets – the economy is financed by bank loans, and the main refinancing source for banks is customer deposits. If the digital euro were made too attractive, there is a risk of an unintended consequence that money would move from these important commercial bank deposits and into the central banks. The panel identified a couple of migration measures that could help to avoid this: setting a threshold for private holdings and disincentivising remuneration for CBDC holdings, such that the private sector remains attractive.
“Sanctions are a critical piece of what banks do, and they continue to grow in both scope and volume”
4. The new sanctions environment
Pictured: Dean Sposito (left) and Katrin Arend (middle) at the “Sanctions: Operating as a Financial Institution in a Changing World” panel at the BAFT 2023 Europe Bank to Bank Forum
Moderating the “Sanctions: Operating as a Financial Institution in a Changing World” panel, Dean Sposito, Head of Institutional Cash and Trade, Western Europe, Deutsche Bank, explained that “sanctions are a critical piece of what banks do, and they continue to grow in both scope and volume.” Banks have historically been the implementing arm of government-driven sanctions, but recent events have really driven this to the fore. Since February 2022, there have been hundreds of key regulatory sanctions, thousands of new designations on sanctions lists and sanctions on approximately 8,000 Russia-related securities (out of a total of 10,000).
A key challenge – beyond volume – has been the complexity of the sanctions. For example, while EU sanctions are ultimately issued by the EU, some countries have supplemental lists. If a bank wants to apply for a licence or ask for a clarification on a sanction in a specific jurisdiction, this goes to the local country and not the EU itself. And this helps to create an asymmetrical implementation of the sanction, which can be difficult to navigate.
Add to this the fact that banks sometimes lack the controls to implement new types of sanctions. For example, the EU recently banned “any deposits from Russian nationals or legal persons if the total value exceeds €100,000”.5 “These new forms of sanctions are always bringing us to our limits,” reported panelist Katrin Arend, Deputy Global Head of Sanctions, Deutsche Bank. “How can banks control that? Are there exemptions for permanent residency or if they have a visa – and how do we find this out? We had to move fast to answer these questions, and in just 48 hours we had set up a website for clients to provide their residents with permits – and were able to clear thousands in this way.”
There is also inconsistency across sanctions among policy makers. Regulators have, at different times, designated certain oligarchs while others have excluded them. “The targets of sanctions will naturally capitalise on these divergences and incompleteness in order to continue to generate revenues for their purpose,” Arend added.
5. Electronic trade documents and the law
The “Accelerating the Use of Electronic Trade Documents” panel tackled a key question facing trade: why is an industry worth £1.26trn to the UK still reliant on centuries-old paper-based processes developed by merchants? The answer is well known: the operation of many documents important to international trade, including bills of lading and bills of exchange, are legally premised on their physical possession – meaning digital documents are simply not an option.6
Thanks to a three-page piece of UK legislation – described by Lord Holmes as “one of the most important Bills you’ve never heard of” – this could soon be changing. The proposed Electronic Trade Document Bill – based on a model law passed in 2017 by the UN International Trade group – will allow electronic trade documents to have the same legal effects as their paper equivalents. If the bill passes, the impact will be huge. To put it into perspective, the International Chamber of Commerce (ICC) has estimated that digitalising trade documents could generate £25bn in new economic growth by 2024, and free up £224bn in efficiency savings.
Implementing the bill will also have a global impact, as English law governs 80% of trade documents worldwide. So the bill represents an opportunity for the UK to lead the way on this topic, becoming the first G7 country to implement the standard, and providing a framework for other countries looking to adopt the model law.7
See you next year, BAFT
With the physical BAFT event having been forced to go virtual from 2020-22 it is fitting that the final panel of day two explored what the next five years would hold for the industry. “We are coming from a decade of agility, product development, design, convenience, understanding and entering into a decade of robustness, stability, and resilience,” explained Daniel Schmand, Global Head Institutional Cash Management and CB Operations, Deutsche Bank.
“Going forward we, as transaction banks will need to pick the products and client segments we want to deal in more carefully”
Schmand explained his rationale. “Imagine you have a single euro to spend on improving your business. In today’s environment, would you spend it on improving your client access channel? Or automating four-eye or six-eye controls to bolster resiliency?”
For him, it is the latter every time. “Going forward we, as transaction banks will need to pick the products and client segments we want to deal in more carefully, and that then comes back to the theme of risk and return – with the theme of risk now becoming greater than return,” he concluded.
Pictured: Delegates at BAFT 2023 Europe Bank to Bank Forum
The 2023 Europe Bank to Bank Forum took place on 24 and 25 January 2023, at 133 Houndsditch, London, near Liverpool Street Station
1 See swift.com
2 See bankofengland.co.uk
3 See Guide to ISO 20022 migration Part 5 at corporates.db.com
4 See bis.org
5 See fieldfisher.com
6 See gov.uk
7 See lordchrisholmes.com
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