Mark Evans reckons he has been working in supply chain finance since 1997, long before most transaction bankers were applying the term 'supply chain'. Evans was head of HSBC's trade and supply chain business in Asia until the middle of last year when he jumped across to ANZ to become global head of the same business for the Australian bank.
Evans says while supply chain has become a buzzword in the industry, the practice of financing transactions based on underlying trade flows makes common sense and was once the backbone of traditional trade banking. If banks hadn't strayed from this tradition, they might have avoided some of the pain felt during the recent global financial crisis. Cherie Marriott talked to Evans in Sydney.
You say that the global financial crisis was exacerbated by the fact that banks lost sight of the important role of trade finance. How do you draw this connection?
A major contributor to the global financial crisis was that banks had focussed their lending on overdrafts and loans. Instead of lending to customers based on their trade flows and the related assets and cash flows, banks were extending credit against broader balance sheet items and property. So when asset valuations started to drop, the banks weren't able to see what was really going on inside their customers' businesses. They had moved away from the traditional commercial banking practice of lending to customers based on their underlying business activities, which consequently impacted control over their own loan portfolios.
How did it come to this?
Twenty years ago relationship managers were really plugged into their customers' businesses. They spent time gaining practical experience with trade products and processes, and selling trade products to companies based on what they needed. Then, in the mid-1990s, the perception of trade -- that it was humdrum and involved tedious document checking -- led to young graduates deciding that it wasn't such an attractive place to develop a career. So many of these bankers went to work in capital markets, M&A or simply pursued a more generalist banking career. When the Asian financial crisis came along in the late-1990s, a lot of Australasian banks panicked. Since they no longer had strong trade teams to call on for market intelligence or product knowledge, they weren't able to get their heads around the risks of doing business in Asia and so most of them stepped back, and became very insular, focusing only on the domestic market. They have largely remained that way up until today.
Is ANZ different?
To a great extent, yes. We have always been clear about our wish to have a strong presence in offshore markets and that is reinforced through our super-regional strategy. And trade finance is a key component of our regional offering. Though, that said, we haven't been totally insulated from the generation gap that has formed in trade banking. We need to focus our attentions on training our staff and hiring people that will engage with our customers and commit to understanding their trade flows.
Where are you going to find these supply chain bankers?
We are looking internally and externally for these people. We are investing in graduates and in broadening people's understanding of the end-to-end components of trade and supply chain which includes but is not limited to, issuing letters of credit and handling documentation. We are also attracting people from the relationship side of the bank -- those that have the basics of lending under their wing -- and helping them to better understand the fundamentals of how our customers' supply chains work. And lastly, we are educating our relationship managers to think about trade solutions when they are considering what products to recommend to their customers. We have to encourage them to think that a "supply chain solution" isn't, for example, just a piece of technology that handles open-account business; supply chain covers every step in the process from when a customer receives a purchase order to when they finally get paid for the goods.
The definition of supply chain finance seems to vary from bank to bank. Is this confusing for customers?
Absolutely. The term supply chain is used in so many different ways that it is confusing to a lot of people -- not just customers but bankers, analysts and journalists. The problem is that many banks claim to have a supply-chain business when really they are offering one product. For example, an individual offering like invoice financing overlaid with an electronic portal is just one product that addresses one stage in the trade process, in this case, the post-shipment stage. Banks need to develop broader solutions if they wish to make a significant contribution as a supply-chain player.
So how do you define supply chain?
ANZ supports its customers at every stage along the chain -- from financing the purchase of materials needed to manufacture goods, right through the sales process to the delivery and payment stage. Sure, we finance against invoices, but we do more than this. Our people are able to work out where a customer needs support along the chain, and then suggest the right product to help with cash needs or risk alleviation. We differentiate between straight funding requirements and funding tied to the underlying flow of goods, and much of what we can do reflects our ability to support our customers' counterparties in the markets in which they operate.
Does that blur the line between business banking and trade finance?
In some product areas, yes. Simple loan financing of open account transactions, for example, was once considered a business banking product. But I see this activity gradually shifting over to the trade side as risk monitoring becomes more ingrained in banks following the global financial crisis. Gaining more visibility over these transactions is really critical to getting credit flowing again. The rise in open account trading that began a few years ago will continue.
How important is straight-through processing to your trade customers?
There is no doubt that we need to reduce the amount of paperwork involved in trade transactions. Over the years, there have been a number of global initiatives, like Bolero and Swift's TSU, that have promised to cut down on key strokes and make trade finance more efficient. While an industry-wide solution would be welcome, I have doubts as to whether this is commercially achievable in the short term as it isn't easy for these platforms to operate across so many different jurisdictions, risks and currencies. Instead, being a good trade bank isn't about designing the best looking infrastructure, it is about offering technology and solutions to customers that promote expediency and are easy-to-use. More importantly, it's about making sure that you respond to their queries quickly and remain focused on helping them to grow their businesses. It's also about being consistent across jurisdictions; if they have offices in different countries around the region, then they want to get the same answer from ANZ, no matter which branch they call.
Where would you place ANZ in the competitive landscape?
When it comes to regional trade finance, we want to be seen as one of the top three trade and supply chain banks, in the company of the likes of HSBC, Standard Chartered and Citi for example. Outside of Australia and New Zealand, we realise we can't always compete in all segments in all markets in which we operate and we recognise that the majority of the trade wallet available in Asia is handled by the domestic banks -- but, at the regional level, we are and will increasingly compete for mandates with other large regional banks.
How do you measure your success?
We say our business is growing when we are handling more and more of a customer's underlying transactions; when we are involved in more stages of the supply chain. A simple measure of this is increased revenue for the bank, but more than that, it's about making sure that we are listening to our customers and coming up with the right solutions.
This story was first published in the Asian Trade Finance Yearbook supplement to the April 2010 issue of FinanceAsia magazine.
