Katie Ellis: Hello and thank you for joining this episode of “Leading the Conversation: Insights from Wells Fargo.” My name is Katie Ellis. And I’ll be hosting today’s discussion of trends and international trade finance and services. We’re very fortunate today to have the opportunity to speak with Chris Lewis global head of international trade services for Wells Fargo. Chris thank you for joining me today.
Chris Lewis: Thanks Katie, it’s great to be here.
Katie Ellis: Wells Fargo’s 2016 International Business indicator shows that despite concerns about exchange rates and global economic conditions that U.S. companies actually expect an increase in transactions with overseas buyers and suppliers after the next 12 months. What does that outlook mean for financial institutions providing child services?
Chris Lewis: The International Business indicator reflects what we’ve been hearing from corporate America for some time now and that is that in order to reduce production costs or to enhance revenue growth.
Chris Lewis: Many are now going outside of the United States are going international to find those opportunities. And what that means specifically for financial institutions is those that are providing trade services. Obviously, it’s it’s an opportunity to grow revenue themselves. And what’s important is for those financial institutions to get the product mix right because customers are always going to be looking to enhance liquidity when they go overseas just like they do domestically.
Chris Lewis: They’re also going to be looking to mitigate risk wherever they can. So whether it’s a mix of traditional trade products like commercial letters a credit or standby letters of credit and guarantees or maybe the more sophisticated products like in the open accounts supply chain finance space it’s important that financial institutions offer a wide variety in order to meet customers needs. Now having said that this business is getting very competitive. And when you look at it costs are increasing especially in the compliance area. But even when it comes to the back office support the production in mature markets like the United States in Europe costs continue to rise fairly dramatically. So really what the story is is this is coming down to a business of scale. And it’s really important that financial institutions understand that and that they understand that they’re going to have to cover both fixed direct and indirect costs in order to make this a successful business.
Katie Ellis: So in terms of different quarters where are you seeing kind of increases in insert markets where housing declines.
Chris Lewis: Global trade is still growing albeit modestly. I mean we’re still consuming we’re still eating food and eating more food now than we ever have been. We’re still consuming or buying iPhone’s buying clothing we’re buying automobiles. If we continue to buy and consume all sorts of things. I think where the difference is now is that in the past couple of years the price of commodities have come down significantly over time. So when you’re looking at commodities like oil or for example agricultural products soybeans for example which is used as animal feed or cotton used in clothing production or for that matter metalsetc. The price of those commodities have come down. So that has really affected the trade corridors in the. When it comes to the producers of those commodities for example in Brazil in Australia and the flows of those goods into places like China which are big consumers of it. So you’re seeing that the actual trade volumes coming down and the value of the trade that’s being traded coming down. However when you look at the traditional manufacturing hubs in Asia and what they produce there and what they’re selling into the traditional markets like theU.S. and the European Union the trade business there is still fairly robust and we’re still seeing an increase in fact. When you look at trade overall is probably now in line with the growth in global GDP which is running around two and a half percent.
Katie Ellis: So what does the state of standby letters of credit to be in international trade finance and what are the market differentiators when it comes to those that standby letters of credit providers.
Chris Lewis: Standby letters of credit are generally used as financial guarantees for performance bonds. But increasingly they’re being used in the international space and in fact when I speak to our peers in the industry or my peers in the industry they agree with me that standby letters of credit and guarantees as a product is the one area where we’re seeing fairly significant growth.
Chris Lewis: As opposed to let’s say the traditional trade base of commercial letters of credit. So that’s that’s been good to see when when it comes to what differentiates and provider of standby letters of credit. Actually a real key thing there is the providers back office or operational staff. It’s important that they have the technical expertise when it comes to dealing with standby letters of credit. And what I mean by that is stammerer letters of credit were often suspicion in international transaction be supporting a transaction that’s governed by a contract and you need to look at the contract as opposed to the wording that’s going into the standby letter of credit to ensure that the standby letter credit is ultimately workable. And the only way you can do that is when you have technically astute and a very experienced trade operations staff. So that’s a key differentiator. So what’s really important there is that whoever you’re dealing with internationally you’ve got a long standing and perhaps a deeper relationship and a Trussel relationship with that bank that you’ll come to a quick agreement on transactions like that in order to meet the customer’s needs.
Katie Ellis: Chris you mentioned compliance in an earlier answer. What would you say are the greatest challenges for international trade services in terms of regulatory compliance changes and to what extent do you feel that these changes will really affect the ability for some banks to continue to provide trade finance to our clients.
Chris Lewis: There are probably three key challenges at the moment. The way I see it at least. The first one is is providing or meeting the Regulators expectations in a cost efficient manner. Costs continue to rise in the business and we have to find a way of finding greater efficiency and perhaps even looking at automation when it comes to addressing MLA and money laundering issues or a BSA Bank Secrecy Act issues because that continues to plague the business. The other one the second issue and again I am not sure that the industry has appreciated what’s happened here but over time as the line of business or financial institutions area is looked to reduce the number of relationships that they have worldwide.
Chris Lewis: So in a given country instead of having 10 relationships they’ve now reduced to three because of compliance issues because of the cost of trying to maintain those those previously 10 relationships that’s impacting the business that we can do on behalf of our customer with another counterparty. So that’s become a real issue. So instead of being able to have our exports come to us and say well my buyers got five different banks that they would like to use tissue and LC we may only be in a position to use one of those five banks if they even have a relationship with that. So that’s causing us some real concerns right now. The third issue and this is again more of a probably an industry wide issues that we as the industry are not approaching the regulator with really one voice. Right now a lot of the banks are doing a good job of dealing with their regulator and in a singular fashion but as an industry we continue to struggle to present that one voice to the regulator and so through organizations like Barford which is the. Bankers Association for the Finance a trade part of the American Bankers Association or through the ICC the National Chamber of Commerce we do a lot of advocacy work in dealing with the regulator but I think we still have a long way to go on that one.
Katie Ellis: Looking ahead what do you see as the biggest threats and opportunities for trade finance in the next five years?
Chris Lewis: When it comes to the challenges that we face in the industry or the threats if you want to call it that there’s a couple of areas in particular that I look at but I look at them as both a threat and an opportunity. One of them for example has to do with the current global economic situation and the current global political situation both of which are fairly volatile and uncertain at the moment. And whenever you have volatility or uncertainty that’s not necessarily a good thing for trade for global trade. And when people go international they want to know that it’s safe to do so.
Chris Lewis: So that’s a real key issue right now. But having said that if you go back to the International Business indicator and you see what companies are saying about wanting to go international. Even though China has slowed down they’re still doing growing at 6 percent was Paran in GDP there’s still good opportunities there. And if you look at some of the other emerging markets whether that’s India Indonesia Vietnam for example in other Asian countries if you look at the African continent if you look at Latin America despite what’s happening in those parts of the world right now there will continue to be opportunities for companies to reduce their costs of production in those areas as well as also perhaps finding opportunities for revenue growth. So actually when you look at it the emerging markets story and trade related to that which is a lot of what trade’s been about over the past 10 years has slowed down but it hasn’t stopped. I mean think of it as taking a breather. So I think in the next couple of years it will start picking up again more significantly than it has the past couple of years. So we will grow more significantly. The last threat opportunity the way I see it is when it comes to technology and technology in particular. Block Chain so when when I when I look at block chain I don’t really think of it in the negative terms that it’s often reflected in the media. So, in other words, yes it’s a threat to the banking insurers are really an opportunity for the banking industry. And I think the way that we’re looking at trying to drive cost efficiencies in the business and particularly in trade the way we’re trying to enhance or let’s say mitigate the risk in doing trade transactions gene technology is something that we’re not only embracing but we’re rapidly embracing to try and address those concerns within the trade business.
Katie Ellis: Well thank you thank you for joining us today.
Chris Lewis: You’re welcome. It’s great to be here. Thanks, Katie.
Katie Ellis: This wraps up the insights from Wells Fargo video for today. We hope you enjoyed this discussion and invite you to join us again for future video interviews. If you’re interested in submitting a topic of interest to discussing a future video please e-mail us at GFI@WellsFargo.com. Thank you and we hope to hear from you soon.
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