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Deep-tier supply chain finance (DTSCF) is an innovative financial solution with the potential to unlock financing for smaller suppliers deep into a supply chain by leveraging the credit risk of the anchor buyer.

The latest whitepaper from BAFT (Bankers Association for Finance and Trade) and the Asian Development Bank (ADB), “Deep-Tier Supply Chain Finance: Unlocking the Potential”, explores some of the more opaque aspects of deep-tier supply chains. 

To discuss the paper and better understand how DTSCF can promote financial stability, risk management, and sustainability, Trade Finance Global (TFG) spoke with Tod Burwell, President and CEO of BAFT.

BAFT is a member of the Global Supply Chain Finance Forum (GSCFF), an organisation established in 2014 to develop, publish, and champion a set of commonly agreed standard market definitions for supply chain finance (SCF).

DTSCF and its differences from traditional supply chain finance 

DTSCF, a variation of the traditional forms of SCF, has the potential to reach micro, small, and medium-sized enterprises (MSMEs) deep within supply chains by allowing them to finance their payables based on the credit risk profile of the anchor buyer. 

According to the BAFT and ADB whitepaper, a program must have several core elements to be considered DTSCF. For example, it must be related to trade finance, driven by the anchor buyer’s supply chain, occur post-shipment, and be predicated on an irrevocable payment obligation.

Burwell said, “DTSCF allows an original receivable to be discounted in parts at multiple levels, with the benefits transferring down the chain.” 

It is a distinct form of payables finance as tier 1 suppliers are typically the main beneficiaries of a payables finance structure. 

Benefits for anchor buyers, suppliers, and financiers 

From a buyer standpoint, DTSCF creates greater resilience and transparency in the supply chain by creating value for lower-level suppliers through reduced costs and fraud risks. 

Burwell said, “In a deep tier structure, your tier 2 supplier who has presented an invoice to your tier 1 supplier also gets the ability to discount that invoice, and the tier 3 supplier that has presented an invoice to the tier 2 supplier, and so forth down the line.” 

From the seller’s perspective, DTSCF provides better access to financing at lower rates driven by the anchor buyer’s credit rating. As this is extended down the chain, sellers at each level can access more favourable financing rates. 

From a financier’s perspective, with many currently not financing MSMEs, this presents a way to grow natural client bases due to the increased visibility of deeper-tier suppliers.

There is also an opportunity to link ESG reporting once deeper levels of the supply chain are connected.

Burwell said, “DTSCF creates more efficient operations, which can help lower costs. As we see more ESG creeping into the structure of supply chains, it enables these lower-tier suppliers to achieve compliance and reporting requirements in the context of that supply chain.” 

Core implementation challenges 

DTSCF builds on several of the core elements of traditional SCF. Unfortunately, inadequate secured financing infrastructure has prevented the widespread adoption of SCF in many markets. Without that foundation, many markets are not prepared for a deep-tier alternative.

Currency impediments are also factors. While tier 1 suppliers often deal in major tradable currencies, suppliers further downstream are likely to work with local currencies that can be subject to tight FX control regimes. 

Burwell said, “One big challenge is having willing participants. You are dependent on everyone in the supply chain to be open to being transparent with everyone else. You start

with the anchor buyer, but if you are the tier 1 supplier, you need to be willing to open up about your own supply chain to your buyer.”  

According to the whitepaper, complex and onerous onboarding procedures also hinder the scalability of supplier-led financing offerings. The cost and effort required to onboard suppliers, particularly MSMEs, can be prohibitive for lenders, making it difficult to extend financing to the deeper tiers of the supply chain.

Despite the challenges, there are case studies of successfully implemented DTSCF programs. 

Successful implementation case studies 

One operation in China had reached 9 levels down the supply chain, reaching $70 billion over several years, with the average invoice totalling $77,000. 

Burwell said, “The smallest invoice we came across in this program was $15. Traditionally, this would be unthinkable because many financiers are not interested in a deal if the ticket sizes are that small. But the point of this is to provide value at the MSME level, where you will have smaller and smaller ticket sizes. If it can work for a $15 invoice, it can work for anything.”

Another example is a bank with about 1000 suppliers on a blockchain-based platform that reduced onboarding time by 75%. Given that many consider the supplier onboarding process alone responsible for holding back SCF scaling, this is critical. 

Burwell said, “Having the right technology and the structure where each of the tiers are onboarding their own supplier networks; if you can reduce onboarding time by 75%, you have something.” 

Next steps to scale and fully realise opportunities 

To continue advancing DTSCF, the two most important next steps are education and developing consistent legal frameworks.

On the education side, the industry must continue to engage with and communicate DTSCF structures and benefits. The more organisations know about a utility, the more they use it, and the more innovation will be added to existing structures. 

On the legal side, it will be important to create consistent legal frameworks to enable DTSCF on a cross-border basis. While some structures are based on contract rights with irrevocable payment undertakings, others are based on negotiable instruments. 

Burwell said, “The heavy lifting for us is going to be looking at the legal frameworks and how we can better enable cross-border legal frameworks to standardise the client agreements and onboarding processes to achieve scale.” 

The post Podcast | Using deep-tier supply chain financing’s potential to unlock capital appeared first on Trade Finance Global.

Trade Finance Global (TFG) spoke to president and CEO of BAFT at Sibos 2022 about the role that banking organisations can play in developing environment, social, governance (ESG) and sustainability best practices within global trade.

Estimated reading time: 5 minutes

COVID-19 has changed a lot of things, for better and for worse.

On the one hand, the knock-on effects of the pandemic, including supply chain delays, have been a significant contributing factor to the economic downturn and difficult trading circumstances the world currently finds itself in.

But on the other, many believe that it has also helped to accelerate several much-needed reforms within trade finance, including the introduction of digital systems to help streamline documentation and fraud monitoring processes, as well as the implementation of more sustainable business practices.

At Sibos 2022, TFG spoke to Tod Burwell, president and CEO of the BAFT (Bankers Association for Financing Trade), a global trade finance association headquartered in Washington DC, about the key issues within the industry.

Burwell said, “That still remains a top priority. There’s also been a lot of emerging energy around ESG and sustainability. 

“There were a couple of things that I’d say sort of went silent a little bit for a while, but it re-emerged. One of them is the implementation of the Basel Framework, with several jurisdictions now going through their implementation process.”

In his view, one of the challenges of introducing key reforms around ESG and digitisation within the finance industry is trying to deal with existing gaps in existing legal frameworks so that they better support the introduction of digital trade documentation.

ESG: sustainability about more than climate

In terms of the connection between digitisation and greener trade practices, Burwell feels that technology has a role to play in making ESG reporting and monitoring a lot easier.

However, as far as the role of banks is concerned, Burwell believes that the banking community can help provide the ‘connective tissue’ from a standards point of view.

This is particularly true when it comes to the question of interoperability––a major pre-requisite for the rollout of the digital agenda. 

To achieve this, you have to introduce international standards––something that large financial organisations have a lot of experience with. 

Burwell said, “And so I think a lot of the discussions are going to focus on: where are we in the standards process, with the adoption process of those standards and the like?”

And while they aren’t in a position to help trading companies source, produce, or transport goods sustainably, banks and trade finance organisations can potentially help with the financing of more sustainable supply chains, thereby incentivising more importers and exporters to adopt sustainable practices.

However, he also feels it is important to gain clarity on what precisely sustainability means to trade organisations. 

Burwell said, “The UN has their 17 sustainable development goals (SDGs). But then when you look at the policy community, everything is focused on climate and environment. 

“So much of trade actually facilitates SDGs outside of climate change. And so one of the biggest issues for our members is how do you apply the concepts of sustainability across the spectrum of trade, measure it in a way that’s consistent with policy frameworks?”

Legal frameworks: a region-by-region affair

On the issue of legal frameworks, BAFT has teamed up with the legal reform advisory board of the ICC to try and drive forward the adoption of the Model Law on Electronic Transferable Records (MLETR) region-by-region. 

Burwell added, “There are about seven countries that have already adopted MLETR, but there are some major jurisdictions [are] on the cusp of making significant steps forward. 

“The UK has an electronic documentation bill that’s under consideration right now.” 

Indeed, the Electronic Trade Document Bill which is currently making its way through the UK Parliament has been designed to address a long-term bugbear within English law around the question of legal ownership of intangible items. 

Up until now, this has made it hard to address the issue of control, without which it is difficult to develop a reliable document control and verification system. 

In the US, where BAFT is based, recent amendments that were made to the Uniform Commercial Code at a national level still need to be approved by all 50 states before these will apply universally across all major US trade jurisdictions.

When it comes to things like cross-border trade and global payments, the situation is a bit more complex.

Burwell said, “When we look at cash management, particularly on the payment side, we’re trying to focus on the unevenness of regulations and how that’s impacting the disparate faster payment systems around the world: What are the rules, who’s allowed to participate, how is [know your customer] KYC––as well as banks versus non-banks––being considered?”

Basel and closing the trade finance gap

When it comes to trade finance, BAFT is advocating for ways to encourage more financial inclusion so that the standing trade finance gap doesn’t continue to widen, especially given the current tough trading environment. 

Here, Burwell feels it is also important to introduce some basic legislation around capital frameworks in accordance with the Basel Framework for international settlements. This directly impacts how much liquidity banks are able to provide to trade organisations, which in turn, determines their ability to help close trade finance gaps.

Overall, though, Burwell feels that things are headed in a very positive direction, and BAFT is doing all it can to facilitate this process through a mixture of policy advocacy, education and training, alongside global community building.

Burwell said, “You need to collaborate in order to solve those challenges, and they do it through us.”

The post VIDEO | The role of banks in developing greener, more sustainable trade practices appeared first on Trade Finance Global.

WASHINGTON — BAFT, an international financial services association, recently announced the publication of BAFT’s Global Trade Industry Council Payables Finance Principles to inform the industry on the payables finance supply chain finance product.  

Members of BAFT’s Global Trade Industry Council (GTIC), which consists of heads of trade from 19 of the largest trade banks in the world, worked to codify a framework for articulating the essential criteria for use and structuring of payables finance, a financial product providing support for the global economy.  

“The BAFT GTIC spent considerable time developing these principles to help those in the industry build strong, sustainable payables finance supply chain programs,”

said Geoffrey Brady, MD, chair of the BAFT GTIC and head of global trade and supply chain for Bank of America.

Because payables finance is often misunderstood, the GTIC requested BAFT develop a working group of member experts to draft guiding principles designed not only to assist the international trade industry with a framework for delivering and building payables finance supply chain finance programs, but also to provide specificity to the rating agencies and other stakeholders to avoid confusing it with different supply chain finance programs. 

“In the absence of written rules, these new payables finance principles provide a common framework for banks to structure their individual programs, while contributing  to a broader industry understanding of payables finance and its benefits,”

said Tod Burwell, president and CEO, BAFT.

The post BAFT Announces New Payables Finance Principles appeared first on Trade Finance Global.

What is BAFT?

BAFT is the leading global industry association for International Transaction Banking. It helps bridge solutions across financial institutions, service providers and the regulatory community that promote sound financial practices enabling innovation, efficiency and commercial growth.

What are the key BAFT updates this year?

BAFT continues to promote thought leadership and best practices, conduct advocacy and provide needed education and training.

SCF / Payables Finance

BAFT has engaged standard setting bodies (FASB, IFRS) on accounting treatment and disclosure concerns for payables finance. Additionally, we have worked with our partners in the GSCFF to document guidance for Payables Finance market practices.

IBOR Transition

BAFT is engaged on the creation of a forward-looking term SOFR – deemed critical for discounted trade products. BAFT is also assessing the feasibility of alternate calculation methodologies should a forward-looking term SOFR not be available before the transition.

DLPC

BAFT outlined guidance for technical and business requirements to conduct a distributed ledger payment commitment (DLPC), which has now been put into practice with live transactions.

Africa Council & Global Payments Industry Council (GPIC)

Continuing to build a global community, BAFT launched two new councils, the Africa Council, providing leadership for member services in sub-Saharan Africa, and the Global Payments Industry Council (GPIC), driving the payments/cash management agenda for the association.

What are the key COVID related initiatives you’ve worked on and how can we effectively ‘turn trade on’ as we head into recovery?

• Hosted a series of Member Briefings addressing Financing Trade during the Pandemic “force majeure”, the challenges to present physical documents and certain ECs/MLA programs designed to assist during the pandemic
• BAFT published a joint industry paper – Digital Rapid Response Measures Taken By Banks Under COVID 19 – highlighting practical approaches undertaken by various FIs following a brief survey initiated by BAFT
• Advocacy initiatives to e-enable trade product delivery (e-documents, e-signatures, e-bills of lading and e-negotiable instruments) in the context of local law.
• Advocacy to export credit agencies to expand support to institutions and consideration for private trade credit insurance to ensure liquidity for trade finance.
• Preparing an updated response to our previous communication with the European Commission in light of the impact of COVID-19 on trade finance in the context of the final Basel III framework.

Key Dates and Projects for 2020

• Digital Ledger Payment Commitment (DLPC) Business and Technical Best Practices, April 2020
  Paper and webinar on same topic.

• BAFT Class of 2020 Future Leaders Program, May 2020
  Graduating class of 30 completed papers and webinars on Sustainability, SWIFT gpi, Faster Payments and IBOR transition.

• Cross-Border Real Time Payments Barriers whitepaper, fall 2020

• Virtual Events/Webinars, Q3 and Q4 2020
  BAFT MENA Forum (Sept.) and BAFT International Convention (Nov.) will now be virtual events. BAFT MPA and Islamic MPA workshops will be held virtually (Sept.). Check www.baft.org/events for the latest updates on programs and webinars.

• Two New BAFT Certificate Programs, Q3 2020
  BAFT Certificate in Introductory Transaction Banking (CITB) will provide an entry level overview of the primary functions of transaction banking, while BAFT Transaction Risk for Trade Professionals will address the skills to identify, mitigate and price transaction risk while developing products and services.

• Two New BAFT Certificate Programs, Q3 2020
  All papers and recordings available on www.baft.org

Find out all of the latest updates in trade and credit insurance in our latest edition of Trade Finance Talks, here.

Now launched! Summer Edition 2020

Trade Finance Global’s latest edition of Trade Finance Talks is now out!

This summer 2020 edition, entitled ‘Coronavirus & The Fourth Industrial Revolution’, is available for free online, covering the latest in trade, export credit insurance, receivables and supply chain, with special features on fintech and digitisation.

The post BAFT industry update: How is trade financed during a pandemic? – An update from Tod Burwell, President and CEO appeared first on Trade Finance Global.

We caught up with the President of the Bankers Association for Finance and Trade (BAFT), Tod Burwell. We talked about the balance of human capital and technology in the international transaction banking, about the amendments of the funded master risk participation agreement and how trade-based money laundering can be eradicated.

Featuring: Tod Burwell, CEO and President of BAFT

Host: Deepesh Patel, Editor, Trade Finance Global

I’m Tod Burwell, the President and CEO of BAFT. We’re an International Industry Association specifically focused on transaction banking. We’re headquartered in Washington, DC, but our members are located around the world and about 61 countries right now.

Here we are in SIBOS in London, 2019. As a representative of the International Transaction Banking Community, what has been keeping transaction bankers up at night?

So it’s interesting, so depends on who I’m talking to and where they’re from. There are slightly different things that are taking a higher priority. I think we have consistently heard regulation was something that kept seeing leaders up at night. But there are some growing headwinds, concerns about negative interest rates and a lot of positive energy about how to re-engineer their business particularly in the context of technological transformation. You know, their old business models may not really work in a new technology world. So you’re trying to think through business models, you’re trying to think through the balance of human capital versus technology.

Great. So let’s talk about some of the key milestones of BAFT. Can you talk to us about the new amends to the Funded Master Risk Participation Agreement for trade finance this year?

Sure. I’ve been at BAFT about eight and a half years. This was easily the most productive year from the standpoint of work product that the industry has been able to take advantage of; advocacy work that we’ve done; best practice guidance is and so forth. So most people when they think about BAFT, they think about the Risk Participation Agreement that we developed for secondary sales of trade assets. That was done about 10 years ago. There was a New York law version and English law version. And those have both gone through revisions this year, primarily because organisations that had been using them found that the way the business has evolved, the agreements needed to evolve with it. So we spent some time working with practitioners in the industry. We got together with the ITFA because they also have a membership base that are active users of trade risk participations. And we put together some revisions that reflect the current business environment. We took a look at one of the agreements to specifically try to achieve true sale on the secondary sales. And so there were some provisions that allowed for that. Now, both the old agreements and the new agreements are still in effect in the market. So it’s up to clients to decide. The other thing that was interesting for us this year is we worked with the IIFM, which is based in Bahrain. And they are really experts in Islamic finance. Some of our members, particularly in the Middle East, had noted to us that about 25% of the trade in the Middle East was being done as Islamic trade. And they were interested to see if they could leverage a similar type of agreement as to the Risk Participation Agreement for Islamic trade, but obviously it had to be modified. So we worked with the IIFM to come up with is now called Islamic Risk Participation Agreement. So that was launched in early 2019. And we have both funded and unfunded version of that. And we’re trying to get the market comfortable with that, so they can use it.

Great. So let’s talk about digitization. Why is the digitization of trade and Supply Chain Finance so important? And what is the industry doing about this?

If you walk around SIBOS, you can’t help but notice that technology is on par with banking, in the way that it’s displayed in the vendors and providers that are here. In all the topics of discussion. Trade is still very much a paper-based manual business. It’s very, very costly. It’s labour intensive. It’s difficult to do seamlessly, which is what we think about what technology has done for us in our daily lives. So much of what we do as humans is done in a touchless contactless, frictionless way. And when you think about how trade is done, it’s everything but frictionless and that creates a lot of obstacles. So the significance of digitising trade is to increase the ability of parties anywhere to do trade with others, to increase the cost-efficiency of doing trade with others, to increase the speed efficiency of being able to settle trade and transact trade, and really getting people used to doing trade and the way that they do everything else in their life. So there’s a lot of challenges with it because it’s a very fragmented process. So you have to get not only banks on board, you have to get their clients on board. You have to get SMEs on board. Ultimately, you have to get freight companies, customs organisations, and a lot of parties so it’s a very complex ecosystem. Well, one that obviously has a tremendous amount of potential if we can collaborate around it and get it done.

Absolutely, I think another issue within trade and supply chain finance is a financial crime, financial crime risks is abundant but very problematic for trade violence activities. And I know that together with the Wolfsburg group and ICC, BAFT continues to work on the standardisation and definition of some of these principles. Why is this important to the community? And can you explain a little bit more about these principles?

Yeah, so let me approach it from a little bit of historical context. So there’s been increasing concern from regulators around trade-based money laundering. Part of the challenge is that trade-based money laundering as it actually happens does not necessarily happen in the context of traditional trade, finance. So we’ve had to do a lot of work to really try to define what is trade-based money laundering, how does it happen? And what capacity do banks even have to try to identify it and interdicted? So we did a paper on combating trade-based money laundering in 2017. And that’s just one piece of the challenge. Another issue around financial crime is that if you look at trade and I think we all agree that there is about a one and a half $1.6 trillion trade finance gap, mostly with SMEs. What’s happened is a lot of that gap has originated because of compliance concerns, know your customer concerns and limitations that those banks have with doing business with smaller companies. So we have to somehow solve this problem if we’re going to solve the trade finance gap. So if we peel that back, and we look at the regulatory environment Some of the issues that the regulations are typically left with a certain amount of discretion for how its applied. It makes it difficult, from bank to bank, to bank to bank, to apply the regulations in the same way and in the most effective way. So we thought there were a need and an opportunity to try to develop some best practices for how to apply these regulations to gain some clarity about parts of the regulations that were maybe causing banks some issues. So working with the Wolfsburg group and the ICC, we were able to develop trade finance principles, which really look at a variety of issues, including non customer due diligence, looking at due diligence at a transaction level, not just at a client level, and tries to layout in a little bit more consumable fashion, what the expectations are. So we published the original version two years ago. This year, we updated that document to cover open account, as well as bank to bank trade loans. So we’re continuing to work together and I think the next iteration, we’re going to drill down and a little bit more detail on what the risk-based approach really means. 

Okay, great. Thank you. And finally, we expect to see more active implementation of Basel III in the next 12 months. It is like Basel IV, Right. What is BAFT doing here?

Yeah, so if we go back five or six years ago, that was our single most important advocacy topic. And working together with the industry. I think collectively, we laid out about eight or so issues that were significantly and negatively going to impact the trade finance, business and the ability of banks to lend. So of those eight issues, and working with the Basel Committee and working with the local and regional regulators, I think we were able to get some agreement on modifications to about six of those issues. In the final framework of Basel III, I think a couple of those settled issues have become a little bit unclear again. So the industry is has coalesced to try to identify in the final framework, what are the issues that are still really going to cause some difficulties for banks to provide real economy lending. What happens is every geography then has to go and implement the Basel framework in local law and into local context. So we’re having conversations on a local jurisdiction level now about how countries are going to implement Basel III. And hopefully they will implement the framework in a way that really considers the low risk nature of trade finance.

29th Annual BAFT Conference on International Trade

Learn more

Great. Well, Tod, thank you so much for joining us here in SIBOS. 

My pleasure. 

And we’ll see you in Chicago. Tell us a bit more about the Chicago conference.

So we have our Annual International Trade conference in Chicago. We’re excited about it. We have a variety of important topics. We have the newly appointed president and chair of US EXIM Bank, which is one of the organisations we have been fighting to get reauthorize so we have her joining us in Chicago, will have a variety of sessions that touch on digitization, as well as Supply Chain Finance, evolutions and a whole host of issues. It’ll be a good chance for more thought leadership around hot topics. It’ll be a good chance for people to network.

Great and TFG are media partners there so we will be there and be covering the event.

Looking forward to it.

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