Karl Page had a 40-year plus career in banking, mostly in corporate banking and in trade finance. He is currently on the board of Toknar in an advisory capacity. We discussed the changing culture of banking, the trade finance gap, financial technology and ESG.
All right. Could you tell me about your background? I understand you’re a veteran of the banking sector.
I guess just over four decades probably does qualify me as a veteran of the banking industry. Of 40 years in the industry, around 25 of those were spent covering trade finance in its various forms. Out of the five institutions I’ve worked for, the key ones, where I was the longest, and where I learned the most, were ABN AMRO and Barclays. In terms of the kind of roles that I’ve covered, syndications and risk distribution have been the main roles, but I’ve also worked on documentation, execution, and transaction management as well.
Okay, so with all this experience in banking you’ve had, what are the key developments that you’ve witnessed in banking over the last 10 years? I can see that this question may need a longer timeframe because, of course, 2008 happened more than 10 years ago. And what do you see happening in the next 10 years?
As you mentioned, major changes did start more than 10 years ago when the crisis happened. Certainly, the regulatory environment has brought about massive changes in banks; the main change in my view has been the rise in the power of compliance departments within banks; historically, compliance was always there, of course, but they didn’t feature that large as a stakeholder within a bank prior to the crisis.
But now, it feels like almost everything has to go through compliance for approval. And then beyond that, the sheer number of stakeholders that now have to get involved just in agreeing whether a bank is going to do a deal or not, is quite staggering. So on a working level, that’s been a big change that I’ve witnessed.
I think how banks work with technology has changed as well; by that I mean the way banks adopt new technologies and the way they work with FinTechs. 10 years ago, the decision a bank needed to make was: ‘Well, for this particular system or technology solution that we need, are we going to build this in house or are we going to go external?’
But I think in recent years, that question has changed to “what external provider are we going to use?’ So, you know, a big change for banks is they’re not really investing much in their own systems any more. It’s all about what software is out there that they can bring in to complement their existing solutions; what FinTechs can they work with?
The first thing of interest to me is regulations because I understood that after 2008, many governments enacted tougher regulations to prevent what happened with the Lehman Brothers and these securitizations of particularly dodgy mortgages. So, my question is: did that have an impact or do you think these regulations have been rolled back, you know, quite quietly in Britain and maybe in America, putting us potentially in the same position again going into the future? Was there any real bite to those changes, I suppose is what I’m asking?
Yeah, it’s a good question. If you think about the behaviour of banks, some of the products they’re offering, such as securitizations, you could say those things are still around. If you think about the more aggressive end of investment banking and look at what’s going on in that world, then you could ask did those regulations have any real bite? Because a common expression when I was working in banking over the last few years was: ‘Hey, this is like 2007 all over again.’
I think the reality for most people in banking is that the way they work has changed; having said that, banks being banks, they will always push the boundaries and certainly that is more the culture in investment banking as compared to corporate banking. In the areas where I worked, which was mostly corporate banking and trade finance, certainly I would say that post-crisis regulations have had a fundamental impact on those businesses over the years.
You mentioned needing lots of stakeholders to sign off on big decisions. Can you explain about that? So, it’s become a bigger, clumsier system because of that? And who are the principal stakeholders that we’re talking about?
I’m talking more about the big banks in that context; if you’re in a smaller bank there tends to be less layers to go through, but certainly, in the larger institutions there are so many stakeholders to navigate now. Beyond the traditional ones such as credit and legal, you have compliance, portfolio management, reputational risk, operational risk, regulatory accounting, audit, sustainability committees, and the list goes on.
So, does that make them more cumbersome; the decisions slower because you’ve got all these layers?
Yes, indeed. It makes decisions slower, and sometimes if just one out of umpteen stakeholders says ‘no, we don’t like this’ or ‘we don’t think we should be doing this’, that can be enough to kill a deal.
Before the crisis, you would typically have a few senior bankers who would get their heads together and say ‘right, we’re going to do this’, and that would be of sufficient weight to carry a deal through the organisation. I think those days are not around anymore; there are lots of different stakeholders to satisfy and all the boxes need to be ticked; if they can’t, then it’s more likely that a deal won’t get done.
Well, I can see that as being a good and a bad thing. There’s more risk analysis going on.
Yeah, I think as a result of it, clearly banks have become more risk averse in their approach in recent years.
You talked about banks deciding to go external with FinTech, to source the technology to deal with customers and businesses: why is it that banks aren’t interested in getting specialists into banks to set up their own systems? Is it just cheaper to buy a license from a FinTech company?
I suspect it’s cheaper. And banks, especially big banks, they’re slow to change, and they’re slow to build systems. I think there’s been a general cultural shift; banks have seen how they’ve been left handicapped by outdated legacy systems in the past and they want to move away from that culture. When banks in the past built their own systems, each bank would always put their own twist on things. So, you then get to the point where each bank becomes a bit of an island in terms of the bespoke systems it has. Whereas, if you’re buying technology from outside then it’s more harmonious in terms of what’s being used across the industry, which is probably a good thing.
Yes, I agree with that. But you can see how by buying in the tech you give FinTech platforms with a bit of financing behind them, a head start. I was speaking to Federico Travella the other day and he was suggesting that if there’s not at least a million-pound invoice involved, then a lot of banks would just turn down the financing opportunity. The smaller, more agile FinTechs are happy to price in the risk of dealing with SMEs and smaller invoices and banks are turning their noses up at this trade, which is making them less relevant.
Yeah, absolutely. And that’s why you’ve now got many more diverse funders and lenders out there: challenger banks, small banks disrupting the larger banks.
Putting your magic hat on, what do you think is going to happen in the next 10 years?
Well, in terms of trade finance, I would certainly hope that we can get some more favourable treatment from the regulators for trade. Is this going to happen? We’ll see. The recent direction of travel, in terms of the capital the regulators want lenders to allocate against trade, is not a good one. It’s become a blunt instrument for regulators who see trade finance as high risk and don’t seem prepared to look at the nuances around trade.
The self-liquidating nature of trade makes it a safe product relative to other forms of lending: the default rates are very low, but still the regulator doesn’t really appreciate that, especially when it comes to capital. The regulation needs to be more nuanced, to recognize what trade is and how these transactions are carried out. I would dearly love to see that, but I’m not holding my breath if I’m honest.
Technology is obviously another big one there. I think the trend in terms of FinTechs collaborating with banks and vice versa, that will continue, for sure.
And as I mentioned, most banks have moved away from building their own systems and, and are looking to use external systems. And I think we’ll see an increasing number of smaller banks, small institutions and challenger banks that are filling in the gaps in the market where the big banks don’t play.
And do you see the complete removal of banks from the high street? And at the same time, all money will become digital – we will lose paper money?
If you look at what’s happening with technology, an awful lot more has happened in the retail banking world, i.e. consumer banking, than it has in business banking. Business/corporate banking is behind retail banking in terms of technological developments. For retail banking, the writing is on the wall: banks are pulling out of having physical offices.
There’s this new concept that the UK retail banks are rolling out, which is the idea of shared banking hubs. The idea is to have a number of banks physically together to serve particular areas; hopefully in this way, physical presence and support for local businesses and communities can be preserved.
It just struck me. There’s a psychological element to this. For years and years, as I grew up, Fort Knox was a sort of symbol for Americans – even though they suspected there was no gold in it – they felt that there’s a physical thing here: the dollar is backed up by Fort Knox. It’s a real thing. And to see banks on the high street it kind of made the backbone of the high street. They had a solid presence in people’s lives. You could go to them like you could go to government officials. And if that just disappears, then there’s going to be an impact, isn’t there? Especially in the way that people think about banks? Which could be a bit sad. It obviously doesn’t help old people who are very reluctant to embrace digital technology.
Yeah, it’s the older generation that will suffer. And let’s face it, in retail banking most of the bank workers that are still physically there in the branches, mostly what they do is help people with the technology, in terms of pointing them to the right place to go to on a website or whatever.
I think we can move on now. There are various figures being used regarding the current shortfall in finance needed for business globally. There is a consensus that it is currently at about 6 trillion dollars. Where do you see that funding coming from in the future? Would bridging this gap in funding result in a boom for the global economy?
Yeah, this is the famous “trade finance gap”. I know there are lots of different numbers bandied around; whatever the actual number is, it is huge. It is in the trillions. A lot of that shortfall is in the SME market, and as we know that sector is very underserved. Also, a lot of the shortfall is attributable to certain geographies, namely emerging markets. So, if you are an SME in an emerging market, then it’s particularly tough. In continents like Africa and parts of Asia for example, SMEs struggle to get access to any finance. I think that, in terms of what you mentioned, the smaller players in finance, the challenger banks, etc, are going to play a bigger and bigger part in filling in the gaps that the big institutions can’t fill.
I think that technology will play a big part there, and will help that gap to be bridged. Where we are at the moment, a small transaction for an SME is just not really worth the while of a large bank to process that transaction; it’s uneconomical for them in view of the size of the transaction and the work that’s involved to process it. Trade finance, depending on the type of product we’re talking about, can be quite manually intensive and quite clunky. However, technology can speed up the execution as more of the actions are performed by computers and not people. Then the idea that a transaction is uneconomical will fall away to an extent. Certainly, technology can make it easier.
In terms of funding, I think the smaller institutions have got a part to play. Plus you’ve got very strong support in the UK and around the world in terms of government lending institutions, export credit agencies and of course the Development Banks. They will play a big role in trying to close that gap.
Indirectly you’ve got institutional investors that certainly can make a difference. The idea that a bank can originate a transaction and then pass the risk on to an insurance company or a pension fund or whatever, I think that will help as well.
Ultimately, I think we have to be realistic though – if you’re talking about an SME in one of the African countries for example, when it comes to credit appetite from funders/institutional investors, often that appetite is constrained. And that’s just a fact of life, I’m afraid. But if you think about trade and you think about the fundamentals of trade, which most of the time is financing the movement of goods from one place to another, then technology is going to make transactional trade more transparent. That should allow institutions to get more comfortable with some of the risks that you see in emerging markets. So, if you have distributed ledger technology, you’ve got the transparency of where the goods are in different locations; whether they’re on the ship or they’re at port side or whatever.
Lenders can get more comfortable with some of those risks in emerging markets if there’s more transparency because of technology. So, hopefully we will see the gap closed.
Would it cause a boom? I think that’s hard to say. We’ll have to see how it goes, but certainly I’d like to think that we can get to a situation where SMEs and emerging markets get a fairer crack of the whip in terms of financing that might be made available to them.
The British Business Bank’s Small Business Finance Markets Report for 2022/23 showed that challenger and specialist banks lent more money to businesses than traditional banks during the last financial year. Why do you think that was? I suppose it’s partly what we’ve been talking about already.
Yeah, I think that that’s it. As I mentioned, challenger banks can fill those gaps. They’re nimbler: decisions can be can be made quicker than the larger institutions. And they can innovate quicker. A big bank is a bit like a super tanker trying to change direction: it takes a long time. Whereas, a small lender can be nimble enough to move around and innovate quicker and make decisions quicker.
Yes. I was reading today that even though challenger banks manage to be nimbler and quicker to innovate, there’s a bigger regulatory burden on them [than on big banks]. They have to keep more reserves than a traditional bank? So, they’re pushing their margins essentially.
I think that’s true. I don’t know much of the detail on that, but yes, certainly the regulator will look at the size of your balance sheet and the risks you’ve got on your books, so from a capital perspective it’s tougher for challenger banks than it is for the big banks.
I think part of the reason for that is, as I mentioned before, that there’s not enough recognition from the regulators of the nuances of trade, and of trade having very low default rates. If you compare trade finance to just clean lending then you see trade finance is a lot safer. There are natural mitigants there that, unfortunately, the regulators are not recognising.
Yes, because of course, in many cases, there’s real collateral behind it. There’s the invoice or the equipment or the plant so you can feel safer about lending the money. How will AI and distributed ledger technology support step-changes within the trade finance sector?
Well, I think there’s no doubt that AI, machine learning and distributed ledger technology will revolutionize business banking and trade finance in the years to come. We’ve already mentioned transparency; I think technology will bring greater transparency to trade. There will be much more visibility about the underlying goods that are being financed and where they are in the supply chain; where they are in terms of the transportation journey that they have to go on. What technology will give you as well is speed of execution, and that leads to lower costs.
At Toknar, we have a concept that we call the “digital office”, which is driven by smart contracts that contain specific code and algorithms that provide automatic execution of all the various elements contained in a receivables purchase agreement or whatever is the particular finance contract. Combining those smart contracts with artificial intelligence means you have a digital office; you’ll have humans overseeing what’s happening, but those humans don’t need to do the processing and execution work. Therefore, it’s going to be faster, and human errors will be removed. That’s a step change that we’re going to see.
About blockchain: everything will be on a blockchain because of transparency. It’s there forever. It can’t be changed. It can be accessed from anywhere. It creates accountability, doesn’t it? And so, integrating blockchain technology into trade finance would seem the logical next move.
Yes, definitely. Blockchain will bring more consistency in the industry because of that and hopefully, this will make financing more inclusive as well. Smaller businesses will have wider access to financing and funding because of the technology. Just going back to the regulators, because blockchain technology increases transparency and removes human errors, hopefully these benefits will influence the regulator to change their mindset about trade finance as well, around all those things that we’ve been talking about. The transactions often have natural collateral there, they’re self-liquidating and, hopefully, the benefits of the technology can influence the regulators as well to give more favourable capital treatment to funders and lenders.
Yes. The only worry I have is about how AI is already become so weaponized and politicized. It’s almost distracting from the obvious benefits that this technology has. We’re just immediately worried that the Russians or the Chinese are going to bring down the power grid or something like that.
It’s like a lot of things: it can be used for good or it can be used for bad. It’s just that the bad often attracts all the attention, doesn’t it?
Indeed. On the positive side I can see that risk mitigation is going to improve massively because AI won’t miss anything and AI can make models and conceive models that we didn’t even think of. So, it’s going to revolutionize analytics in the future. As far as trade finance goes, AI will help us massively.
Governments, large corporations, banks, factoring firms and SMEs are all investing resources into ESG initiatives. Is this a fad? Afterall, in the 1990s there was a lot of talk about the Triple Bottom Line – People, Planet, Profits – that failed to produce a paradigm shift and that didn’t halt global warming.
I think it’s more than a fad. If you look at political agendas, public policy; if you look at all kinds of areas, not just financing, but in all kinds of industries globally, pretty much everywhere ESG is very high on those agendas.
Having said that, if we think about the world of finance, whilst ESG has got a lot of attention, and there’s a lot of work being done around it – the path ahead isn’t clear. We’re in a situation where regulation is lacking. At the moment, there is no favourable capital treatment for transactions that are ESG compliant. Also, the very fact of being “ESG compliant” – what does that mean? And who sets the standards for compliance, who measures that, who tests that? There are no common standards at the moment.
Most attention is around the ‘E’ in ESG, but even there little clarity exists. A lot of the attention, of course, is around transition from carbon energy to more renewable sources of energy, but the measurement of that transition is extremely difficult. I’m seeing different views about what that means, and how it should be tested.
It’s a difficult one. At all banks now they have ESG experts within their institutions. In the larger banks, there are large teams of people that are looking after ESG, and they’re all very busy because everyone’s talking about it. All the relationship managers in banks want to talk to their clients about ESG.
But even if you were to compare one bank to another in terms of its approach to ESG compliance, and the criteria it assesses – even at an individual bank level, they’ve all got their own particular models, how they perceive the risk, how they measure the risk, et cetera. So, I think there’s a long way to go before we have consistency.
ITFA (International Trade & Forfaiting Association) recently published a market report on ESG following a survey of its members; one of the key outputs of that is the recommendation that an independent audit council be set up to act as a single voice for the trade finance market towards regulators in connection with regulatory reporting and capital requirements. There are of course a number of bodies providing taxonomies and reporting frameworks for ESG, but again most of this is focused on the ‘E’. The ‘S’ and the ‘G’ are much more intangible, and clarifying and measuring those aspects is extremely difficult.
Yes, that’s my next question. So, let’s carry on from that. A couple of things to note. I’ve asked this type of question to quite a few people now. And it seems to me it’s a bit like going into Woolworths. You just take the sweeties that you want, just as companies take the ESG initiatives they want: ‘well, we do a bit of electrification or we take a train. We do one day a month working in a food bank…’. There’s no overarching ethos to their approach; it’s just the bits that they can do. Companies just contribute in any way that they can realistically and they will interpret it through the lens of ESG. And I’m thinking, this is just so random at the moment, isn’t it? The solution is clearly government guidance, telling institutions and companies what they should be doing.
I think it’s absolutely right. There has to be government institutions or approved industry bodies that take the lead and define what these things (ESG policies) should look like.
We were talking about the trade finance gap earlier: there’s lots of efforts afoot to bring about more inclusive financing for SMEs emerging markets, but when you bring ESG into that mix as well, and especially when you’re talking about emerging markets, a lot of countries can’t afford at the moment to spend the money needed on renewable energy. For the time being, they can only exist on energy from fossil fuels.
Then if you get into the social and governance areas – I keep mentioning Africa, I don’t particularly mean to pick on them – but if you become happy with the environmental aspects of a transaction that you’re financing in Africa, but then if you’re not happy about the governance (you have lots of governance issues at government level and corporate level), do you then say: ‘we’re not going to finance this’? Ironically, one of the impacts of ESG standards could be that the trade gap gets even wider. If you can’t tick those boxes when you’re looking at SMEs and emerging markets, then you can’t provide funding because of ESG strictures.
The world can almost accept there is a problem with the climate and things are getting worse and we need to address that, but ‘S’ and ‘G’ will be completely different for a Saudi Arabian than it will be for a European. The American right is strongly against quotas for black people going to college; they see the quota system as patronizing and not meritocratic. On the other hand, there’s clearly many Europeans and liberals who are very keen push this idea that we should have more diversity; that we should have huge programs channelling profits into charities and community projects. I think it’s brilliant, but I just can’t see this flying in the context of world trade and the political setup that we have at the moment.
I would tend to agree. Time will tell. You’ve got many people putting a lot of effort into defining criteria for finance, and the basis on which certain decisions are going to be made as to whether someone receives financing. Because, don’t forget, for banks and lenders, there are often potentially massive reputational risks within any area of finance they operate in, in terms of the companies they lend to and the types of things that they finance. Certainly, trade is not immune to that. The lack of common standards, combined with massive cultural differences around the world, makes this an extremely complex jigsaw puzzle to put together.
Special thanks to Karl for his insights into banking, new technology and the issues surrounding ESG.