1) Adrian Teng, former group treasurer of Jardine Matheson, predicts that banks will no longer be the primary lenders to large corporations within 30 years due to regulatory burdens and the rise of alternative credit sources like capital markets and fintech companies.
2) Teng proposes creating an online portal where borrowers can publicly list their funding needs and lenders like banks and non-bank institutions can bid on loans, bringing more transparency and efficiency to the lending process.
3) While such a platform faces challenges, Teng believes that technology and digital innovation will drive the corporate lending market towards more transparency and alternative credit sources over time.
1. thecorporatetreasurer.com18 corporate treasurer MONTH / month 2014
Jardine Matheson’s former group
treasurer shares his disappointment
with bank lending in the modern
world, how he views alternative
credit sources, and how technology
could revolutionise fund-raising.
Ann Shi reports
The
biggest
lender
biggest
thecorporatetreasurer.com18 corporate treasurer June / July 2016
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2. thecorporatetreasurer.com June / July 2016 corporate treasurer 19
JardineMatheson
A
drian Teng peeked into the
future and said: “I predict that
my company’s biggest lender
would not be a bank in 30
years from today.”
Teng, the former group treasurer of
Jardine Matheson and now group finance
director of its subsidiary, Jardine Cycle &
Carriage, said he wasn’t certain who the
primary source of funding would be, but
he is clear it will come from alternative
credit sources – capital markets, non-bank
organisations such as asset managers,
and fintech companies like Ant Financial.
“The key point is that banks should not be
the core credit source alone,” he said.
This is already happening to some
degree. Debt capital markets (DCM) have
surpassed bank loans as the primary
source for corporate funding in Asia,
according to Dealogic. In 2015 in Asia,
DCM borrowings represented 42% of the
corporate funding mix, with loans taking
37% and equity capital markets (ECM)
21%. In 2011, loans were the primary
source for funding, taking 48% of the
corporate funding mix, while DCM had
only 35% and ECM 17%.
Teng’s forecast for the future stems
from the pain he has experienced in
getting a bank loan. “Whenever we do a
financing transaction, it tends to be very
long and tedious,” Teng said.
Teng said that simply establishing a
credit facility with a bank in order to
finance a company’s subsidiary level could
take two months to accomplish. “There
are instances where financing can take six
to 12 months,” Teng added.
Bank tedium
Many of us are conscious that the lenders
themselves are not entirely to blame;
at least not in isolation. The current
regulatory environment has thrown the
financial system off-kilter. Many global
banks are more interested in increasing
the profitability of existing clients through
cash management, trade finance, foreign
exchange, and financial advisory, rather
than trying to build up a new client base.
In Teng’s view, the tedium of
banking comes from a complete lack of
transparency in the bank lending process.
But what’s new? Banks have never been
transparent about this information. In
some cases, key relationship managers
may lack necessary information
themselves, and it is clearly not in their
interests to openly part with their credit
evaluation process. For many treasurers, a
truly open dialogue is as far away as it has
ever been.
Teng believes it doesn’t need to be this
way. In his mind, banks that continue
to keep their cards close to their chests
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3. thecorporatetreasurer.com20 corporate treasurer MONTH / month 2014
Bid and click
One idea Teng came up with was the
creation of a centralised two-way
information exchange portal system for
credit owners and borrowers. Simply
put, the portal would connect potential
borrowers and lenders through a platform,
similar to an exchange. So, when a
company needs funding, a treasurer or
finance executive can go to the portal,
list out the necessary information such
as borrowing amount, tenor, requirement
and borrowing entity. Interested lenders,
whether banks or non-bank institutions,
can access information via the portal and
list their pricing and terms, which are
only seen by the borrower. Based on all
the “bids”, the treasurer can have a quick
view of the liquidity available and cost,
and settle on the best offer.
Banks, Teng argued, can also save on
the costs of “having an army of middle-
office and back-office people” supporting
loan negotiation and documentation,
assuming they are willing to participate.
Even if they don’t, anyone with excess
capital should be able to access the portal,
potentially creating a larger pool of
liquidity.
“There are entities and organisations
that have excess capital. For example,
insurance companies, asset management
companies and corporates such as Google
or Apple sit on billions of cash,” Teng
summarised.
The interest is there. In fact, some non-
bank institutions are already putting their
money into peer-to-peer (P2P) lending –
although this is fraught with risks. A 2014
review by The Economist found that only
a third of the money coming to Lending
Club, a P2P financier, was from retail
investors, while the rest and the fastest-
growing slice came from wealthy people
and institutions.
Additionally, in some industries there
are already some direct lending channels.
According to Brian Edmondson, head
of transaction banking sales at Misys,
the motor manufacturing industries
are handy at setting up their own P2P
lending marketplaces. “Some of the more
dominant companies are quite happy to
provide financing to the suppliers,” he
said.
But even non-bank lenders still need to
conduct due diligence on the borrowers on
the platform. Robert Yenko, a treasurer at
Intel, said a lot of legal and documentary
requirements would be inevitable in the
due diligence process before on-boarding,
which would be an obstacle for corporate
lending platforms.
Yenko viewed Teng’s suggestion as a
“novel idea” but suggested the portal
could start off as an “FXall for loans”
(FXall is a Thomson Reuters platform of
foreign exchange trading for institutional
and corporate clients), a marketplace
where lenders bid for the best pricing
of loans to corporations. Eventually, it
should morph into a real P2P lending
platform where any lender can bid to offer
a loan to any borrower, after due diligence
has been fulfilled, said Yenko.
Gregory Gibb, chairman and
chief executive officer at Shanghai
Lujiazui International Financial Asset
Exchange, an online P2P marketplace
for financial assets trading, listed some
likely challenges in developing such
an independent “P2P for corporates”
platform:
l How to build a large enough two-
sided network and keep it intact as it
grows. Once corporates interact on
the network, it is very easy for them to
conduct bilateral deals outside of the
network.
l It would need to operate in an
environment where corporate
transparency/ratings are sufficiently
trusted, which could be more
challenging in developed markets.
l It would require a sufficiently large
institutional investor base to support
lending. Would this be feasible in
China, for example, where few large
institutions are fully private?
l “A platform that exists between
large buyers and sellers often sees its
margins quickly squeezed,” said Gibb.
“I imagine it being built out first in
industry clusters, say 100 companies in
a vertical that know each other agree to
lend… Once verticals are built in several
sectors it could create cross-sector
opportunities.”
Unstoppable
Teng knows there will be challenges and
failures, but views it as “an unstoppable
trend” that companies and their lenders
lean towards transparency, with
technology providing the hook. “The real
challenge is people’s mindset. Everything
else is possible,” said Teng.
But transparency works both ways.
How open would companies be in turning
“If embraced
correctly,
digital
innovation
can bring
significant
upside for
banks. Such
technology
has the scope
to reduce
operational
and
compliance
costs”
Boston Consulting Group
will surely go the way of the dodo.
“Banks would be wrong if they still think
they have this secret information that
differentiates themselves from others,” he
said.
He explained that regulatory scrutiny
on the banking sector will eventually
eliminate differentiating factors, if
it hasn’t already. When dealing with
regulations that are not clearly defined
internationally – nor consistent across
borders – banks tend to overcompensate
to make sure all the boxes are ticked. And
“the cost of regulatory compliance and
legal is so expensive that … banks don’t
make the money by pure lending”, said
Teng.
Ultimately, however, Teng believes that
technology will drive banks away from the
traditional lending model. After a recent
trip to Silicon Valley, Teng opened his eyes
to the power of digital innovation in the
world of finance.
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4. thecorporatetreasurer.com June / July 2016 corporate treasurer 21
JardineMatheson
over their books? Teng acknowledged that
they won’t be, but felt that the option will
soon be out of their hands. “If the world is
moving towards that level of transparency
with technology, can I stop it? I might as
well gather the benefits of it,” he said.
Regardless of its feasibility, the lending
portal concept is just one of the many
possible ways in which technology could
eventually change how banks conduct
business. Damian Glendinning, treasurer
at Lenovo, recognises that bank lending
has already become less important as a
means of funding companies. “This has
already happened to a large extent in the
US [and Europe], and I expect Asia will
follow over the next ten or 20 years,” he
said.
Glendinning said that in the future,
capital markets would replace banks, with
bonds, commercial paper, crowd-funding
and factoring portals taking over.
Does this mean the world’s major
lenders will all essentially become
investment banks? Probably not, but
should banks look to focus their attention
on value-added transactional services, as
Teng said? Maybe.
With challenges come opportunities.
In a recent research paper, Boston
Consulting Group (BCG) said banks
should embrace technology, especially in
the area of trade finance.
“If embraced correctly, digital
innovation can bring significant upside
for banks,” BCG said. “Such technology
has the scope to reduce operational and
compliance costs of paper-based trade
by 10% to 15%, provide a platform to
grow revenues by 5% to 15%, and help
banks capture strategic advantage going
forward.”
But banks must move fast. Goldman
Sachs reports that alternative lending
could put an estimated $11 billion in
banking sector profits at risk through
2020. Almost half (46%) of private
funding for fintech start-ups by 2015
was for lending services, which currently
account for 56% of the profits generated
by the US and European banks,
according to Citi’s March report, “Digital
Disruption”.
The changing agenda is daunting and
reaches far beyond just lending. Examples
BCG named include payments and
financial supply chain solutions (Square;
Tungsten), financing (Google-backed
OnDeck Capital; Amazon), and foreign
exchange (OzForex).
Banks know the threats they face. While
“incumbent financial institutions still
have the upper hand in terms of scale…
given the growth in fintech investment,
this isn’t likely to continue for long,”
Citi recently acknowledged. In China,
for example, transformation to digital
financial flows has been “breathtaking”,
with 96% of e-commerce sales done
without a single bank’s involvement, the
US bank estimated.
“Either banks evolve, or they will die like
dinosaurs,” warned Teng. Maybe the same
could be said for old-school treasurers. n
“The real challenge is people’s
mindset. Everything else is
possible”
Adrian Teng
Adrian Teng Inspired
by a Silicon Valley visit
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