Although global trade continues to increase in scale and scope, the banking business of providing letters of credit has been on the decline. "More and more customers are discontinuing their letters of credit and going to an open account basis," says Joseph Meehan, senior vice president, international financial marketing group, ABN Amro Bank. "That means less and less traditional business for the banks."
While there's still a need to track the financial flows and accompanying documents to a trade transaction, managing trade on open account is a different type of business, and one that calls for scale and successive investments in information technology. "These pressures are going to narrow the trade finance banking community down to a handful," predicts Meehan.
That's not to say that smaller banks won't be able to offer a full complement of trade finance services to their customers. It's just that they're increasingly likely to do so with a larger partner, according to speakers at the Executive Technology Forum Online, a Web conference produced last month by Bank Systems & Technology and BAFT. Two case studies were presented: ABN Amro (Amsterdam; assets: $584 billion) and Key Bank (Cleveland; U.S. assets: $85 billion); and Bank of New York (New York; assets: $78 billion) and CIBC (Toronto, assets: $175 billion).
When Key Bank outsourced its trade finance business to ABN Amro, it went from "duct tape to Star Wars," says David Verhotz, senior vice president, KeyCorp. Key Bank's QuickTrade service is powered by ABN Amro's Maxtrad, the same system used by LaSalle Bank and Standard Federal Bank, ABN Amro's U.S. subsidiaries. Through the private-labeled system, Key Bank clients can create import/export letters of credit, documentary collections and bankers acceptances.
Although the paperwork and electronic interaction has been outsourced, Key Bank still retains the credit risk. That means ABN Amro doesn't have to allocate capital against those exposures, and Key Bank gets to remain involved, as bankers, per its risk appetite.
Since KeyBank has a largely non-overlapping footprint in relation to ABN Amro's subsidiaries, it was able to justify going ahead with an outsourcing deal without having to enrich its direct competitors. "During the RFP process, we knocked out a good number of banks that were viewed as competitors in our 14-state franchise," says Verhotz.
The benefit is mutual, as Key provides "additional transactions from a client base we would not normally have access to," says ABN Amro's Meehan. "We're really taking advantage of economies of scale."
CLIENT COMMUNICATION IS KEY
In a similar arrangement, Bank of New York provides trade finance outsourcing to CIBC, albeit with a few slight differences. One difference was the cross-border complexities involved with operating in Canada, along with including CIBC's Hong Kong branch along with the outsourcing arrangement.
Another difference is that CIBC openly hands off its customers to its outsourcing partner, unlike Key Bank's private-labeled approach. That allows CIBC to tout the benefits of The Bank of New York, and to make clear the chain of responsibility on the other end of the transaction. "A client communication strategy is really a key element in any outsourcing arrangement," says Neil A. Rennie, general manager, trade finance, CIBC.
When CIBC went looking for a solution four years ago, it was aiming to reduce expenses for documentary processing in Canada and to increase its ability to serve global corporate customers. While most of the third-party service providers offered solutions centered around Asia, where the bulk of CIBC's foreign trade still occurs, the bank decided to go with a global bank as a partner. "Bank of New York really demonstrated how we could benefit by adopting a model that encompassed all business, not just Asian business," Rennie says. "Having access to a partner with an on-the-ground presence and the ability to generate incremental revenues was key to our decision process."
NOT JUST IT OUTSOURCING
That's one of the benefits of using a bank instead of a third-party processor, according to The Bank of New York. "The bank partner typically is bringing you a system that it's already using for its own clients," says Philip Anspach, vice president, global trade financial services, The Bank of New York. "We had a fairly high degree of confidence it would suit their needs very well."
Also, it's not just a technology outsourcing play, but a human resources one. "As banks seek to move their processing centers to a lower-cost environment, it might be at the cost of a highly-skilled workforce," says Anspach. "This is a way to not only eliminate the cost of staffing, but also to maintain a high degree of expertise in the staffing that you're delivering to your customers."