Venturing, Cautiously, into International Trade Finance
Global commerce is bringing down barriers around the world, including the barrier to bankers entering into International Trade Finance (ITF). Companies of all sizes are being pulled into cross-border commerce by the forces of supply and demand, facilitated by the Internet and fueled by shifting and unequal labor force costs.
The question for banks is, should they follow their customers, and if so, with what level of services?
Because of its complexity, ITF was long the purview of a handful of truly international financial institutions. To deliver a superior ITF product, they had to offer extensive knowledge of special credit products and trade-related services, highly trained employees in key global trade areas, bank partnerships in multiple countries, reliable contractors and fluency in languages, laws and trade practices – not to mention familiarity with the customer’s line of business. They had to be able to navigate the complications of multiple parties in every transaction.
A full suite of ITF products might include collections, letters of credit, letters of indemnity, banker’s acceptances, discounting, negotiation, billing, forfeiting, factoring and trust receipt. Hand in hand with ITF goes foreign exchange. And most of the big players found it necessary to provide these services in all the major foreign trade geographies.
The investment to develop such a comprehensive operation was affordable by few and the accompanying risk desirable by even fewer. Trade technologies might be rudimentary but they are notoriously difficult to integrate, forcing extensive manual intervention and risk of error.
As a consequence, most U.S. banks turned to an established ITF bank when their customers came up with ITF needs. That option is still on the table and, for many banks, remains the best solution. Unless the customer’s global trade business is destined to become a significant part of its business, exposing a customer to competition from the ITF provider is a more reasonable risk than attempting to deliver services for which the bank is ill-equipped.
But for many others, it may be time to carve out a new ITF strategy to protect their relationships and capture new sources of interest income and fees. As reported recently in Global Trade magazine: “According to the latest Wells Fargo International Business Indicator survey, nearly 70% of the U.S. companies surveyed expect to see their international business activity increase over the next year. Additionally, more than half anticipate that their global business will be more important to their company’s overall financial success, both in terms of revenue and profit contributions.”
It was one thing to hand off a customer to a global institution when the customer’s needs were only occasional or tangential. But as one bank CEO explained, “These days, we have to realize that if we hand off a good customer to an international bank, and the customer’s global commerce is growing, we are not going to remain the primary bank.”
If it’s time for your bank to consider taking a role in ITF, what are the questions to ask?
The first should be, is there a niche strategy we can and should pursue, instead of going all in? A viable niche might be geography-based, as more countries in Africa, Asia and South America nurture manufacturing facilities that didn’t exist a few years ago – countries where large global banks don’t have an established advantage yet. Or it might be a service specialty, like servicing U.S. imports, but not exports, or vice versa.
Are there technology advances that can ease the cost of entry into the business? Document imaging systems facilitate inspection of shipping documents. New multi-currency banking systems facilitate cross-border payments. Some new entrants lower their costs by private labeling another bank’s or a vendor’s software – not using their full suite of services, but just “renting” their software.
Where will technology coupled with your particular expertise actually enable you to out-compete the established correspondents who are often still using legacy systems and almost always struggling to integrate them? A bank that can enter the arena with its trade system already integrated with its lending system might wield a sizeable cost and convenience advantage over most providers.
What is the nature of the needs customers are bringing you? Are they all over the map (literally)? Is the need for a wide variety of sophisticated services, or just some entry-level, low-cost service? If you have special expertise in the U.S. for lending to a certain type of industry where you serve many companies, it follows that if one of them suddenly begins importing from Costa Rica, others might soon do the same. Can you leverage your relationships and knowledge of the industry to serve it more deeply?
Or it might be a single-service specialty: You may decide you are comfortable offering letters of credit in Guatemala, but you would rather outsource to a reliable correspondent the labor-intensive process of painstakingly comparing contracts to bills of lading. Or you may decide that’s a phase one approach, while you develop enough expertise to re-insource the whole ITF relationship.
Can you fully commit to investing in real expertise in new international markets your customers are targeting? Your learning curve has to involve actually spending time in those markets, understanding laws and cultural distinctions, hiring employees or contractors who have the right connections and establishing a brand and reputation. That’s not a job for the telephone or Internet, any more than you would conduct your domestic relationships via remote channels.
What are the risks involved – not just the typical risks bankers already manage well, but volatile populations, crime, insecurity, violence, terrorism, governmental instability and so on?
What niche strategy will not jeopardize vital correspondent relationships? After all, it will take you time to execute your strategy, build your relationships, establish your expertise and integrate your technology. In the meantime, who is going to be taking care of your customers’ needs while you can’t? Your correspondents.
How sophisticated is your bank’s risk management? The business case for any foray into ITF has to include a thorough review of currency risk, regional/political risk and compliance risk.
As global trade makes the world a smaller place, ultimately global finance will be a basic need for many companies. They will expect their banks to offer related services seamlessly and expertly. Banks need to begin transitioning today by finding the right place on today’s international trade finance spectrum.