Harold Meyerman, managing director at Chase Manhattan Bank, is leading a charge by Chase to expand its trade finance services.
In Mr. Meyerman's view, key trade finance players of coming years will be large-volume operators who supply "private-label" service to regional banks and will be linked to foreign banks in strategic alliances. They will also have advanced technology, as well as specialized units for securitizing and selling trade receivables.
"Trade finance is back in the limelight," Mr. Meyerman said in a recent interview.
Chase's new drive into trade finance comes as banks nationwide are scrambling to keep up with rising demand for import- and export-related services.
Commerce Department data show that U.S. exports have surged from $57 billion in 1970 to more than $800 billion last year, while imports have risen equally dramatically, to $906 billion last year from $56 billion in 1970.
As part of its drive to build a global processing capacity for trade finance, securities custody, and funds transfer, Chase is building a major processing center in Hong Kong. The center will rank alongside those in New York and Bournemouth, England, as among the bank's key back offices. It is to be up and running in about 18 months and will help Chase double its business in the next four years, Mr. Meyerman predicted.
In a further measure of the bank's commitment to trade finance, Chase has boosted its outstanding commercial letters of credit by more than 50% in two years, to $3.2 billion at yearend 1995, making it the second-biggest bank in the business after Citicorp's Citibank, whose outstandings grew 16% during the same period, to $5.56 billion.
And since the April 1 merger with Chemical Banking Corp., Chase ranks as the No. 1 player in trade finance, with nearly $6 billion of outstandings.
For Mr. Meyerman, a veteran banker who previously was president and chief executive of First Interstate Bank Ltd., a wholesale banking unit of the former First Interstate Bancorp, nothing is unusual about the buildup and concentration in trade finance.
"Those banks that have the ability to originate transactions and handle high volumes at low costs will dominate the business," he said.
As in areas such as securities processing and global payments, scale, geographic reach, and market share have become keys to success, he said.
Just as important, since many of the big players have invested heavily in cutting-edge technology, excess capacity has been created, and a need for volume to cover expenses. Chase itself, since its merger with Chemical, is operating at 60% to 70% of capacity to process letters of credit and has ample room for extra volume.
Meanwhile, banks that need to offer the same services but are unwilling to make large and continuing technology investments are ready to outsource to larger institutions.
"Banks are rationalizing and are expense-driven," Mr. Meyerman observed. "And smaller banks don't have the overseas networks they need to serve their clients."
Chase is not the only bank seeking to make a comeback in international trade finance. Data show that after significantly reducing the scope of their activities in the late 1980s - when many developing countries defaulted on bank credits - big U.S. banks have been steadily reentering the business.
BankAmerica Corp., for example, increased its outstandings by 30%, to $3.1 billion, between 1993 and yearend 1995, while Bank of New York Co.'s outstandings jumped 26%, to $2.6 billion.
Superregionals, too, are stepping up their activities. Banc One Corp., for example, has just recruited Darin Narayana, former head of corporate finance at Norwest Corp., to head an ambitious expansion in international operations. Wells Fargo & Co. has set up a joint venture with London-based HSBC Holdings PLC, while First Union Corp. and CoreStates Financial Corp. are expanding their international networks, targeting middle-market companies.
One reason big banks are moving back into trade finance is that technology has radically altered the nature of the business since the late 1980s, when financing imports and exports was still mainly a paper-based business handled by large numbers of clerks and complicated by the slightest mistake.
Since then, trade finance has moved from manual typing to word processing to PC-based systems and, most recently, systems that are integrated into a bank's accounting and payments networks. This integration lets clients look directly into files to determine the status of any transaction.
Banks are also testing image-processing systems that could make processing documents even faster and more efficient.
Another reason for the return to trade finance, Mr. Meyerman said, is the dramatic increase in U.S. exports during the last decade.
"These incredible growth rates, with the accompanying infrastructure privatization and industrial development, represent great opportunities for U.S. companies," the Chase executive said.
Trade, he noted, has become "integral" to many companies, and banks can no longer afford to ignore the increased demand for international services.
Still, a drawback of the current expansion in trade finance is the limit on the amount of risk a bank can accept from any one country or borrower. Though opportunities may exist, banks must find some way of reducing risk as their exposure grows, short of pumping in extra capital.
As part of an effort to reduce risk and capital needs, Chase is working to securitize trade-related financing and distribute the securities among both institutional and individual investors. The effort is similar to the packaging and sale of credit card and other receivables.
"Without an ability to distribute risk, banks will be hamstrung," Mr. Meyerman said.
Analysts like Diane Glossman at Salomon Brothers Inc. see no reason to criticize the Chase buildup in trade finance and other processing sectors.
"Chase is already very big in these businesses," she said, "and even though they have high fixed costs and need high volume, they passed the break-even point long ago."
Any incremental volume Chase can attract, she added, "is gravy on top."
Still, executives at other trade finance banks saw flaws in Chase's strategy.
"It's eminently logical that banks that don't have the scale can piggyback on big banks," said Mr. Narayana, the executive recently recruited to head Banc One's expansion program in Dallas, "and that's where strategic alliances and private-label come in. But products by themselves do not give a competitive advantage."
Banks that get the business, he added, "will be those in front of the customers."
Other trade finance experts also question the extent to which smaller regional banks will be willing to turn over to Chase their letter of credit business, even if they stand to save money.
"Any smaller bank that goes into an alliance with a bigger bank knows that, sooner or later, the bigger bank will hook up with the customer and cut the smaller bank out," said a banker who declined to be named.
"Most small local banks are very reluctant to expose their clients to the big banks because they know they risk losing their customers," the banker said.
Processing trade documents, he added, "is a very competitive business, and there are a lot of people out there who already do it and do it very well."
Mr. Meyerman answered such criticism by pointing out that, to avoid conflicts of interest, Chase is seeking processing business in markets where it does not otherwise compete.