Successful super community banks seek to develop niche opportunities where a solid community orientation can be leveraged. One often-overlooked area is international banking opportunities existing in their own backyard.
As small and midsize corporate customers look for growth opportunities outside U.S. borders, community-oriented banks need to be able to provide international banking services to meet their needs. Otherwise, customers needing these services will move to the competition.
While developing international banking capabilities may be a defensive move, it also may provide new sources of quality loan growth, fee income, relationship building, and augmentation opportunities.
International banking means providing trade finance and trade services to a local corporate customer. Trade finance includes foreign receivable financing, bankers and trade acceptances brokerage, and international letters of credit transactions.
Two Major Hurdles
Trade services covers foreign exchange, documentary collection, international cash management, and trade tracking services.
The primary hurdles for a super community bank contemplating the development of an international banking business are mitigating the foreign credit risk and minimizing the added investment in people and infrastructure. In order to overcome these obstacles, there are three steps to undertake when setting up an international banking business:
* Develop specific strategies to reduce international credit risk through credit enhancement programs offered by the Export-Import Bank of the United States.
* Piggy-back onto a solid correspondent banking relationship for those products and services which cannot be effectively provided in-house.
* Target and mine the existing customer base and the local market for potential business expansion opportunities.
Risk Frightens Some Banks
Typically, the first area of development in trade finance services is in the working capital arena. Many growing customers look to exports as a logical first leap into doing business overseas, and begin to need special credit capabilities from their bank.
When asked to extend credit on foreign receivables, many super community banks simply decline, because they are not willing to bear the foreign credit risk. For those banks who are willing lend on an "insured" basis, customers are often discouraged by the private insurer's premium which often eats up much of the profit margin. One solution is Export-Import Bank guarantees and insurance.
In some instances an emerging international company's borrowing needs can be satisfied through the Export-Import Bank. A super community bank can look to the Export-Import Bank to replace the foreign credit risk with U.S. agency risk.
Two Helpful Programs
The Ex-Im has two programs through which a trade finance orientation can be quickly and readily developed:
* The working capital guarantee. This is a loan guarantee program designed to provide an eligible exporter with short-term (one year or less) credit enhancement for a working capital loan received from a commercial bank. It represents a relatively low-cost, asset-based borrowing approach backed by the U.S. government.
* Foreign receivable insurance. There are numerous insurance products which apply to various scenarios. Each type provides coverage for 100% of the political risk and from 90% to 98% of the commercial risk. All enhance the commercial bank's ability to lend in support of the international trade transaction by reducing the associated risk to between 2% and 10% of the outstanding amount.
Furthermore, the remaining risk can be mitigated by the super community bank's borrowing-base criteria, a cash development, or letter of credit.
Under the two Export-Import Bank programs described above, a super community bank can take a step toward providing support for a customer's international business. However, the Export-Import Bank often is helpful only in meeting a specific and limited trade finance need.
The exporter's needs will quickly expand to a wider range of trade products and services (letters of credit, bankers acceptances, collections, foreign exchange, international cash management, etc). The bank needs to meet these needs in order to retain the customer relationship by providing the broader array of trade finance products and trade services defined earlier.
Typically, this is achieved by the establishment of correspondent banking relationships.
Some super community banks, particularly larger ones, may find it efficient and cost-effective to provide trade services internally. Many, however, will need to rely on others' capabilities. In choosing the correspondent banking relationship, emphasis should be placed on the level of competing interests, point of contact resolution, and global concentration.
A super community bank should select an internatioonal correspondent bank that has little likelihood of encroaching upon the customer relationship. Larger superregional or money-center banks which offer correspondent services may eventually focus retail business expansion in a super community bank's home market and could one day become unwelcome competition.
Transparent to Customers
To the extent possible, the correspondent bank should be strategically focused on providing just correspondent services. As competition from the "big guys" intensifies, it will be better to establish correspondent relationships with wholesale or merchant banks that are focused in a different strategic direction than community banking.
The correspondent bank's involvement should be transparent to the super community bank's customers, so as not to undermine the fundamentals of the super community banking concept. From the perspective of the corporate customer, the super community bank should be the point of contact and the point of resolution for international transaction activities.
A correspondent bank's ability to remain transparent will most likely be dependent on its expertise, depth of customer service capabilities, and technological ability to give the bank immediate access through on-line operations.
The level of global concentration is an important consideration. There are numerous foreign banks that can provide international capabilities to a super community bank. However, most are oriented toward the regions where their host country is located.
Therefore, if a super community bank has a customer base with the need for diverse global access, numerous international banking relationships will need to be cultivated and managed, which is a less-effective strategy.
Developing numerous correspondent banking relationships may be a positive move once the international banking business matures. However, early on, one globally sophisticated provider creates less of a burden on the super community bank, creating a one-stop-shopping ideal.
Weighing the Merits
Some of the pluses and minuses to consider when choosing a U.S. correspondent bank can be summarized as follows:
Pluses:
* Wholesale or merchant banking focus.
* Real-time customer-support function.
* Efficient correspondent desktop account access.
* Breadth of global presence.
Minuses:
* Commitment to developing a greater retail network.
* Limited customer service capability.
* Trailing-edge systems and technology.
* Inconsistent global diversity.
A number of banks we know have capitalized on concentrations of importers and exporters in their markets. For instance, Silicon Valley Bancshares of San Jose, Calif., a heavy user of Export-Import Bank programs, is unique in the sense that its "community" is primarily comprised of high-tech businesses.
Another example of an super community bank with an emerging international banking business is Liberty Bank and Trust of Tulsa, Okla. It services the international needs of its geographic market, which comprises oil patch, aerospace, light manufacturing, and service-oriented companies.
Not Hard to Find
It is not necessarily difficult to find highly internationally oriented geographic sectors with a clearly identifiable "community" of exporters. There are several international trade hubs across the United States, some of which are more obvious than others.
If a super community bank is located in the farm belt states, Nafta border states, port cities, regions with a high commodity concentration (i.e. oil, agriculture, lumber, steel, livestock, chemical deposits, etc.), it is likely to have an international customer base. Even if the market does not have a clearly identifiable trade hub, research may identify many widely scattered businesses that export goods and services.
Step-by-Step Analysis
Analysis of a super community bank's market trade activity which will provide the foundation for an international banking feasibility assessment involves the following steps:
* Scanning the current corporate customer information file. Cross-selling existing relationships is easier and less expensive than acquiring new ones. In conducting this phase of research, look through historical receivable agings and financial statements for foreign receivables and affiliations.
Attention should be given to sources of nonbank financing, foreign receivable trends, and whether or not the company has previously been denied a loan request for trade financing.
* Assessing the trade activity in the super community bank's marketplace. There are many sources for this type of information. At the same time, the data available must be gathered from a number of places and, typically, the format is not particularly user-friendly.
Some of the information can be retrieved from members of the U.S. Trade Promotion Coordinating Committee (e.g., the Departments of Commerce and Agriculture).
These government agencies can identify the types of goods and services exported from a specific region, and their trade volume trends. Once the exported goods and services are known, there are state and local agencies with track import and export activity by entity.
Other sources of information include the Office of Export Licensing, International Division of Economic Development, the Export Yellow Pages, and the National Trade Data Bank.
Developing the Business
The initial contact list for the Super community bank will not include those companies which are too big (Fortune 1,000 corporations or their subsidiaries) and in all probability, already bank with the super regional and money-center banks. The customer information file and market scan will produce a focused call list for feasibility assessment and other marketing initiatives.
Like other product development and implementation efforts, the development of the international business is then a matter of creating a plan and following it. Most banks use structured calling programs and marketing initiatives to begin with. Then, as for commercial lending and other corporate services, business development is a matter of building relationships.
Reporting Capability a Key
As with other product lines, management will need to be able to measure and track success and profitability. Hence, a good reporting capability is an important component for building the business.
International banking services can provide the super community bank with the ability to expand existing customer relationships and build new ones by meeting their growing needs in ways that small community banks cannot.
Through the use of Export-Import Bank programs, the international risk can be reduced and the entry into international business facilitated. By structuring solid international correspondent banking relationships, a super community bank can effectively offer the array of international products demanded by the customer and expand into this line of business.
By leveraging its community orientation and expanding product lines through customer-transparent correspondent relationships, the super community bank can help customers grow and thereby develop new fee income sources.
