Back Office Processing Models for Trade Services Prepared for: BAFT Chicago

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Back Office Processing Models for Trade Services
Prepared forBAFT Chicago
STRICTLY PRIVATE CONFIDENTIAL

• Global Trade Advisory, October, 2001

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Current trends in global trade highlight the
importance of identifying the correct back office
model
All numbers in US billions of dollars
Trend in Global Trade v. Commercial L/Cs

• Overall, global trade continues to exhibit steady
  growth
• However, the use of commercial L/Cs has begun to
  slowly decline
• In order to expand their business, trade banks
  need to bring products to market that address
  both the growing open account trade as well as
  credit-enhanced trade

Total Global Trade of Goods
Commercial L/Cs
(projected)
Source International Monetary Fund (IMF), US
Call Reports (including ABN AMRO)
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Current trends in global trade highlight the
importance of identifying the correct back office
model.
All numbers in US billions of dollars
Top 20 Banks Share of Commercial L/Cs

• In conjunction with the slow decline in the use
  of commercial L/Cs, the top 20 trade banks are
  consolidating their hold on the market
• Smaller trade banks are therefore seeing their
  business squeezed not only by the downward trend
  in market size, but also share

84
71
72
74
77
Source US Call Reports (including ABN AMRO)
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Current trends in global trade highlight the
importance of identifying the correct back office
model
All numbers in US billions of dollars
Trend in Global Trade v. Commercial L/Cs

• Overall, global trade continues to exhibit steady
  growth
• However, the use of commercial L/Cs has begun to
  slowly decline
• In order to expand their business, trade banks
  need to bring products to market that address
  both the growing open account trade as well as
  credit-enhanced trade

Total Global Trade of Goods
Commercial L/Cs
(projected)
Source International Monetary Fund (IMF), US
Call Reports (including ABN AMRO)
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Product Portfolio
Web-Enabled Products Online Initiation and
Reporting for L/Cs, Collections, Reimbursements
Web-Native Products Paperless Initiation and
Processing - AllTrade, Web-Based Doc Prep
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Challenges facing Financial Institutions
Financial Institution Market Challenges
Result

• Pressure to reduce costs in non-core areas to
  bolster share price
• Rising volume thresholds to achieve processing
  economies-of-scale
• Competition for high value customers who demand
  technology-intensive services
• Need to provide global support to customers as
  they expand overseas business
• Disintermediation from traditional roles caused
  by new technology

• Growing realization of huge upfront technology
  investments in non-core areas needed to retain
  high value customers
• Increasingly outsourcing a variety of functions
  including
• cash management,
• transit operations,
• corporate trust, and
• wire transfers

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Trade Services represents an ideal candidate for
outsourcing
Global Trade Characteristics Calling For
Outsourcing
Financial Institution Challenges/Opportunities
in Trade
Trade Customer Trends

• Shrinking profit margins on trade products as
  efficient providers drive down pricing
• Difficulty in achieving necessary
  economies-of-scale
• Technology investment costs surpass earnings
  potential
• Desire to retain lucrative trade fees while
  controlling costs
• Scarce seasoned trade resources
• Narrowing target segments as the market
  consolidates around large trade banks
• Need to differentiate capabilities by enhancing
  trade service offerings

• Demand for 24/7 global support delivered locally
• Demand for a complete portfolio of robust
  products and expert knowledge
• Looking to banks to provide solutions that enable
  Global Supply Chain objectives
• Demand for local presence in widely spread
  geographies
• Looking for banks continued dedication to the
  business demonstrated through product innovation

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Trade insourcing programs deliver significant
outsourcing benefits
Internal Benefits
Market Facing Benefits

• Free resources to focus on your core business
• Limit capital outlays to integration costs
• Make trade services into a driver of bottom line
  profitability
• Cap overall costs and turn trade processing into
  a variable cost rather than a fixed cost
  requiring continual investment

• Deliver next generation technology to your trade
  customers
• Retain customers who are aggressively pursuing
  supply chain optimization and online global
  settlement
• Address concerns about being disintermediated
  from trade transactions
• Become a leader in cross-border trade services by
  being among the first companies to offer truly
  digital trade solutions
• Options to ensure local client privaty

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Various models exist in the market
Full Integration Insourcing
Light Integration Insourcing

• Provides some trade services back office
  operational processing
• Customer service may be outsourced
• Front-end systems are co-branded
• Allows Partner Bank to provide branded initial
  customer interaction
• Requires Partner Bank to update all credit and
  DDA systems
• Requires a credit relationship

• Provides all customer processing on behalf of the
  Partner Bank with fully private-labeled
  interfaces
• Interfaces digitally with Partner Banks host
  credit, DDA or other reporting systems
• Supports customer service and front-end systems
• Provides Partner Bank access to a global branch
  network

Pricing is based on volumes, activity-based
costs, and an annual review
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Various models exist in the market
Hong Kong Processing
Document Examination Services

• Provides document examination services to Partner
  Bank
• Usually restrictive language used on the issued
  L/C
• No regulatory requirements
• Allows Partner Bank to avoid the cost of document
  examination. (This is the most expensive part of
  trade operations)
• Agreements cover risk scenarios
• Revenue share or fee for service

• Provides all customer processing in Asia for the
  Partner Bank which is usually private-labeled
• No Interfaces are normally developed. Messaging
  usually is done over SWIFT
• Normally a separate legal entity is established
  using a Trade Services Limited Corporation
• Compensation is determined on a revenue share
  basis

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Full Integration Insourcing requires management
of four interdependent workstreams
Planning
Define Project Organization
Create Project Team
Negotiate Contracts
Technical Integration
Prepare Detailed Project Plan
Prepare Specs
Install Custom Software

• Critical First Steps
• Agreement to implementation timeframe
• Adequate and dedicated support from Partner Bank
• Appropriate user support from Partner Bank
• Timely specification of all required interfaces

Sales and Marketing Integration
Sales Training
Product Rollout
Marketing Support
Ongoing Feedback and Development
Operational Integration
Prepare Detailed Project Plan
Train Operating Areas
Implement Custom Processing
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Light Integration Insourcing entails a simpler
implementation process
Planning
Plan Project
Negotiate Contracts
Implement Processing
Technical Integration
Design Co- Branded Web Access
Install Software

• Critical First Steps
• Agreement to implementation timeframe
• Adequate and dedicated support from Partner Bank
• Appropriate user support from Partner Bank
• Timely specification of all required manual
  interfaces

Sales and Marketing Integration
Sales Training
Product Rollout
Marketing Support