Welcome to the world of international banking!

RMA Journal, The, May, 2003 by Harry G. III Hayman

The world marketplace is dynamic and exciting with its appeal of untapped markets and suppliers attracting businesses of all sizes. In the past 20 years, international trade in the U.S. has grown from 12% of GDP to 20%. With the development of NAFTA, the general trend toward globalization for selling and sourcing, and the continued reduction of trade barriers (including the President's Fast-Track authority), it has become increasingly important for banks to be able to provide services supportive of companies with international needs.

As a bank evaluates its target market segments, it may be surprised to find that an important percentage of corporate customers and prospects require basic international banking services. At PNC Bank, for example, 36% of corporate customers with more than $10 million in annual sales require some level of international services. Depending on geographic location, the range for most banks would be between 20% and 40% and growing.

It is critical for a bank contemplating a new international banking initiative to first establish exactly what services will be provided. Specific policies addressing credit, operational, and reputation risk must be adopted to define expectations and guidelines for the bank's board of directors, executive management, and business officers. It is also valuable to evaluate already existing international activities using this same process, identifying strengths and weaknesses in current policies. A process must be in place to review compliance (e.g., an insurance expert or a lawyer should review all private credit insurance transactions).

Three general approaches can be taken when starting an international banking initiative--basic, full, and advanced.

Basic International Services

With this strategy, the bank focuses on providing basic trade services--international payments, letters of credit, documentary collections, and related foreign exchange services. Risk exposure to overseas banks and countries is frequently near zero. The U.S. bank should have a small group of officers who can offer advice to customers and process transactions. Typically, the bank will work closely with a larger U.S. or foreign bank to provide support for most of these services. The unit normally can be expected to make a small profit and provide adequate service to smaller companies. It will likely encounter difficulty competing against banks with more broad-ranging capability for those companies with annual sales above $25 million if international is more than 10% of their business.

Full International Services Group

In this strategy, the bank provides the same basic trade services but will have an advanced technology platform, including Web-based initiation capability for all transactions. The group will have a strong capability for Structured Trade Finance, including financing customers' export sales through programs offered by the Export-Import Bank of the United States and major private insurers. The Foreign Exchange group will have experienced interbank traders and will be positioned to compete with the larger banks for customers in the $10 million to $500 million annual sales range. In addition, to compete, the bank will assume carefully underwritten levels of foreign credit exposure to support the overall customer strategy. This will vary by bank, but generally would range between $500 million and $1 billion in the more highly rated, non-OECD (Organisation for Economic Co-operation and Development) countries.

Advanced Global

The third strategy is to conduct business internationally with a global view, so that the bank has active, direct relationships with foreign banks and corporations. Providing U.S. dollar services to foreign banks is viewed as a target market segment, similar to out-of-market large corporate transactions. The same applies to internationally based corporations that conduct business locally in the bank's region. The strength of these relationships allows the bank to be competitive and gain market share in a target market of $100 million in annual sales up to the Fortune 50. Successfully achieving this status requires a very sophisticated strategy that is well established throughout the bank, very capable officers and controls, and understanding and support from executive management. With these capabilities, international banking can become a potent weapon for gaining market share and aligning with the strong trend to increased foreign trade and investment, as well as a major contributor to the profits of the ins titution.

A thorough understanding of the effort, combined with complete risk management strategies, is crucial. That said, providing strong international service products can be a critical element in a bank's strategy.

Contact Hayman by e-mail at harry.hayman@pncbank.com.

[C] 2003 by RMA. Harry G. Hayman III is SVP and group head of Global Treasury Management and Strategic Partners at PNC Bank, National Association, a member of time PNC Financial Services Group, Inc. Global Treasury Management includes Trade Services, Trade Finance, International Correspondent Banking and International Cash Management. He brings to PNC 725 years of experience in international banking and capital markets.