Build the best banking relationship for your trade finance needs

19/08/2016

Banking relationship

Banking relationshipThere are generally two schools of thought related to the management of domestic and international business. One proposes that organizations divide their activities and infrastructure clearly between domestic and international operations, the most common argument being that this division prevents exposing a generally lower-risk domestic undertaking to the unpredictable winds of global commerce. Such a split also prevents the international venture from being funded through an established domestic line of business.

The second view suggests taking a holistic approach by managing domestic and international business as an integrated whole and considering both, in tracking the overall success—and value—of the enterprise.

There is no single correct model.

The first approach is particularly well suited to situations where a company evolves gradually from a domestic start-up to a viable venture to a credible business and then decides to explore international markets and options for expansion beyond comfortable domestic borders.

This model of gradual international expansion, however, is more likely to be the exception than the rule in today’s highly globalized business environment. Companies in knowledge industries, such as information and communications technology (ICT), biotechnology, professional services and others, tend to look at global opportunities very early in their lifecycles.

Evolving models of global sourcing, the increasing interconnection between trade and foreign investment and the increasing momentum of outsourcing and offshoring all combine to motivate companies to look beyond domestic borders—early and often—as attractive opportunities beckon, or powerful competitive forces compel. The issue is now less a matter of choice and more a matter of necessity.

What are the main strategies for a strong banking relationship?

Whether a company adopts the integrated model or the structure that delineates along domestic and international lines, there is a parallel debate about the nature of a financial institution or banking relationship for organizations seeking to do business internationally.

In some markets, banking relationships are “for life,” whereas in others, banks and companies alike take a very “transactional view,” looking at each proposed deal on its own merits.

Should a company—even a SME—consider keeping domestic banking and trade/international banking relationships separate, with different financial institutions?

Generally, and based on the traditional trade finance instruments, an importer is more restricted in decisions related to banking relationships. This is because a credit relationship has to be in place to enable the granting/provision of a trade finance product, which is typically based on an existing line of credit. Importers are generally restricted to dealing with banks where they maintain an account relationship.

Exporters, on the other hand, are much freer to select the bank they may wish to do business with, provided that the bank is able and prepared to transact under the trade finance instrument agreed on between the importer and the exporter, and provided that the role envisioned for that bank is acceptable to it.

The exporter could, in theory, change banks for every transaction. Perhaps more practically, an exporter could select banks based upon their risk tolerance (and/or pricing) in certain markets, or based upon industry or sector-level specialization at the banks, which can prove valuable to an exporter.

Should I stay or should I go?

Bankers will point out that there are also advantages for exporters that remain with their primary relationship banks in working through export transactions. It is true that the primary bank is more likely to act in the interest of an established client (as long as the bank’s other responsibilities in the transaction are not compromised).

It is equally true, however, that the expertise and capabilities required for a particular transaction may simply not be available through the primary bank, or that the bank cannot support business in a given market due to its own risk assessments or credit limitations. Determining factors will often be the country risk a bank is prepared to accept and the price charged for that risk.

Large corporate entities and multinationals can maintain a dozen or more core banking relationships across various geographic markets, even by industry vertical, given that banks do have specializations.

However, for SMEs, the question of how best to approach banking relationships is an important one. A bank’s willingness to finance or facilitate trade finance transactions will often depend on its understanding of the company’s entire business, and a smaller company that is expanding internationally may need to choose its banking relationships carefully.

Take a closer look at your bank’s priorities before making a final decision

A fundamental truth is that a healthy and positive relationship with a bank or financial institution can be a lifeline for a small business. There are risks to maintaining an integrated banking relationship: the bank could, for example, take possession of current account deposits to offset an expected loss on an export finance transaction where the importer has become insolvent; the benefits of building a strong, trust-based relationship with a financial institution over time must be carefully weighed.

“Shopping” the business to other banks can be beneficial in terms of securing lower pricing, but again, the benefit of establishing a strong relationship may be worth the occasional premium in bank charges.

The final answer is that the best model depends on the priorities of the company and the practical realities of dealing with bankers in a given market. Some banks claim to be SME-oriented, others try to be, and some succeed fully, and both sides of the equation—the client and the bank—matter.

Banks are under ever-increasing regulatory pressure to understand their clients’ business, and to be able to demonstrate that understanding at the level of individual transactions. This ongoing challenge for banks, arising from anti-money-laundering and anti-terrorism measures, as well as from numerous spectacular financial failures, will make banks hesitant to take on new clients without knowing the business well, first.

Banks that fail to demonstrate that they have undertaken appropriate due diligence to meet the Know Your Customer (KYC) standard can incur significant financial penalty.

Ultimately, the decision about the most effective banking relationship structure may come down to a combination of factors—the company’s objectives and requirements, together with the banks’ obligations.

This content is an excerpt from the FITTskills International Trade Finance textbook. Enhance your knowledge and credibility with the leading international trade training and certification experts.

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About the author

Ewan Roy

Author: Ewan Roy

I'm a Digital Marketing Specialist for the Forum for International Trade Training (FITT). My background is in writing and research, and I am passionate about communicating new ideas and telling stories that matter to you.

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