The Australia and New Zealand Banking Group, Barclays and the Bank of Montreal have teamed with AmericanManagement Systems, an IT consultancy and application vendor, to form an independent trade-transaction processing company exclusively for banks and their corporate customers.
The company, unnamed as yet, will target the trade service business of banks around the world, delivering such long-established, back-office staples as commercial and standby letters of credit, guarantees, bankers' acceptances, documentary collections and reimbursements over the Internet.
"We'll start with letters of credit, although we're committed to other offerings over time," said Adam Dener, a senior principal at AMS, which developed the trade-processing software-already used by about 40 banks-and the Web-enabling technology.
The company plans to go live by the middle of next year.
Despite the hundreds of other online trade networks that keep cropping up, Dener said the company's main competition comes from the few big banks, such as Bank of New York, Citibank and First Union, that manage trades for other banks. Dener said what distinguishes the new company is its ability to "unbundle" the front- and middle-office functions of a trade transaction so that such services as risk and profitability management, which generate more earnings than those of the back office, stay with the bank client.
He doesn't see the company competing with TradeCard, whose focus is providing alternatives to current international trade-payment mechanisms, such as the letter of credit. "Their offering is trying to change how people do business," he said.
With a compound annual growth rate of less than 3% over 10 years, trade-transaction processing has traditionally been a slow-growth, low-margin business for banks, but one in which they must continue to invest because customers demand the service.
"There's a constant pressure to improve the offerings we provide clients through improved technology and efficiency and at reduced cost, and an increasing demand from our shareholders to increase profits delivered by various lines of business in the bank," said Peter Grills, vice president of trade finance at the Bank of Montreal.
"This is obviously a difficult environment in which to grow a business and compete effectively for internal capital investments within our institution," Grills added
By forming a partnership with AMS, which holds a minority stake, and contracting their business to the new company, the three founding banks believe they can bring new efficiency and savings to trade services.
"We'll be able to generate enough business to justify everybody's investment," said Grills.
Acting as an application service provider, the company will pin most client fees-after a one-time "transition investment"-mainly to their number of transactions.
This pricing arrangement should draw banks, said Grills, because it takes into account the variability of their business. And by turning an unprofitable enterprise over to an outside company, banks free capital for other investments.
Recognizing that large financial institutions might hesitate to outsource their trade service business-a practice that is not widespread-Dener said the negative dynamics of the business might force them over the hurdle. "At the end of the day, banks might have to decide they don't have the capital to yield investments across every business they're in."
As an independent processing company with its own management, the new outsourcing venture will not be competing for business with its clients.
"The banks will maintain their client ownership and their branding, so there's not the competitive threat they might face if they outsourced their business to another bank provider," said Grills. Although the bank partners are so far its only clients, discussions have been under way with other banks.
"Banks in the Western Hemisphere are probably further along in their thinking about being able to do this type of thing," said Dener, "and we suspect that's where we'll see some of the first contracts written."