Bankers Without Borders

By Craig Colgan

The case is not a complicated one for small and midsize banks to begin to consider exploring the international trade finance business. Much of it goes something like this: Fully 98 percent of U.S. exporters are small and midsize enterprises, accounting for about one-third of U.S. export sales.

Many of these, as well as many other small businesses yet to make the leap to international markets, are hunting for revenue growth. But in their search for banks with trade finance expertise, some may prefer to partner with a smaller and/or local bank, with which they have a relationship. One that can offer the right experience, that is.

The case against smaller and mid-size banks seeking to enlarge their trade finance and broader transactional banking business would seem to be self-evident as well. Trade is facing challenges. Even as global trade volume increased 4.7 percent in 2017, the strongest year since 2011, tension has emerged over tariffs and recent trade issues threats. BAFT, the leading global financial services association for international transaction banking, warns that SMEs often bear a heavier burden when retaliatory protectionist measures are imposed, as they often lack the knowledge and resources to navigate through additional restrictions. Regulatory burdens and costs have increased as well, in the global hunt to track bad actors in the system.

Trade finance is the general term for lines of business and services aimed at mitigating credit risk for exporters and importers. The irony is that smaller businesses rely on trade finance to access foreign markets to a greater extent than larger businesses. But of the smaller banks pushing forward into trade finance against tough challenges, the key is service. And assistance is out there.

“Most small to medium business owners will tell you: It’s a slog,” says Chuck Withee, president and chief lending officer at the Provident Bank, a nearly $1 billion bank based in Amesbury, Mass. “So, if you can offer another channel of revenue delivery, for them that is pretty remarkable. And if you have somebody helping with the process, and creating an ecosystem, these companies can really grow. That’s really the punchline.”

Expanding challenges, unexpected benefits

About four years ago, the Provident Bank had a prospect.

“It was a very desirable commercial lending prospect, and they were enamored with us,” Withee said. The potential client was with a large bank but sought a better institutional fit. “The president and CEO of the company said, ‘You know, you are a perfect fit for us, but we have a very large line of credit that has the Export-Import Bank backing it. And in order for us to change banks, we would have to have that available to us. By you.’ And we said, well, wow. We really thought we had won the day. And we had. Except that there was this hurdle.”

Withee said the solution was to dive in, completely. His team went to Washington for training to become a delegated authority for Ex-Im’s working capital lending program. “In short, that availed us the opportunity to now offer their working capital line of credit products to small and medium size businesses in our area.” The bank won the client.

Withee said his team began discovering more SMEs in the region that would benefit from exploring exporting. The bank did more training and expanded its team, notably hiring Leeann Spees as SVP for international finance, who brought plenty of expertise working with Ex-Im Bank. Withee still calls his bank’s trade finance efforts a “niche” business—with clients that range in size from $5 million to $25 million in sales—but it has benefits beyond what would be immediately measurable, he points out. Clients and potential clients are often impressed when they learn that the Provident Bank has that expertise.

“In other words, that differentiation has created opportunities for us,” Withee says.

His advice: “Go in with your eyes open and do your homework.” From such recent beginnings, the Provident Bank has become a leader in growing a regional effort to expand the New England Export Expansion Fund, a partnership between local trade councils and the U.S. Department of Commerce, which provides grants to offset costs of services related to international trade.

Many smaller banks turn to the Ex-Im Bank for assistance before venturing internationally.

“Smaller banks may be unfamiliar with foreign markets and so be unwilling to take the foreign credit risk,” says James Burrow, Ex-Im’s SVP in the Office of Small Business. “Ex-Im provides the loan guarantee that minimizes this risk and allows them to finance their borrower’s export sales.” Ex-Im’s Working Capital Guarantee Program provides guidance to smaller banks that are not familiar with trade finance and assists them in structuring transactions to mitigate foreign risk. Ex-Im also provides experienced trade-finance staff with plenty of expertise.

Small and midsize banks have one big disadvantage and one big advantage in trade financing compared to the big banks, notes Amiyatosh Purnanandam, a professor of finance at the Ross School of Business at the University of Michigan who focuses on international trade. Both perhaps are obvious. But they are crucial to the dynamic.

“The disadvantage comes from their higher cost of capital,” he says. “Large banks have a variety of sources from where they raise capital, which allows them to lower the cost of funds.

“On the other hand,” he adds, “small banks have a big advantage for smaller, local clients. For such borrowers, smaller banks often have better information than large banks. Smaller banks are more of a relationship lender than large banks. If small banks can properly use their information and relationship advantage, they can overcome the cost of capital disadvantage.”

Banks helping banks

The major partner for smaller banks expanding into trade finance is of course other banks.

“Just generally speaking, banks need each other to make things work,” says Mark Garfield, head of global financial institutions at Zions Bank, a $68 billion bank in Salt Lake City, and a member of the BAFT board. Big banks often provide key services to smaller banks all along the international trade path, such as transaction clearing services, he said. “Banks in their connectivity are invaluable to foreign trade.”

And now bigger banks are partnering in the rush to develop new ways to speed and authenticate and even often share much of the trade finance process. Several of the world’s largest banks announced in October that they are jointly building a digital platform called the Trade Information Network. The system offers trading companies fast access to requesting trade financing from banks, as well as a convenient method to submit invoices and other documents, then quickly gain verification, all lowering the cost of doing trade finance business with smaller companies. Banks will provide financing outside of the platform using their own systems.

Gaining attention also are various projects among individual banks and bank consortia on blockchain technology. Blockchain-based trade finance projects also getting a wide push in China. One question is the extent such solutions will be available to smaller banks.

SME trade finance issues are increasingly a major focus among trade leaders globally. World Trade Organization leaders make speeches about it. Davos attendees make videos about it. The theme of which lately is reducing the global trade finance gap. Which is defined as the amount of trade finance that has been requested by importers and exporters but rejected. One universal focus for these organizations and gatherings is confronting the learning curve for this type of banking for smaller banks.

“We definitely have a challenge of getting people trained in the business of international and global banking,” Garfield says. “And BAFT has a great future leaders program that addresses this. I am still very optimistic about the future, about trade itself. And of the continued need in this process for main street banks serving main street customers, making their goods accessible to be bought and sold overseas.”