Banks Start Exiting Trade Finance

It used to be no bank would consider exiting the trade finance business. This was a classic product set and studies by consultants found that bank clients that used trade finance products and services used many more products than those that did not (eg. FX, standbys, guarantees, international cash management, overseas accounts, etc.)

In addition, the fact that more companies must manage global supply chains and are attempting to sell in markets outside their own bodes well for the business, right?

But the business of supporting companies with trade finance, documentary support, FX, risk management, and other services may not be as appealing in the past. What’s new?

Well for one, much of the news around banks shrinking their balance sheets is real. And this is one of the businesses that can be shrunk relatively rapidly given the short term nature of trade obligations. Number two, I believe the efforts to keep up with compliance around trade have added tremendous costs without corresponding revenue gains. I have written about that here.

So it was hardly surprising to see RBS, which had global ambitions not too long ago with their acquisition of the ABN AMRO network, decide to pull out of 25 of the 38 countries it currently has operations and with that, close its Global Transaction service ("GTS") operations. In essence, RBS will turn into a U.K. corporate bank. It told its corporate clients as much by asking them to find other banks or use RBS services through the NatWest systems in the UK.

The implications? Probably like much since the 2008 global financial recession, the rich get richer as the big banks carve up the market share.

But the most dramatic part for those of us in payments, is that RBS is closing its GTS operation.

Reading between the lines, I would hasten to guess that as many of the trade finance businesses within banks now report to Investment Bankers, their pencils are much sharper and the return on capital of this business just did not warrant further investment in technology, compliance, operations, and most importantly people (that is another subject for another day, but trade finance operation staff have some of the more crappy jobs in banking looking at screens all day and checking documents. Not likely to attract the best and brightest from the millennials.

The future? I would imagine we have not seen the end of this.

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Voices (3)

  1. William Laraque:

    Banks are exiting trade finance for many reasons. The foremost reason is that banks are increasingly becoming irrelevant to the main issues regarding trade finance which have to do with its democratization. All this horsefeathers about BPO, SCF, reverse factoring, the dematerialization of trade documents. Trade finance is about and has always been about creating a better life for all people, for humanity.

    Other players will enter now and they will re-enliven trade finance by making it relevant. As Tim Cook of Apple is fond of saying, “in the long arc of things, you are only relevant if people love you.” People haven’t loved trade finance for a long time.

  2. V V S Rao:

    I am not in agreement. May be what is said correct from the point of view of bosses at Investment banking function. But let us remember as long as “trade” exists the “trade finance” also exist.

    1. David Gustin:

      Hey VVS – you may not agree but banks continue to exit – GE, now Deutsche… David

      Deutsche Bank Recommits to U.S. as It Tempers Global Ambitions
      by Chris Cumming
      APR 27, 2015 4:45pm ET

      The German bank’s massive strategic overhaul will include cutting key businesses and leaving 10 countries, but it plans to invest in the U.S. despite all the regulatory troubles it has had here.

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