KeyBank found itself stuck on the horns of a dilemma: The bank's international department needed to make a major capital investment to upgrade its global trade technology. Management asked David Verhotz, Senior Vice President and Manager of the International Department, how much new business that large investment would reap. Verhotz answered, "We need to upgrade our back-office systems to maintain our existing client base."
KeyBank, America's eleventh largest bank with $90 billion in assets, works with companies of all sizes. Its large corporate customers needed sophisticated global trade services. If Verhotz didn't get the capital to be able to offer those services, the executive knew these coveted corporate customers would be put at risk. The bank potentially could lose them to the competition; KeyBank executives worried that other banks would woo their customers to get their other business, too, leaving KeyBank with the smaller customers with simpler needs who generated less profit for the bank. "We didn't want to take that risk," says Verhotz.
At the same time, Verhotz says a current banking trend is for large corporate clients to consolidate the number of banks they use. "If we didn't offer a full palette of services, including international banking, it would give our customers a reason to leave," he continues, and also gives its competitors a foothold in a growing global market.
Keeping these corporate customers is a big concern since international trade continues to grow. A June 2003 Aberdeen Group report discovered 37 percent of its respondents had 50 percent or more of their supply base located in another country. Sixty percent responded that they will have more than half their suppliers offshore by 2008. These global customers typically use letters of credit to facilitate their transactions.
Since the bank did not want to invest in the requisite technology for global trade services, the only way for KeyBank to service this growing market was to outsource. At first Verhotz was incredulous. "No bank has outsourced its international back office," he told management.
Verhotz began researching outsourcing opportunities. He talked to 10 banks. Four agreed to respond to his Request for Proposal. But only one bank, ABN AMRO, was actually outsourcing the international back office for other banks. "We needed an investment-grade bank with an international footprint and one where trade was a core competency," explains Verhotz. "We wanted an outsourcer who made a financial commitment to develop new products," he says. In addition, KeyBank liked the fact that ABN AMRO is a member of industry oversight committees, which determine the technologies of the future. KeyBank outsourced its international back office to ABN AMRO, a bank that also acts as an outsourcing service provider, in 2000, and was America's first large bank to outsource this function.
Outsourcing Makes the Bank More Competitive
Four years later, he says the bank "went from duct tape to Star Wars. It was the first time in my career that we had state-of-the-art technology and new products." Verhotz says he stopped worrying about how the bank would be able to stay competitive. For example, in the near future all letters of credit will go from paper to an electronic format. "Now I don't have to worry about how I'm going to get there," he notes.
Another happy result: KeyBank discovered it could woo even bigger--and more profitable--corporate customers now that it could offer top-notch products and services. "We weren't competitive in the large corporate market before we outsourced. Now our victories are much larger," Verhotz says.
For the first time, KeyBank used international banking to open the door to new client relationships, thanks to the new products and technology ABN AMRO offers. "Our department was never the lead before," he continues.
Disarming the Nay-saying Competitors
Since KeyBank was the first large bank to outsource its international back office, it was concerned that its competitors would disparage that decision and use it as a marketing wedge against them. "We were concerned how our clients would react," Verhotz adds. Acting proactively, the bank shared the news with its customers and explained the new benefits they would be receiving from the outsourcing arrangement.
Getting things started on the right foot, the two banks put together a one-year implementation schedule "to keep as much of the change as transparent as possible," notes Verhotz. KeyBank has processing centers in Chicago, Cleveland, New York City, and Seattle; it requested ABN AMRO duplicate its sites in those locations. For six months before the cut over, the ABN AMRO staff worked side-by-side with KeyBank personnel handling KeyBank's customers, giving the supplier's staff time to develop personal relationships with KeyBank's customers. "When we transitioned, all we had to worry about were the systems changes," Verhotz recalls.
The KeyBank executive says the true litmus test of outsourcing's success was how many customers defected to the competition. KeyBank lost only one customer due to an operations snafu. In the end, "outsourcing is a gift that keeps on giving," says Verhotz.
How Outsourcing Letters of Credit Work
Suppliers Supply Letters of Credit Too
A bank provides letters of credit to its customers. The letter of credit promises a supplier of goods that the bank will guarantee the buyer's payment. It's a way to settle payments across borders with the minimum of risk. Once the exporter ships the goods, it presents the specified documents to the issuer (the bank), who pays the exporter. The importer--the bank's customer--pays the bank once it receives the goods. "We view letters of credit as loans to our customers," explains Buddy Baker, Director, Technical Advisory/Compliance for ABN AMRO. Outsourcing allows the underwriting bank (KeyBank) to utilize an outside service provider (ABN AMRO) to handle these back-office processing and settlement functions, while the original letter of credit instrument and credit risk remain in the name of the underwriting bank.
Baker says the credit component and the client management around that is a separate need from the back-office processing of the related transactions. The credit component requires "intimate client knowledge and sound internal decision making." The back-office processing requires "a combination of scale and technology to reduce costs, improve service, and generate the MIS possible to run the business."
Letters of credit are big business. The World Trade Organization reported global trade totaled $7.76 trillion in 2003. Baker estimates letters of credit account for eight percent of that--about $650 billion last year. Unfortunately, the technology to automate the letter-of-credit process is expensive. "Customers like having the ability to do this on the Internet," says Baker. Most banks, like KeyBank, could not justify the expense. But outsourcers can; ABN AMRO currently has 30 banks as letter-of-credit customers.
ABN AMRO issues all of KeyBank's import letters of credit; it private labels them so the customer sees KeyBank's name on the Internet and outgoing documents. Its customer-interface technology, called MaxTrad, is a Web-based tool both importers and exporters can use. Importers can fill out letters of credit applications and exporters can receive full details of their incoming letters of credit online. A benefit: both the software and trained employees at ABN AMRO review the applications to make sure the wording on the documents is accurate, cutting down errors in a heretofore problem area.
ABN AMRO's origins date back 180 years to the founding of the Netherlands Trading Society (NTS), which played a major role in developing trade between the Netherlands and the Dutch East Indies. Baker says its 19th-century executives realized "financing trade was more lucrative than trade itself." A few years ago, the bank's management decided that, by leveraging its global infrastructure and technology, the next evolutionary step was to become a service provider to other financial institutions.
Lessons from the Outsourcing Journal:
- KeyBank outsourced its international department because it didn't want to make a capital investment that was necessary to retain its global customers. Two happy and unexpected results: (1) KeyBank was able to attract bigger, more profitable customers because of the new services it offered through its outsourcing service provider, and (2) this service became the main reason for attracting new customers to the bank, the first time ever.