A half dozen years ago, the international trade finance business at KeyBank ($86 billion assets, headquartered in Cleveland) was at a major crossroads. Through growth and acquisitions, super-regional Key ranked among the dozen biggest banks in the U.S., but even so it was clear to management that they lacked the size to be able to scale the investment in trade operations necessary to remain a player.

"Major dollars were needed to upgrade back office processes and even after spending all that money just to link the back office we would have still needed more money for product enhancement and product development," recalls David Verhotz, Senior Vice President and Manager of the International Department at KeyBank. In the fight for internal resources, Verhotz and his colleagues couldn't guarantee enough added business to justify the open-ended investment. But without those investments in capacity, even the existing business (mostly mid-sized corporates) would be very much at risk.

The dilemma wasn't unique to Key. Most major regional banks face displacement in the trade finance and services arena. Customers are demanding more sophisticated back office processing (meaning mostly electronic integration and online access to real-time reporting and management information) and while the big global banks are able to afford continual improvement, regionals can't. Meanwhile, mid-sized corporates, typically outside the sights of the big banks and dependent on regional banks for trade financing, increasingly suffer from a competitive disadvantage without access to those sophisticated products.

The bottom line: without help, a lot of regional trade clients, like those of KeyBank, would have a tougher time in the marketplace.

One option that other banks have taken is to move their trade finance processing to Asia or India, a move estimated to reduce costs by as much as fivefold. "Over time," Verhotz has recently written, "banks that are unable to make this move will not be able to compete with banks that have processing centers in low-cost regions overseas." But, this was not the solution KeyBank chose.

At a critical moment in the management discussions about what to do, Verhotz recalls that "somebody asked 'have you considered outsourcing?' I had been in international my whole career and no bank was outsourcing their back office. But, we went out into the marketplace and talked to around ten banks." At that point, virtually no one was engaged in the wholesale outsourcing of the back office. Except, as Verhotz was to discover, ABN AMRO, the Dutch global giant which, upon acquiring several U.S.-based banks, had managed to integrate their trade operations into a single transparent back office platform.

"Their back office was set up to handle four legal entities," remembers Verhotz, and they said 'we could add a line for KeyBank.'" This was the model Key was looking for. Conversations ensued for more than a year as the techies and bankers figured out ways to build interfaces between the two banks, and transfer files seamlessly back and forth.

But, there was a giant hurdle that had to be cleared or the deal was off. One of Key's prime competitive advantages was the 'high-touch' personal interface it offered. It was thus imperative to Verhotz that Key's smaller customers not be herded into a vast, single anonymous processing center. "Our customers are used to dealing with the same trade processing team on a day-to day basis."

Could the partnership work? "I was the most negative of the Key people up front when the idea was proposed," admits Verhotz. "I kept asking, 'What will the customer reaction be when we tell them? What will be the negative spin our competition puts on it? Will we lose our customer base?'" But after extensive consideration, the partnership with ABN AMRO seemed the best alternative and Verhotz awaited response from the marketplace.

The verdict couldn't have been better. "In three and a half years, we lost one customer because of an operation snafu."

From the ABN AMRO side, the alliance made both operational and business sense. "We had refined our model, allowing multiple legal entities to process their trade transactions on a common platform," says Christine Tomala-Budz of ABN AMRO Global Trade Advisory Group. "We decided that by leveraging our infrastructure and global network we could successfully extend our capabilities to other banks in the trade arena." With a large technology investment in place, ABN AMRO was looking for other customers to spread out the cost. KeyBank would be the first.

"We always approached this as a partnership alliance," observes Tomala-Budz. "From a competitive standpoint, the negligible customer overlap between ABN AMRO's Tier 1 global large corporate finance footprint and Key's bodes well. Should a conflict arise, the non-compete clauses in ABN AMRO's service level agreement will help determine the best course of action. In the end, if KeyBank wins, ABN AMRO wins."

From his side of the fence, Verhotz doesn't doubt that KeyBank and its customers are winning, which is why it decided to renew its partnership with ABN AMRO in October. "Since our partnership began, ABN AMRO has significantly expanded its solutions offering with an emphasis on open account and end-to-end supply chain management. KeyBank, in turn, is able to enhance its offering to its existing clientele and pursue new market segments." As trade processing goes from paper to electronics, Key is positioned to keep up. This capability is even more critical since international standards for electronic presentment of documents was codified 18 months ago. "Where international banks have an accepted standard of how they would respond to electronic presentment, not all the trade players in the cycle are there yet. But, because of our relationship with ABN AMRO, I can do that today. We're just waiting for the other banks to catch up."

For example, Key offers an ABN AMRO-supported Internet front end platform branded as Quick Trade Web. "We put our clients on this system so they can issue letters of credit, process collections and export letters of credit, handle open account transactions and purchase order management." According to Verhotz, this puts his bank in the most select company among super-regional banks.

KeyBank customers like Perrysburg, Ohio-based Glasstech are reaping the considerable benefits of the back office partnership. The company-an industrial equipment manufacturer (furnaces that temper glass for auto makers)-posts annual sales ranging between $50 and $60 million, some two-thirds of which are international. "Our need from a trade service provider is international expertise," explains Comptroller Larry Cryan, "not only to negotiate documents and finance customer acquisition, but also to help provide risk analysis."

In China, where Glasstech's business is "vigorous," letters of credit are the preferred instrument (in part to control the inflow and outflow of currency in the country). "Key has provided great expertise," says Cryan. "In the past, Key wasn't able to take on as much of the confirmation of our letters of credit. Now, we haven't had any problems getting paid once Key/ABN AMRO looks at the documents." There's also been a step up in terms of risk appraisal. "We've never had Key come back and say 'we're maxed out on country risk in China.' In the past, that might have been the case."

Managing exposure has also improved in the last few years. "Our contracts go from $1 million to $6 million, with a 20 percent down payment and a LOC for the balance. China's banking system isn't as well known as, say Europe's, and we ask Key to confirm the issuing bank's worthiness. We'll figure out with my KeyBank primary contact the country and issuing bank risk factors. They can get an evaluation on every bank and communicate back to me the potential risk." When there is enough risk, Glasstech will get Key to confirm the letter of credit (the commission for confirmation instruments is typically 2 percent of the total draw). "They're saying if the issuing bank doesn't pay within a specified amount of time, Key will pay us. Over the past course of years, Key has paid us at least once prior to them being paid by the issuing bank."

Customers like Glasstech are often not fully aware of the ABN AMRO connection (Key markets products under its own brand), but they do know they can go on the web to check on the status of a particular letter of credit or receive electronic notification of a transaction's progress.

It's in this middle market that Verhotz anticipates growth. "People often think it's the large corporate sector that has all the international needs, but when you get out into the marketplace you realize that the middle market is demanding the same thing now as big companies. Competitive pressures are pushing the same product capability into the middle market that we would give to large customers. As these companies start moving from letters of credit to open account, paper gets pushed back into the client's office. They're not staffed to handle that paper. We've come a long way in that area. Banks that can't deliver as technology moves from LCs to open account won't stay in business."

"We used to be a bank that could take care of the trade services needs of middle-to-smaller companies, but we weren't competitive in the upper corporate levels," Verhotz concludes. "Now, I can compete against all of our major regional and money center bank competitors in all market segments."