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Connecting the World: The Importance of Intermediary Banks

intermediary banks

Connecting the World: The Importance of Intermediary Banks

Whether you are initiating electronic international payments through a fintech solution or buying physical currency, the chances are high that a bank will be involved. The relationship between banks, as well as the role of intermediary banks, often eludes the general public, who are content with the process as long as it works.

However, understanding how the sausage is made can provide valuable insight into the way you conduct your business. Let’s take a closer look at intermediary banks and their subsequent relationship with currency exchange.

What is an Intermediary Bank?

In layman’s terms, an intermediary bank is where funds are transferred prior to reaching their destination, the payment bank. 

To transfer money, banks must hold accounts with each other in the same way that a typical client would. However, there are too many banks for one to hold accounts with all the others, so instead, they strategically choose where to open accounts. The result is a fragmented network of financial institutions. 

When a bank needs to send money to a location where their bank does not hold an account, the bank instructs an intermediary bank to act as a “middle man” to pass on the funds on their behalf. Funds can transfer between multiple intermediaries, especially if one of the banks is not networked with many larger banks. If the payment bank is across an international border, the intermediary bank may also act as the currency exchange provider.

The Role of Currency Exchange

Currency exchange refers to the use of one currency to purchase the same value in another currency. It’s required any time one entity wishes to pay another in a currency different from their default option.

Each country has either a “fixed” or “floating” exchange rate. A “fixed” exchange rate—also known as the “gold standard”—means that all the country’s money has a physical equivalent in gold or another precious material. “Floating” exchange rates may not have a physical worth, but are influenced by the market and politics, as is currently the case with the Great British pound’s relationship with Brexit.

Breaking Down the Cost

For businesses, currency exchange is vital to a true international payment process. Some vendors may wish to be paid in their customer’s default currency, which would not warrant an exchange. U.S. businesses may experience this when working with vendors in countries like China or Japan, who often prefer payments in USD. This happens when a vendor finds it cheaper to open accounts specific to currencies other than their own in order to avoid exchange fees.

Some vendors have opened multi-currency accounts, which enable vendors to accept and store more than one currency in a single account. Because this method is still gaining traction, it’s good practice to ask if vendors have multi-currency accounts before sending them money. If they don’t, and their account cannot support your currency, the payment bank will likely reject the funds.

Other hidden costs to consider when working with international payments are:

The exchange. If your origin currency is weaker than the payment currency, your money may lose some value in the trade. However, the market is continuously shifting, so the exchange will also gain value at times. The more international payments you make, the likelier that this cost will even out over time.

Intermediary bank fees. Some intermediary banks shave off a fee for their services, which is usually taken from the sum – the net amount is deposited into the vendor’s account. Not all intermediary banks will charge this fee, and it’s not immediately obvious which banks will do so.

Payment bank fees. Similar to the intermediary banks, certain payment banks also charge a fee for processing international payments. Again, not every bank charges this fee, but those that do will deduct it from the payment sum before depositing the net amount into the vendor’s account. Vendors can discuss this charge with their bank if it occurs.

Disrupting the Status Quo

With all these nuances to keep in mind, it can feel like involving a fintech will only add another cog to an already-overwhelming process. However, a fintech can determine the most efficient route through an intermediary bank, and assist in locating missing payments. If funds are returned for any reason, fintechs also act as a holding account while you decide if you want to exchange the funds back or resend them. Following a process like this ultimately saves time, money, and hassle.

If you’re on the fence about using a fintech for international payments, keep in mind that you aren’t losing out by mitigating an overly complicated bank processes. You’re merely side-stepping the complications in favor of usability.

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Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

supply chain finance

5 Companies to Consider for Supply Chain Finance

Supply chain finance is a set of technology-based business and financing processes that link the various parties in a transaction—buyer, seller and financing institution— to lower financing costs and improve business efficiency. Short-term credit that optimizes working capital for both the buyer and the seller is provided by what the hip kids refer to as SCF.

There are several SCF transactions, including an extension of buyer’s accounts payable terms, inventory finance and payables discounting. The SCF solutions differ from traditional supply chain programs to enhance working capital, such as factoring and payment discounts, by connecting financial transactions to value as it moves through the supply chain. Also, SCF encourages collaboration between the buyer and seller, rather than the competition that often pits buyer against the seller and vice versa.

Tom Roberts, senior vice president of Marketing at PrimeRevenue, warned Global Trade readers in September 2016 that a multinational bank may not be the way to go when it comes to SCF. “First, both global supply chains and multinational banks are highly susceptible to changes in the economic and geopolitical landscape,” Roberts wrote. “Supply chain finance programs that are locked into a single source of funding are held hostage to that funder’s risk tolerance. It’s a dangerous game, especially as the global coverage of multinational banks continues to be a moving target.”

No one bank—no matter how global—has the processes and systems in place to serve all currencies and jurisdictions, he also noted. “If a company needs to add a supplier that can’t be funded by their multinational bank, they have to not only source alternative funding, they have to handle the back-end systems integration required to facilitate the trading of receivables. It’s a resource-intensive approach that many companies simply can’t afford.”

The best-in-class supply chain finance programs are typically based on multi-funder platforms, rather than closed, bank-proprietary platforms, according to Roberts. “While it may seem counter-intuitive to simplify supply chain finance by adding more players, it’s not,” he wrote. “With the right processes and systems in place, a multi-funder strategy can increase program participation, secure more competitive pricing and discounts, and ultimately increase cash flow predictably and sustainably for both buyers and suppliers.”

What follows are Global Trade’s picks for places to consider for SCF.

Raistone Capital

Located on Madison Avenue in New York City, Raistone Capital started as a division of Seaport Global, a full-service, independent investment bank. Today, Raistone Capital has access to significant levels of institutional capital and the ability to deliver on customer’s needs, “whether it’s $50,000 or $300,000,000+,” according to the company. Raistone even created invoiceXcel (iX), a complementary financial solution so banks “can continue to serve clients in this ever-changing regulatory environment by providing additional capital offerings to customers—such as supply chain finance and accounts receivable finance.” 

Flexport

Headquartered in San Francisco—with global offices in several major U.S. cities as well as Hong Kong, mainland China, Germany and Holland—Flexport offers clients lines of credit ranging from $100,000 to $20 million to finance inventory, freight and duty and so that customers can accelerate product expansion and revenue growth; enable strategic decisions that reduce landed costs; and minimize supply chain disruption. Best of all, it costs nothing to connect with a Flexport Capital expert to discuss how your supplier terms, customer terms, and capital structure can be optimized to support your working capital goals and business growth. 

PrimeRevenue

Giving the expertise Tom Roberts has already shared via Global Trade, how could we in good conscience skip over his Atlanta-based company that also has offices in Hong Kong, Australia, London, Frankfurt, and Prague. Billed as “the leading provider of working capital financial technology solutions,” PrimeRevenue helps more than 30,000 clients in 70+ countries optimize their working capital to efficiently fund strategic initiatives, gain a competitive advantage and strengthen relationships throughout the supply chain. Established in 2003, PrimeRevenue boasts of now having “the largest and most diverse global funding network of more than 100 funding partners.” They support 30+ currencies on a single cloud-based, multi-lingual, cross-border network, facilitating a volume of more than $200 billion in payment transactions per year.

Trade Finance Global

London-based TFG assists companies with raising debt finance, accessing many traditional forms of finance while also specializing in alternative finance and complex funding solutions related to international trade. “We help companies to raise finance in ways that are sometimes out of reach for mainstream lenders,” according to the company, which taps into more than 250 lenders with unique focuses on different products and/or geographies. And TGF boasts of being able to “quickly get to the key decision-makers of financiers, to make sure your application gets through to the right person.” That ability is built on reputation alone, as TGF is 100 percent independent and not tied to any lenders. Instead, they find the most appropriate SCF solution for the individual customer.

Bank of America Merrill Lynch

Okay, much of this article details why a multinational bank may not be the best option when it comes to SCF, but Charlotte, North Carolina-based Bank of America Merrill Lynch, which also has central hubs in New York City, London, Hong Kong, Minneapolis, and Toronto, does have a solid, end-to-end SCF program. Bank of America Merrill Lynch boasts of having a number of tools to help: segment suppliers and analyze rates; design an optimal marketing program; and educate suppliers on program benefits.

“Bank of America Merrill Lynch made sure that the resources needed—support staff, legal, credit and such—all worked towards achieving the efficient deployment of the program,” says Philippe Andre Marcoux, credit and treasury manager at SCF customer Uni-Select Inc., a large multiservice corporation that distributes motor vehicle replacement parts, tools equipment and accessories. “Communication between Bank of America Merrill Lynch, our suppliers and ourselves was the driving force behind the successful implementation. Tools to evaluate the benefits to our suppliers and ourselves were key in convincing our team to participate.” 

Russia

U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

The Trump Administration on Aug. 2 imposed a second round of sanctions on Russia in response to Moscow’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy. Three days later, the White House intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with China and … wait for it … Russia!

So much for collusion.

For the seed that planted the intensified economic pressure on the Kremlin, you have to go back to March 2018, when former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England. 

The UK determined that the Russian government was responsible for the attacks and, in response, the U.S. expelled Russian officials, closed the Russian consulate in Seattle and, in August 2018, announced sanctions that impacted arms sales and foreign assistance to Russia. The second round of sanctions concern restricted export licensing and loans and other financial assistance from U.S. banks and international financial institutions to Russia. 

As was the case with Russia, the Venezuela sanctions came as a result of a late-night Executive Order by President Donald Trump, who blocked all property, and interests in property, of the South American country’s government that are within the jurisdiction of the U.S. The Secretary of the Treasury is also authorized to impose secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Venezuelan government. 

Trump’s order accuses the Maduro regime of “human rights abuses,” “interference with freedom of expression” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

Top 5 Leading Global Banks

A cursory search of “top global banks” will yield a list, typically according to size and assets, of a familiar set of names. While many of these same names are mentioned in this piece, understanding why a bank is considered a top global bank is much more nuanced than how big they are or how much they’ve netted.

Leading global banks are recognized as leading by their peers because they perform exceptionally well in one of more categories. No bank has a monopoly over leading performance in investments, digital services, sustainable finance or diversity and inclusion. It’s hard to the be the top dog in everything. Therefore, we’ve selected the leaders in each of the previously mentioned, timely categories, as these are the categories that are most relevant in 2019 and these are the banks that are setting trends and leading by example.

Investments

To begin, investments is a tough category to rank, but experts widely agree that Citi is the best investment bank in the world. While Goldman Sachs and Morgan Stanley are highly regarded, when it comes to exceptional performance across regions (North America, Latin America, Western Europe, Central and Eastern Europe, the Middle East, Africa and Asia), Citi rises to the top.

From an institutional client (ICG) perspective, the breadth and scale of Citi’s wholesale banking operations is best-in-class. The ICG unit is divided into a banking division on one end and a markets and a securities group on the other. Revenues in the $35 billion range were registered in 2017, which is 7 percent higher than the previous year. Morgan Stanley reported $37.5 billion and Goldman Sachs, a handful below, but Citi really shines when it comes to personalizing its business per region rather than providing a one-size-fits-all solution to clients across regions.

Digital Services

Bank of America and HSBC are high-flyers in this category, no doubt. But they are not flying as high at the moment as DBS. Mobile banking at the Singapore bank  is leading the pack, and the bank made a concerted effort to get to this point. They started at the premise (with corroborating data) that a digital customer brings in twice the income. Stunning in a way, and couple that with (digital customer) higher loan and deposit balances, it is no wonder DBS chose to de-invest in brick and mortar strategies and throw their cards into the digital ring.

Since 2017, Bank of America has also been moving in line with DBS and notably integrated its now widely used peer-to-peer payment feature, Zelle, which allows users to send and receive payments at astronomically low prices. They also launched 8,500+ contactless ATMs, where card holders can engage in transactions using mobile wallet options (Android Pay, Samsung Pay, Apple Pay, etc.). HSBC has not been far behind, capitalizing on their highly popular virtual assistant, “Ask Amy.” A chatbot, Amy is able to provide timely information 24/7, on nearly any inquiry. An embedded customer feedback mechanism allows for the bot to keep learning and enriching her knowledge, which grows by the day.

With this said, DBS is still ahead of its competitors, with a market cap that was up 44 percent for 2017, and the bank is now considered more “tech” than a traditional banking sector investment. That’s a real sign of success!

Sustainable Finance

A new category (over the past decade), sustainable finance, as defined by Frankfurt Main Finance, “integrates environmental, social or governance criteria into financial services.” Under a responsible sustainable finance model, capital expenditure and investment decisions take the previously mentioned criteria in mind before acting. Last year, the lauded finance publication, Euromoney, awarded BNP Paribas with the “World’s Best Bank for Sustainable Finance” award, besting more than 1,500 contenders and being decided upon after nearly 100 interviews with leading bank CEOs worldwide.

A handful of years ago, BNP Paribas CEO, Jean-Laurent Bonnafe aligned the bank’s strategies with the United Nation’s 17 Sustainable Development Goals. Roughly 135 billion euros have been devoted to energy transition and reaching said goals, and BNP Paribas is now part of the “Breakthrough Energy Coalition” that lends its support to the active promotion and advancement of clean-energy solutions.

Another notable global bank player in this sphere is Nordea, a Nordic financial services group based out of Helsinki, Finland. With total equity of approximately 32.4 billion euros, the bank has capitalized on its multi-cultural history (formed via mergers and acquisitions of Finish, Danish, Norwegian and Swedish banks) to now compete head-to-head on sustainability issues with the likes of BNP Paribas. Strong performance results generated from clean financing activities (green bonds, green loans, etc.) have propelled Nordea to now begin to offer green mortgages.   

Diversity and Inclusion

Brian Moynihan has been rightly lauded as an exceptional CEO, but his work with diversity (which began 10 years ago when he became chair of the Bank of America Global Diversity & Inclusion Council) is where many feel he really made his mark. The company’s diversity numbers are on an upward trajectory where roughly 40 percent of the global management team and 30 percent of board directors are women. At a workforce level, there are more women now than men working at the bank. 

A key issue with Bank of America executives was retaining women during motherhood, and the London office most notably includes a maternity room that new mothers can access while on the job. Small changes like this transform the bank from talking inclusion to “doing” inclusion.

In Mexico, Scotiabank has been recognized by its peers as adopting one of the most progressive LGBT laws in the world. The bank services and employs a disproportionate number of LGBT customers and employees and is re-writing employment law from a policy and internal procedure perspective.

It is exceptional to witness the growth in these areas, digital banking and diversity and inclusion especially. Watch for global banking leaders to continue to emerge from unlikely places and for the industry to become much more diversified. This will be a win-win for customers worldwide.