Howard Bascom, Managing Director Global Trade Financial Services The Bank of New York

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Howard Bascom, Managing DirectorGlobal Trade
Financial ServicesThe Bank of New York

• Insourcing/Outsourcing
• The View from the European Community

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The Bank of New York Overview

• Long history as a traditional commercial Bank
• First corporate stock to be listed on the New
  Stock Exchange
  
• First loan ever extended to the US government
• First New York bank to issue a letter of credit

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Revenue from Credit and Traditional Businesses

• 15 Years ago
• Key business Corporate Banking, Retail Banking,
  Securities Processing
  
• 80 revenue from net interest income
• Less than 5 of staff offshore
• Trade processing, funds transfer core
  international products

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Transformation into a Leading Processing Bank

• Today
• Leading global processing bank
• Market leader in all major product lines
• 71 of revenue from processing businesses
• Over 20 of 23,000 employees are outside the U.S.
  
  
• Over 5,000 in Europe
• Major insourcing partner to corporations,
  financial institutions and fund managers

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Global Trends

• Growth of worldwide financial assets
• Rapid changes in financial markets
• Increased demand for technology solutions
• Margin compression
• Clients concentrating business with fewer
  providers
  
• Industry consolidation
• Accelerating outsourcing trend

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Competitive Landscape 1980
Top 50 US Banks
First National Bank, Boston Seattle First Nationa
l Bank First National Bank, Dallas National Bank
of Detroit Republic Bank Dallas First City Nati
onal Bank, Houston Texas Commerce Bank The Bank
of New York Republic National Bank North Carolin
a National Bank Union Bank, Los Angeles Valley N
ational Bank, Phoenix Southeast Bank National B
ank of North America Harris Trust Savings Bank
Wachovia Pittsburgh National Bank
Philadelphia National Rainer National Northern T
rust BancOhio National Bank United States Nation
al Detroit Bank Ameri Trust, Cleveland First In
terstate Bank of Oregon First Pennsylvania Calif
ornia First Manufacturer National First Union F
irst Interstate Northwestern Citizens Southern
National Bank of Tokyo First National Bank, Min
n.
BankAmerica Citicorp Chase Manufacturers Hanove
r Trust Morgan Guaranty Trust Co. Chemical Bank
of New York Continental Illinois NBT First Nati
onal Bank, Chicago Security Pacific National Bank
Bankers Trust Wells Fargo Crocker National Ban
k First Interstate Bank of Calif. Marine Midland
Mellon Bank Irving Trust
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Competitive Landscape 2004
The Bank of New York
Wachovia
Pittsburgh National Bank
Northern Trust
BankAmerica Citicorp Chase Wells
Fargo
Mellon Bank
The Bank of New York
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BNYs Strategic Repositioning

• Self Assessment conducted in the early 1990s
• Good market position A leader in securities
  servicing, cash, and trade
  
• Established commitment to technology
• Strong capital position
• Limited global presence

Industry trends will create upside revenue
potential for consolidators
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Executing the Strategy

• Vision
• Position the bank to offer a complete array of
  processing services
  
• Support any security transaction anywhere in the
  world
  
• Executing the Vision
• Clear management direction and commitment
• Over 85 acquisitions since 1995
• Over 2.5 billion in technology investment since
  2000
  
• Emphasis on flexibility and customer service
• Become our clients preferred partner, rather than
  competitor
  

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Global Trade Issues

• Modest growth in world trade
• Declining use of letters of credit
• E-commerce offerings and non-bank competitors are
  emerging to challenge legacy businesses and
  increase market intensity
  
• Increasing demand by corporate clients for
  integrated technology solutions
  
• Trade finance transaction processing is a
  low-margin business, but a must-have service
  
• Profit is largely derived from risk mitigation,
  financing and FX services
  
• Revenue/Profitability models must include
  multiple streams of revenue

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Global Trade Issues

• Increased competition as activity is
  concentrating with a few large banks
  
• Global banks have become more aggressive in local
  corporate markets with advanced technology and
  lower pricing
  
• In addition to new technology, major processors
  are migrating to low cost regions
  

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Trade Trends In Europe

• Increased technology needs
• Margin compression
• High cost structure
• Regional processing
• Aging trade staff
• Limited flexibility to move to low cost regions
• Difficult to maximize trade revenue

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Alternative Solutions

• Doing nothing is not an option. Banks will be
  forced to
  

Option 1
Option 3
Option 2
Enhance Existing Trade Systems
Purchase/ Build New System
Outsourcing
Capital Cost of Acquisition Time Consuming/ Distr
action Client Implementation costs Annual Mainte
nance costs Flexibility to address client request
s
Opportunity To Re- Evaluate Technology P
rocessing
Personnel
New Links Required Poorly Integrated Legacy Syst
ems Limited Expertise Ongoing Technical Support
Costs
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Outsourcing Value Proposition
Increased Revenue
Cost Improvements
Operating Risk Mitigation

• Service level improvements
• Standardized processing environment
• Operating technology risk improvement

• Improved efficiency client satisfaction
• Increased focus on new product development
• Faster time to market
• Better utilization of top talent
• Asian Revenue Stream

• Reduced operating costs
• Avoid ongoing capital investment required to
  maintain state-of-the-art technology
  
• Shift from fixed to variable cost structure
• Expenses in line with revenues by product

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Concerns about Outsourcing
Mitigants
Potential Concerns
Accountability Issues
Specific Performance Standards (SLA)
Access to Real Time Information
Enhanced Overseas Control
Loss of Control
Operational Experience/Expertise
Fear of Failure
Core Business Longevity Operating Leverage
Commitment of Partner
Fees Locked for Contract Fees Aligned with
Revenues
Cost Containment
New Competitor
Non-competitor
New Technology Expanded Geographic Presence
Market Perception
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Trade Outsourcing Keys to Success

• Appoint a senior manager to conduct an unbiased
  self-assessment
  
• Evaluate the existing trade services operation
  versus outsourcing
  
• If proceeding with outsourcing, then establish a
  multi-disciplinary team to create and execute a
  conversion plan
  
• Include representatives from accounting, audit,
  compliance, legal, and trade services
  sales/operations/technology
  
• Start with a thorough due diligence process to
  establish realistic goals and to set proper
  expectations

• Develop a detailed plan containing key
  objectives, milestones, and deadlines
  
• Items to be addressed include
• Auditing arrangements
• Contingency plans
• Credit approvals
• Customer standing instructions
• Dispute resolution
• Functional specifications
• Operational risk
• Procedures and workflow
• Regulatory approvals
• Staff training

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