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Foreign Direct Investment
One of the ways banks enter new market is cross border lending. In this method, the foreign bank looks for a correspondent bank just for the sake of internationalizing operations. Often, it is the trade finance arrangements that take shape first and this means there must be a trader in the target market. This method of entry into a foreign market can be classified as foreign direct investment (FDI).
In doing this, the bank that establishes a representative office limits itself to fewer services like consultancy and so the risk is lower and do not necessarily require a banking license, since regulators tend to treat banks as banks when they are collecting deposits and doing money transmission. The bank also takes advantage to set up business for the mother bank abroad. If the bank opens a branch, this is not considered as an independent legal entity.
When deciding whether to enter the foreign market, banks have to consider three types of costs: fixed costs of entry brought about by legal requirements, fixed costs of exit and operating cost. While considering this, the bank must therefore be strategic in timing when to enter the non-traditional market so as to generate enough revenue to justify its existence.
Greenfield investment
Another way that banks can enter new market is green field investment where it sets up an institution from scratch. The new institution may just start as a branch or representative office and this may only involve the transfer of the human capital in the beginning.
In this way, the bank is able to take advantage of its good reputation especially when it enters a less developed country where depositors are looking for safe keeping of their money. The bank that enters the market this way has the advantage of establishing branches anywhere even those regions not previously covered by local bank branches.
Acquisition and mergers
Banks may also enter a new market abroad through acquisition of a local institution. This can be total acquisition or acquisition of a minority stake. If a bank enters a market this way, it has the advantage of easy access of the local knowledge and customers. It is also a good entry method especially where rapid growth is desired. Mergers and acquisitions allow instant access to deposits which means that the bank can now sign up for local currency.
While the foreign bank is good at providing products requiring a global platform, the local bank will in turn provide products that require local abilities and knowledge. For this reason, the local bank tries to focus on retail banking and small and micro-enterprises while the foreign bank focuses on corporate banking while offering trade finance, project finance, financial advisory services and cash management services.
Comparing the three strategies; the most limited but least expensive is the representative office, while acquisition or merger is just expensive in terms of the initial expenditure and not on government requirements. Starting an independent full fledged banking institution requires much legal requirements in most countries and could be charged a lot more by the regulators.
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