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Is Your Bank Substitutable?

  • By Tamir Shafer
  • Published: 2011-06-23

Changing banks is painful. You know it and so does your bank. In fact, they count on it. But every relationship has its breaking point. Yours may be closer than you think.

In Economics 101, we learn about supply and demand, elasticity, and diminishing marginal utility. We also learn about the ease (or difficulty) with which one product can be replaced with a similar product. This consumer decision is called “substitutability,” and the economics behind it drive decision making by all consumers—whether they are buying soft drinks or corporate treasury professionals in charge of bank relationship management.

The Credit Card Act of 2010 forced many banks to reduce or eliminate some of their credit card fees, including rate increases the first year a customer has a credit card, and limitations on the size of a credit card overdraft fee. In response, banks are increasing many of their fees. At a corporate level, especially for companies with complex entity arrangements, monthly fees
can easily run into the tens of thousands of dollars. It begs the question: At what point does your bank become substitutable?


Smaller regional and boutique banks are becoming more attractive by offering reduced fees, improved yield, and better customer service, effectively replacing the big balance sheet and credit lines that big banks offer.

Not only are corporates realizing that they have to recognize bank fees as an expense line item, they are beginning to see that banks often circumvent the entire accounts payable process. Whereas most vendors have to submit a bill or invoice to a company’s AP department to be paid, banks auto-debit a client’s account for whatever fees they feel like charging each month.

To make matters worse, corporate treasury often is not provided with an account analysis from the bank that details the volume, transactions, fees, and yield on long balances. If a bank refuses to provide monthly statements or account analyses, that should be a red flag.

Monthly statements or analyses should provide some level of transactional volume and detail. Depending on the bank, there can be 50, 100, or even 200 different transaction types reflected in these statements. The fragmentation of fees and transaction types has become incredibly elaborate and convoluted.

Once corporate treasury receives a monthly analysis, they need to look for the following:

What is our company’s earnings credit rate?
Is one bank providing a better rate compared to others?
Are there any instances where we are being double-charged?
Have new fees been passed through to us without first confirming them with the bank?
Have any individual fees changed significantly?

With a little extra effort and some expertise, commercial clients can get to the bottom of their total bank spend and begin calling out their banks on unfair charges, questionable fee practices, and inadequate yield.


Assuming a bank is packing fees into a corporate’s account, what is the tipping point? In other words, when does a bank become substitutable?

The answer differs for each company. There are a variety of factors that will help determine whether a client will stay with their bank (and try and compress fees and increase yield), or to move banks to get an even better deal.

The five most common factors include:

Relationship history: For some corporates, the level of interaction is critical. For small to mid-size companies who do not have an experienced treasurer managing the bank relationships (usually it is a controller or accountant, they crave this attention. One of our clients was irate at how his contact at one institution of his two banks changed every three months. “I don’t know who to call anymore,” he said. “Now they’ve given me the general number and the person that picks up doesn’t know me. Before, it was the same person all the time.” This client ended up switching both of their banks.

Yield: A client is earning nine basis points on long cash balances. When the client asked whether higher yield options were available, the bank hemmed and hawed. The client, treasurer of his company, said: “Guys, your title is Client Advocate. Please try and make me look good.” The bank hiked the yield to 55 basis points and it was not substituted.

Fees: Depending on the company and entity complexity, fees could be small ($1500/month) or large ($40,000/month). For example, real estate owners and operators will have one or several bank accounts for each property. This could lead to several hundred bank accounts with all kinds of transactions coming through. It gets so convoluted that treasurers and cash managers need help understanding the big picture. Here is a recent conversation our client, a treasurer, had with the bank:

Treasurer: “Starting last June, a new $2200/month fee was introduced. Did you review this with us first?”

Bank: “No. There was an ‘opt out’ option on our website. If the client didn’t want this service, they could have opted out.”

Treasurer: “We move $200 million through your bank daily and have 300 bank accounts, and you expect me to go on your website and click an opt-out button?”

The bank ended up crediting the client back for seven months.

Credit: This is sometimes the big equalizer, especially for corporates who have large mortgages in place with one or two banks. They are so scared of losing this credit that they do not want to even approach the banks regarding fees. But if the bank charged 20 percent more on the mortgage, would you pay it? Of course not. The bank may be doing the same thing on the fees side.

Operational friction: Depending on a client’s technology and operational processing, a move to a new bank may be very difficult. Also, for companies that utilize treasury workstations, the move is significantly easier then if they use a bank’s website to perform processing. A TWS becomes the interface to the bank, so there is no change for those making daily treasury decisions. If a company has a large contingent using a bank website to conduct all activity, it becomes a much more drawn out process to switch.

Corporate treasury and finance professionals should consider examining these five areas to decide when a bank becomes substitutable.

Tamir Shafer is Managing Partner with The Montauk Group, L.L.C. 




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All rights reserved.

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