What's New in Bank Relationship Management?

Finance and treasury professionals report that consolidation in the banking industry and the realignment of services by many financial institutions have made doing business more difficult. Add in the push toward increased automation, and bank relationship management may well be the primary challenge for many companies in the future.

As a result, several major corporations are looking at ways to handle key relationship issues such as pricing, availability of credit and non-credit services, bundling of services, and continuity in bank's relationship managers.

For any company, the key objectives of bank relationship management are access to credit and non-credit services, management of costs and quality, monitoring risks, and a reasonable approach to dealing with banks.

"We work in a global, multibank environment. Our treasury workstation system software, along with quality of non-credit services and bank operations, are the keys to successful relationship management," said Paul Vovchansky, CTP, a senior treasury analyst for Hoffmann-La Roche Inc.

Options Decrease Among Bank Vendors

Consolidation and specialization among banks and other financial service providers (FSPs) make the selection process critical for companies. Consolidation reduces the number of providers in certain product areas. Specialization raises the importance of matching a given company's needs with a particular provider's strengths.

In fact, at many businesses, such as Coors Brewing Company, bank selection is ultimately determined at the treasurer and chief financial officer level - with some input from the cash management division.

Selecting a financial institution does not always involve a formal process. Sometimes a company already has an established relationship with a particular service provider or financial institution, or has targeted specific candidates. In such cases, the selection process will not involve a formal written proposal.

In other cases, a request for information (RFI) may be used in the selection process. An RFI is issued to confirm that use of a current service provider is justified, or to narrow the field of potential providers before distributing a request for proposal (RFP). An RFI is also used to solicit ideas from service providers on how to solve a particular business or operational problem.

An RFP is a formal document prepared by a company that outlines its objectives and service requirements. Guardian Industries recently went through the process of selecting a new treasury management technology vendor.

According to Scott Billing, Guardian's cash manager, the process involved several departments throughout the company. The input from treasury, accounting and technology staffers helped create a system that served the needs of the entire organization.

Nearly one-third of CFOs and treasurer said they will evaluate their banking services this year, according to a recent survey by Treasury & Risk Management. The RFP is one tool companies can use to find the right vendor relationship. An RFP can be used to obtain bids for everything from one particular service to a company's entire relationship. By law, some government entities are required to prepare RFPs on a periodic basis, usually every three to five years, to ensure they are receiving comparable services at competitive prices. Many private sector companies periodically prepare RFPs for similar reasons. Outside consultants are sometimes used to assist in the preparation of RFPs and evaluation of responses.

There are now standard formats that allow for electronic submission and comparison of proposals. The Association for Financial Professionals (AFP) and the Bank Administration Institute (BAI) have published standard RFP formats for common banking services.

In recent years, companies have started to send out technical RFPs that stress the level and quality of services rather than the pricing. This trend will likely continue as companies look to banks and other vendors to provide mission-critical services for outsourced treasury functions.

Issues in Bank Relationship Management

Companies must consider a wide range of factors when assessing how a bank suits its business needs. Some of the more important elements include: creditworthiness of the bank, number of banking relationships, negotiation and pricing, performance measurement and evaluation.

Bank Creditworthiness

The creditworthiness of financial institutions is a concern of treasurers and cash managers - particularly since the 1980s when some financial institutions failed or were acquired in lieu of being liquidated. Failures and acquisitions affect access to credit and other services that are crucial to a company's business operations.

The credit ratings that agencies give financial institutions are increasingly more important. Ratings are a proxy for creditworthiness, and a number of agencies offer ratings services. Some offer ratings only, while others also offer detailed backup reports that provide both quantitative financial analyses and qualitative assessments of management.

However, credit levels vary from one type of organization to another. For instance, a commercial business may need much higher levels of credit than a university.

Eric Levy, from the corporate treasury/cash management department at Coors Brewing Company said, "Our [bank selection] decision is based almost entirely on credit support - regardless of the bank's cash management competency. As one might expect, our credit banks are typically more than capable of meeting our basic cash management requirements, though each brings different strengths and weaknesses that warrant further consideration.

"We tend to view these products and services as a commodity and expect each bank to have similar offerings, though perhaps not in all regions in which we do business," Levy continued.

On the other hand, several university professionals say that credit access does not figure into their banking decisions at all.

Number of Relationships

Typically, the number and nature of financial institution relationships a company maintains depends upon a variety of considerations. These include: credit accessibility and adequacy, costs, collection/concentration systems, global banking, strategic implications, relative strength and capabilities, and services provided

Considerations in Determining the Number of Bank Relationships
Credit Accessibility/Adequacy	Companies establish multiple relationships to ensure that they have adequate credit facilities or to diversify service providers.
Costs	There are internal and external costs for each financial institution relationship, resulting in an incentive to optimize the number of relationships. There's a trend among large companies to consolidate financial institution relationships.
Collection/Concentration System	Companies in the U.S. with a nationwide over-the-counter/field bank collection and concentration system often find themselves dealing with hundreds of small banks. This is unique to the U.S. banking market where there is a lack of true nationwide banking.
Global Banking	Companies operating on a global basis may need a broader number of banking relationships to provide coverage in every country where they have a presence.
Strategic Implications	Each institution should serve a purpose in the company's business strategy. Because of increasing financial institution consolidation and specialization, there is a trend toward establishing and maintaining relationships based on a particular need.
Relative Strength and Capabilities	When a company has multiple financial institution relationships, often one is designated a lead institution. There may be different lead institutions for credit and other services.
Services Provided	The types, sophistication and geographic location of services needed by a company may require multiple relationships.

Negotiation and Pricing

Negotiation plays an important part in managing relations with financial institutions, particularly since financial institutions have developed more sophisticated methods for measuring relationship profitability.

For example, loan pricing is typically based on interdependent factors such as the cost of funds, risk, total loans committed and outstanding, service fees, deposit balances, and the range of other services used. Likewise, pricing of services is based on such factors as business strategy, volume, customization, exception handling requirements, cost of providing the service, deposit balances, operational overhead, and other services used.

One of the strong trends in the industry is the unbundling of services; what may be quoted today as a single, monolithic service may be broken out in the future (on the company's account analysis statements) into multiple, individual line item charges. Thus, the final service contract should specify a mechanism for negotiating prices for new services implemented by the company, as well as preventing non-negotiated price increases by the unbundling of previous charges.

Performance Measurement and Evaluation

Service quality is an important aspect of corporate relationships with financial institutions. A critical task for a company is to determine exactly what quality standards it wants and what error rates are reasonable for the various services. The company's performance expectations should be based on the service levels stipulated in its agreements with the bank. Two of the most common types of performance measurement techniques are report cards and relationship reviews.

When establishing quality standards for review in a report card, it can be helpful to ask the bank what standards it uses. This allows for negotiation of the actual quality of service standards, and helps tie the standards to reality. It does no good to attempt to set up quality standards on services for which measurements are not being made, or for which it is more costly to measure or gather data than to provide the underlying service.

Also, some companies report that its bank relationship manager changes frequently due to high turnover at a particular bank. For other companies, such as Hoffmann-La Roche, this is not an issue because technology drives transactions, rather than personal contact.

Specific Factors in Choosing Banking Partners

Many factors are relevant when choosing a primary treasury services bank, but often the decision boils down to just one or two major issues, such as access to credit or customized payment services.

Treasury services are sometimes looked upon as a commodity; that is, the major candidate providers offer the same basic services equally competently.

Other issues that can drive the selection process: access to credit, ability to place all services with a single provider, convenience of branch offices, or the opportunity to create customized services to meet special needs. Every organization would be wise to understand what specific factors are most important to them in the selection process so they can appropriately focus their efforts on those areas.

"Credit was the main driver in the selection of our primary banking relationship, followed by quality and availability of electronic services," said Pam Birkholz, CTP, vice president and treasurer for Torch Energy Advisors, Incorporated. "Being able to access bank information via the Internet and quality and continuity of the calling team are also key factors in a good banking relationship."

Other banks have created systemic solutions that combine several traditional and nontraditional treasury services in an effort to obtain more of a company's treasury business.

However, most services being developed by banks are in response to direct needs expressed by corporate customers. For instance, banks are demonstrating or talking about systems for electronic invoice presentment and payment (EIPP) - aimed at business-to-business commerce - and/or electronic bill presentment and payment (EBPP) - aimed at business-to-consumer commerce. Some banks are offering educational products related to the Check 21 Act.

Another example are systems that allow a company to outsource all of its accounts payables disbursements (outsourced payables), up to and including hosting the company's accounts payables on the bank's systems as well as complete payment initiation. Other emerging systems include disaster recovery programs for bank customers, electronic document delivery and management systems (either separate from or part of EIPP systems), specialized disbursement cards (similar to payroll cards but for additional low-value cash disbursements), and outsourced receivables. Some banks are even discussing bringing in efficiency experts to review customer operations with an eye toward implementing more effective use of treasury services.

In addition, more treasury service providers are combining multiple services into a single Web site, which provides more effective interaction with all parts of the bank. This "portal" approach is a natural outgrowth of the trend to push as many services as possible to a bank's Web site, from account research to transaction initiation. Although behind the scenes many of the systems are independent and disconnected. They appear to be part of a seamless whole when viewed from the Internet portal. As they support this integrated portal, banks are becoming better at centralizing support for the various systems lying under the hood.

Company objectives as they pertain to bank relationships vary widely depending on company and bank-specific factors. The common thread is that banks are the primary providers of services, both credit and non-credit, to the treasury area.

Regardless of the direction, the key to long-term success in banking relationships is for both parties to proactively monitor the timeliness and quality of the services and products provided; and to establish frequent and effective communication between the company and the bank.

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D.J. Masson is president of The Resource Alliance, a Florida-based consulting and training company, and serves as a visiting professor of finance at the University of West Florida. He is also the lead editor and author of AFP's soon to be released Essentials of Treasury Management. Masson can be reached at djmassontra@aol.com.

Joseph Tinucci is the assistant director of asset management for the University of Colorado, and is responsible for managing the university's banking relationships. He can be reached at joe.tinucci@cusys.edu.