Treasurers know they are going to pay fees for bank services, but knowing how those fees are calculated and to what degree they are negotiable can ease the pain (slightly).
As with most sustainable commercial organisations, it should be acceptable for banks to generate profitable revenues from the products and services they provide to customers. However, the concept of ‘fair fees’ has some key characteristics that must be observed for this to ring true. “Banks should clearly and transparently communicate the fees and conditions under which these will be levied,” believes Dinesh Krishnan, MD of Global Product Development for bank billing software vendor, Zafin. “Customers should also be guided towards using the most appropriate products and channels through the banks’ clear articulation of the value of these services, which is in essence their features and benefits.”
The problem is that there are a combination of external and internal factors that can affect fee levels, which can serve to muddy the waters somewhat when it comes to fairness in the eyes of the individual client. External factors might include significant components like the markets and countries in which banks operate, local banking models and customs, the prevailing regulatory framework, competitor activity, customer expectations, and technological advances. The internal factors include elements such as customer segment or type, geography, committed balances, breadth of customer relationship across products and lines of business, longevity of relationship, and volume of business. The way in which these internal variables are handled can, in part, be considered as a reflection of how banks manage those external factors and translate them into product and pricing propositions for their clients, notes Krishnan. That management process can also equate to complexity and lack of billing clarity which may ultimately serve to undermine bank/client trust.
However, even with these factors to consider, Krishnan argues that corporates can have “significant leverage” on their fee structures with banks. “They can effectively demand exception pricing by putting their transactional business out to competitive tender using established RFP processes,” he says. Whilst it is unlikely that a corporate will seek a new relationship more than once every few years (if at all), the potential to lose a key client will at least promote discussion around fees. The strongest leverage items for major corporates typically include the ability to commit large volumes of transactions (through direct debits or wire transfers, for example) and by maintaining significant net daily and average balances with their banks. There is, Krishnan notes, typically a direct correlation between client size and their ability to negotiate a more competitive fee structure.
From a bargaining standpoint, to be able to quantify the value of their client relationships, many banks have developed multiple metrics over time, including profitability, contribution, lifetime value, and target revenue based models. “These can be adapted to reflect different business segments – corporate, commercial and small business – and industry segments along with the breadth and extent to which products are consumed,” says Krishnan. “If client relationship value can be normalised across both the asset and liability side of the business to arrive at a relationship score based on the relative product value weightings, separate business and industry segment benchmarks can be defined providing an effective framework to formulate median and best offers that relationship managers can use to negotiate fees with their clients.”
Unfortunately for banks, there is no single way to address requirements across industry segments, he notes. “The reality is that different bank stakeholders require different views to evaluate performance and to inform future decision-making.” A product manager for a specific group of products will require a product view, perhaps cost-to-income ratios, profitability, product-pricing distribution information and so on. A relationship manager will focus more on overall client revenues and profitability. An operational manager, or an operational risk manager, will probably want to view billing cycle transaction levels and invoice levels to identify potential processing issues.
The corresponding issue here is that fee structures are too complex, making differentiated fee propositions difficult to manage. This in part is a technology matter. Historically, Krishnan feels that the structuring of banking fees has been constrained by the capabilities of the underlying core systems. Hence, when it came to introducing new products, banks had to add yet more product variations because they could not flexibly handle these through product parameterisation. “Consequently, the product real estate has become increasingly unwieldy and complex to manage. This makes it challenging to present in an understandable form to their clients.” Indeed, he adds, this has also exacerbated the risks of inconsistent sales execution, with sales and accounts managers selling unsuitable products.
Software advances have incubated a new generation of pricing and billing solutions that enable banks to manage and communicate fees on behalf of their customers. Zafin’s own ‘miRevenue’ solution is joined by the likes of Vallstein’s ‘WalletSizing’, Kyriba’s ‘Bank Relationship Management’ and Chesapeake’s ‘SmartAnalysis’ to help prepare the ground for corporates and banks (depending upon solution). In the banking space, Krishnan says that by combining the front and back office, these systems enable bankers to undertake ‘what-if’ modelling and provide customers with offers that address their specific needs. “The customer can have greater confidence in their relationship with their bank and have the added assurance that they will only be billed in line with their offer.”
“Like a lot of banks, we had different legacy systems that behaved in different ways with different information,” recalls SEB’s Product Manager for Billing, Linda Wade. However, SEB has been using Zafin’s miRevenue platform for the past four years and she fully endorses Krishnan’s view that technology has enabled a more transparent bank billing process. The solution was implemented as part of SEB’s strategic decision taken around five years ago to centralise its billing processes. Where previously it had been difficult to charge customers in a unified way, especially when they operated across the Nordic region, she says the advantages of having a single platform are clear.
The main driver for SEB is to make the entire process more transparent. With banks often being accused of complicating fee structures and overcharging, Wade says it is good to be able to show customers in detail that everything is correct and above board. “We’re not doing this to be able to charge the customer more; we’re doing this to give us more control over our processes and to make it easier for our customers to improve their own AP processes and how they handle invoices received by banks.” She believes that deploying such a solution is a “necessary investment” that a lot of banks have already made or will make, either with an external platform or internal build. “Many of us are now moving in the same direction.”
For an in-depth look at the fairness of bank fees see the forthcoming April 2015 edition of Treasury Today.