If you feel your bank fees are not what they should be, how can you get a better deal?
Everyone likes to think they are getting a good deal. But when it comes to bank fees, how easy is it for treasurers to know if what they are paying is the best possible price? And what exactly is the best price, because in corporate banking it all depends on the relationship?
How banks price cash management services is often not based on the strength of the treasurer’s negotiation, or even how well they know the bank, but on how hungry their bank is for the client’s business, says Bridget Meyer, Senior Director at Redbridge Analytics.
It is hardly a secret too that in this Basel III world, where certain deposits cost more to take than they yield, some clients are just not worth having. Furthermore, where some banks focus on certain sectors or industries, it will be to the exclusion of others.
There may even be a fee impact at a personal level. In some cases, if a bank relationship manager (RM) has not yet met their sales target for the year, they will be looking to extract maximum value from new business. But RMs may be targeted on the total wallet they bring in from each client, or on the amount of new product they sell and this too will affect their appetite for negotiation.
Consider all angles
For a treasurer seeking to negotiate bank fees, all this points to a number of ‘behind-the-scenes’ variables potentially impacting the outcome. For this reason, it is essential for the treasurer to try to understand the bank’s perspective.
It helps knowing what “levers” to push and when, says Meyer. Typically, this is a skill that comes either from extensive experience or from inside knowledge; having a former banker on the team, for example, should provide valuable insight into how certain banks operate in this respect.
If this sounds rather too much like a lottery then she believes that “those who get the best prices are often those who ask and who are persistent”. And when an RM offers a discount, the degree of latitude they often have on price is such that taking the first offer is perhaps rash; push a little harder and the true extent of that latitude may be revealed.
Always remember that there is a partnership at stake here warns Meyer. “It’s not just about taking from the bank. Treasurers need to be able to figure out what ‘carrots’ they can offer in return for a price reduction,” she says.
Before going into negotiation, consider what ancillary business you might be able to offer them. If, for example, there is another bank relationship treasury is not happy with, or a bank where there is very little in the way of committed business, perhaps this business could be offered as a means to raising the total wallet share.
If the bank with whom treasury is negotiating is proffering new services or products, whilst full treasury commitment may not yet be possible, listening with an open mind to these new solutions may help ease the negotiation. “At least hear them out,” advises Meyer.
What are you paying for? A banker’s perspective
“The fees that banks charge ought to be in direct proportion to the value they bring to the client,” says Paul Taylor, Global Head of Corporate Sales, GTS and Head of Sales for GTS EMEA, Bank of America Merrill Lynch.
It’s clear that the value a bank can bring to corporate clients has evolved over time. It used to be a very physical business, he says, with the transportation, clearing and settlement of funds being performed as part of a banking community which was not accessible to the client. Banking was a very distinct function and it was clear what was being paid for.
Today, far more of what a bank does is about data. This is data drawn from many sources including the client, obtained as per the usual transaction banking agreement. The ability of the bank to add value to the company through the use of that data is a vital part of today’s offering.
Because data has its own measurable value, its safekeeping and carriage has become a number one priority for banks today, with cyber-security a major necessity for all companies, says Taylor. “We invest very heavily in cyber-security and the integrity of our systems.”
In practical terms too, banks today manage data, producing more meaningful reporting for clients. This reporting allows clients to make more informed judgements about managing their cash. These are judgements which require banks to take actions which the companies typically cannot take themselves.
In terms of the innovation necessary to keep adding value, few companies want to be a first adopter in a world of proliferating solutions. This is simply because there is no certainty around which will become the de facto solutions, says Taylor. Banks have therefore become “an important litmus test” for new technologies, some of which pass into common usage, many of which do not.
The role of the bank has a value, from the expectation of the safe carriage of data, right through to the investment in and testing of new technologies to solve new problems. These are activities that no company could or should do on its own, says Taylor. “In that sense, banks today verge on being community providers.”
Are the fees in direct proportion to the value these services bring to the client? Try living without them for a while.
Striking a deal is one thing but sustaining the relationship is important too. “The number one requirement is to get the bank to demonstrate commitment,” notes Meyer.
Offering a short-term contract of say 12 months’ duration may seem ideal in that the bank has the perfect opportunity for early price rises. But commitment is a two-way process and the longer the arrangement, the stronger the bond between parties.
In taking the longer-term view, the bank knows its client is less likely to run an RFP in that period. This saves time and money and guarantees revenue for the bank for that period, she explains. “Banks would also rather take on a longer commitment so clients don’t bother them every year for a price reduction.”
Out of common decency, the commitment period offered by the bank should be respected by the corporate who should not go out to RFP until the agreement is coming to an end. However, it is not unheard of for banks to insert terms and conditions in their pricing proposals that allow fee increases on a sliding scale if volumes of business fail to hit a certain level, so the level of commitment is managed by the bank.
Perhaps it sounds too much like the balance of power is stacked in favour of the banks. This is not necessarily the case, says Meyer, but for the treasurer, to keep the banks sharp, “it is important to let them know that you are watching them,” she advises.
Bank fees can appear to rise inexplicably, even for large companies that are sharing a sizeable portion of their wallet, so it is clearly incumbent upon treasurers to keep their eyes wide open.
Treasurers should periodically benchmark their fees against the wider market using an RFP (bearing in mind the commitment to the partnership referred to earlier). The process has the advantage of testing the appetite for the treasurer’s specific business in a competitive environment.
By discussing results with the RMs, it sends the message that the client is very much aware of and tracking its bank fees. “The more treasurers pay attention and let their banks know that they are watching, the more the banks will know to keep their pricing in check,” says Meyer.
Failure to benchmark at all is a mistake. It can lead to corporates keeping certain banks on their panel purely out of habit. Inertia is never a good thing in business. Similarly, although the attitude that ‘if it’s not broken don’t fix it’ is common, it suggests to Meyer that “some companies don’t want to know if its broken”.
This is a curious notion but she explains that there can also sometimes be “an apprehension of rocking the boat”. This fear is misplaced. “No bank ever pulled out of a partnership because the client asked for a discount on cash management.”
When it comes to broaching the subject of fees, let no more than five years elapse before going through an RFP, says Meyer. Requesting a discussion on fees with the current providers every two or three years is “not unreasonable”. Of course, some public bodies (such as municipalities) may even be obliged by law to run regular RFPs.
If an organisation is monitoring and paying attention to results, the treasurer will know when the right time comes to have that conversation. However, so many corporates don’t do anything, notes Meyer. If a treasurer waits for the banks to comes in to do their quarterly reviews, it invites a glossy and somewhat passively received explanation of what the bank is doing for the corporate, with maybe a few service issues raised on the side.
But these reviews are an ideal opportunity for the treasurer to really find out where the relationship is going and improve their treasury services. Do some homework before the review, advises Meyer. Perform an account and service rationalisation and come to these meetings with questions based on your analysis. Why do we have this service on this account and not the others? Timing discussions and negotiations with one of those meetings makes it a “relationship review on steroids”, she says and produces real results.
There is no point negotiating on superfluous services; if paper billing is going to be dropped soon don’t bother getting a reduction on it.
Send the findings to the bank, asking it to come prepared with a response at the next quarterly. The bank should be given enough notice to prepare and not feel like it is being pressured; this should be seen as a friendly reminder that treasury is taking fees seriously.
With RMs servicing many clients, “it’s the squeaky wheel that gets the grease”, says Meyer. If the corporate and bank have been on autopilot for a number of years, a sudden focus on fees may reveal areas where they have risen beyond acceptable levels. The relationship may be quite satisfactory in all other respects but if the treasurer knows they are paying above market rates, the bank now has the opportunity to address the issues and create a win-win situation.
This is not just a tale of prices incrementally increasing over time because they were not kept in check. There are cultural differences that can influence pricing changes too. In the US, fraud protection services are lucrative because businesses are scared of doing the wrong thing; few will ever turn these off. However, banks in Europe know they cannot charge directly because corporates have always seen banks as duty-bound to protect their clients’ interests.
Anecdotal evidence further suggests that banks can and do amend their menu of chargeable items, and they are entitled to do so. Some banks may even use the complexity of their contracts to impose a range of price increases more or less at will.
These contracts are subject to negotiation, and treasurers have been known to challenge and win. But the process is far from easy because banks have vastly experienced legal teams; they have to because they are undertaking huge liabilities and risks.
A large corporate may have the legal resources to return red-lined copies of such documents and enter into negotiation. Even in such organisations the legal expertise will not be in banking per se. However, many more businesses do not have the capacity to do this and will have to accept the contract as is.
Although a smaller banking institution may be more compliant if it wants the business, the likelihood of getting a large bank to sign a service level agreement is minimal. For the treasurer, an appendix of agreed pricing may be about the extent of acceptable amendments in many cases.
When seeking to negotiate, it requires more than just a database of industry best prices to make headway. These figures cannot possibly take into account the full and unique client relationship, which often encompasses a broad suite of products and services across multiple regions.
In any case, attempting to browbeat the bank with a list of the lowest rates on every product and service is likely to prove unsuccessful in negotiation. On the other hand, the ability to think from the bank’s perspective about the depth and desirability of the relationship, and from here set a reasonable pricing target on only the services needed, will be more fruitful.
The treasurer should only use those lowest prices as the starting point, considering each, line by line, only in the context of the entire package. Obviously, the target prices should not be revealed to the bank as sometimes the final offer can improve on these.
Allowing the bank time to think about the deal and come back with what it considers to be a better price is therefore a much healthier approach. It gives the bank the fairest opportunity to demonstrate what it believes is the true worth of the unique relationship it has with the client. If the offer has not met expectations, the client should review it as a good first try, using this as the starting point for the next round of negotiations.
Whether engaging in an RFP or bilateral negotiation, being forearmed with the information, taking a big picture view that encompasses a degree of flexibility and, importantly, being able to understand the bankers’ perspective, will give the treasurer the tools needed to seek and achieve rates that serve both parties well.
Treasurers who are prepared to ask their banks to revisit fees can save between 20% and 30% on pricing alone, says Meyer. Whilst no one benefits from driving too hard a deal, she believes many more in the profession should be thinking about “getting their best game face on”.
Top tips for fee negotiation
Don’t be afraid to ask for a fee reduction.
Try to understand pricing from the bank’s perspective.
Enter a negotiation with something to offer such as ancillary business.
Try to work for the long-term relationship and see the arrangement as a partnership.
Don’t take the first offer – push a little harder.
Keep monitoring fees and let the bank know you are doing so.
Never go more than five years without a review.