The means by which banks generate profit has in the past few years been forensically analysed and some of the outcomes have made for rather depressing reading. But whilst some may say the raft of regulation they now face in response to their more creative practices are of their own doing, it should be acceptable for banks to generate profitable revenues from the products and services they provide to customers. “Banks should, however, clearly and transparently communicate the fees and conditions under which these will be levied,” says Dinesh Krishnan, MD of Global Product Development for financial technology firm, Zafin. “Customers should also be guided towards using the most appropriate products and channels.”
In preparing this article it is interesting to note that several banks declined the opportunity to comment (the help offered by Bank of America Merrill Lynch and SEB is therefore that much more appreciated). Whilst this apparent reluctance is not indicative of anything in particular, it does suggest that, for whatever reason, the topic of fees remains a sensitive subject for some banks.
Fee levels are affected by a combination of external and internal factors. External factors 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. “Internal factors can, in part, then be considered as a reflection of how banks manage the external factors and translate these into product and pricing propositions for their clients,” notes Krishnan. Banks offering differentiated fee propositions will base decisions on such factors as customer segment or type, geography, committed balances, breadth of customer relationship across products and lines of business, longevity of relationship and the volume of business.
However, according to Bruce Meuli, Global Business Solutions Executive, Global Transaction Services, EMEA, Bank of America Merrill Lynch (BofAML), “fairness is in the eye of the beholder”. Whilst this is absolutely true of almost any transaction, he acknowledges that ‘fairness’ can also translate as ‘market value’. Sometimes though, “fairness is relationship driven”.
In practice, Meuli is a firm believer that value, not price, is the major driver behind fair pricing. In this context, he notes, most people recognise that “the cheapest is not always the best”. However, Olle Durelius, Head of WCM Process Management at SEB, adds that even for a commoditised product, ‘value’ may still be generated, allowing the corporate to make significant savings in other parts of its organisation; just consider the upstream process and cost benefits of straight through processing for simple payments, he says.
If the bank knows it is getting a fair share of the corporate wallet, relative to other banks in the group, it will be more amenable to offering improved pricing.
The theme of adding value is something picked up by Linda Wade, Product Manager, Billing, at SEB. She believes banks should not just do what they are paid to do but must also provide a genuine benefit for customers; only then is it possible to talk about fairness. “When we are creating value for our customers then it is fair to charge for that added-value,” she says.
‘Value’ can of course be derived in many different ways. Wade points out, for example, that an effective bank will earn its fee if it can step in and save the day when something goes wrong. The “soft factor” of quickly being able to turn a situation around to the customer’s advantage makes all the difference. She argues that if that ‘soft’ element is removed, many banking products can be seen as the commoditised processes that they really are; often indistinguishable from bank to bank and adding no real value beyond their functional remit.
According to Durelius, the managed delivery of core products and services always ranks highly on the priorities list of SEB’s clients when they are surveyed. “If the day-to-day business does not work, it quickly becomes far more important than any strategic dialogue with us,” he states, adding that “SEB acts accordingly to solve the issues promptly”. Indeed, it might be said that it is only when something goes wrong that the treasurer finds out the true depth and value of its banking relationships.
But fairness in such a relationship must be a two-way street. Most banks operating in the corporate space look at the ‘share of wallet’ they are awarded by a client across a product set from a relationship pricing and relationship revenue point of view. If the bank knows it is getting a fair share of the corporate wallet, relative to other banks in the group, it will be more amenable to offering improved pricing. “For a specific product we can look at volumes or how deeply we are engaged with the customer across the bank,” explains Wade.
Most treasurers will have a method of working out the share of wallet to give to each bank, notes Meuli. Such a model will typically be led by an actively managed treasury policy. The discussion around which institutions should or should not be used is often one between the treasury HQ and its group entities, he notes. Indeed, prescription by HQ of which banks can be used may cause a “profound” discussion where, under the influence of the wallet-share programme, a long-term relationship is no longer supportable at a local level.
Getting a better deal
Local issues aside, it is important that bank and client reach a fair deal. “Just because a bank is a good customer service provider does not mean it is actually giving the client value for money,” says Wade. “I think it is quite normal, if you are paying a lot of money for a service, to know what you are paying for and to make sure you are paying the correct amount.”
When seeking a better deal, a certain amount of treasury tact and guile is required. “It does not make sense to haul your bank over the table; that does not work,” states Hugo van Wijk, a former banker and, for the past 15 years, CEO and founder of Vallstein, a vendor of ‘wallet-sizing’ and bank relationship management technology. But, he adds, there is also absolutely no need to give the bank an “excessive return”.
Typically, fees are set within the system and charged automatically to an account on a ‘local billing’ basis. In isolation they may make little impact on corporate cash, en masse the amount seems rather more consequential. The realisation of just how much it is paying in fees may lead the treasurer to try to negotiate costs. For Krishnan, key leverage items for corporates typically include the ability to commit large volumes of transactions and to maintain significant net daily or average balances.
The key to success in any quest for fee reduction, says van Wijk, is to understand that it makes no sense to try to drive down the fee for every single item (not least because there may be upwards of 1,000 different price points in a bank’s international cash management offering alone). “Only pick out the most relevant,” he advises. “If a company uses a lot of international wire transfers or domestic direct debits then these will be the components to negotiate on – just accept the others.”
How much of a reduction to expect is a moot point. “We are often asked what ‘best practice’ pricing is for certain products,” says van Wijk. “Our standard reply is ‘zero’, because sometimes a corporate can get its bank to waive fees on an individual product.” However, he adds, “it is very important for a treasurer trying to get a grip on banking fees to negotiate only in the context of the overall relationship”. Fairness is, after all, relationship-driven.
The problem here is that whilst the total relationship has a value – how much the client spends in a fixed period – checking and analysing every billable item is essential to be able to accurately plan the share of wallet and conduct an assessment of fair pricing. This is more complex than it first seems, particularly where non-standard pricing is applied.
Out of the hundreds of billable items a bank will offer (and potentially thousands of price points), where a client negotiates a lower price on, for example, just 20 of these, if that client has accounts with the bank in five different countries across 15 different legal entities, billing complexity soon mounts. “Historically, the structuring of banking fees has been constrained by the capabilities of the underlying core systems,” says Krishnan. “Hence, when it comes to introducing new products, banks have to add yet more product variations because they cannot flexibly handle these through product parameterisation; their product real estate has become increasingly unwieldy and complex to manage.”
SEB has a single billing platform (miRevenue from Zafin) and is progressively migrating business units, customers, products and billing data onto it. Such an investment, says Wade, is about gaining control over the process which is good news for bank and client because where previously there was a somewhat “scattered” approach to pricing and billing, now it is unified. “Everything now is much more transparent; customers should expect to see exactly what they are paying for.” In addition to improved pricing flexibility across the bank’s business, Durelius explains that it also enables customers to import and export billing data into and out of their own systems with greater ease.
Unified billing codes: TWIST, AFP and camt.086
For a corporate to know precisely what it is paying for, importing detailed electronic reporting from a bank directly into an ERP, TMS or Account Analysis package is beneficial. There are currently two models of detailed electronic statement that banks may adopt: the TWIST (Transaction Workflow Innovations Standards Team) Bank Services Billing (BSB) initiative and US EDI 822. The Association of Finance Professionals (AFP) domestic AFP Service Codes is used with the EDI 822 and its broader counterpart, the AFP Global Service Codes (the latter was designed specifically to work with the BSB format).
General Electric (GE) was the first corporate to use the BSB back in 2007, receiving billing data from Danske Bank. To date 14 major banks (BofAML, Barclays, BNP Paribas, Citi, Danske Bank, Deutsche Bank, HSBC, Intesa Sanpaolo, J.P. Morgan, RBS, SEB, Societe Generale, Standard Chartered Bank and UniCredit) and around 100 corporates use it.
With the appropriate software at the corporate end, data using AFP and BSB models can be received, reconciled and analysed right down to individual line items. Most of the major ERP and TMS vendors (and a couple of specialist IT firms) can configure their systems to process the extra data.
In explaining the benefits of a common billing code, Paul Burstein, formerly managing director of GE’s Treasury Strategic Initiatives team and for many years a leading light behind the TWIST initiative, says the bottom line is that it “allows for all kinds of checking on what banks are charging”. The level of insight goes beyond a treasury’s bank relationships, reaching into other operating units within the company – payroll, procurement or operating units for example. This, he notes, affords a view of how those other functions are using banking services, enabling treasury to optimise all bank relationships in line with policy and share of wallet, and enhancing the company’s understanding of its total level of exposure to each of its banks across the enterprise – an obvious risk management benefit.
Banks require a system to produce BSB data but corporates must have the right tools to process it too – treasurers could use an XML editor or Excel but to really get value out of BSB data Burstein says specialist software can be used to validate the billings and to analyse them.
The BSB is currently available in two versions: the original TWIST version (Version 3.1) and the ISO 20022 camt.086 version 1 message. The ISO 20022 BSB is currently undergoing a facelift, with many banks, corporates and vendors involved in an assessment of issues that have arisen in the version 1 implementation by banks and the message’s use for electronic invoicing. The current BSB version (3.1) is now fixed, Burstein says any future enhancements will only be made to the ISO 20022 version.
Transparency is the key
SEB’s Wade talked earlier about how shifting the billing function to a central platform could afford more transparency (and flexibility), but this is just one bank’s action. A more fundamental issue arises out of the debate around the fairness of bank fees – and that is whether it is desirable for banks and corporates to agree to a simplified fee structure. “Why should there be so many billable items in cash management? This is complexity from the past,” states van Wijk. The problem, he feels, could be removed altogether with a simplified approach to billing. Whilst any conversation must of course be mindful of the whole bank relationship picture, the real aim, he says, “is to eventually make the entire relationship transparent”.
This point is perhaps contentious and TWIST’s Burstein argues otherwise. “I think you will find that most banks would not want to limit how they bill and what they bill for – and most major corporates with a large relationship with a bank would want to be able to negotiate at a detail level.” The capabilities of a bank’s existing computer systems might also play a role in determining what can be billed and how. At the treasury end this is where bank relationship management software, such as Vallstein’s own ‘WalletSizing’ solution, Kyriba’s ‘Bank Relationship Management’, Zafin’s ‘miRevenue’ or Chesapeake’s ‘SmartAnalysis’, can help prepare the ground.
The ‘WalletSizing’ system, explains van Wijk, starts by examining where the corporate stands today in terms of bank fees, capturing total costs for the corporate and revealing the extent of its global wallet. The next stage indicates if fees agreed are indeed the fees applied – the BSB and AFP codes are clearly useful tools here too. The third stage assesses whether the best possible fee structure is in place or if certain inefficiencies exist in the way the wallet has been divided between the banks.
However it is achieved, analysis of bank billing should be ongoing, perhaps taking place every quarter or half year. “But don’t try to renegotiate every time,” warns van Wijk. It is also important, once a new pricing structure is agreed, that treasury monitors and controls it tightly, he adds. Far from creating tension between partners, he argues that the whole process actually creates stability in the relationship. “Once partners have this level of transparency, the corporate knows it is paying a fair price and that the agreed price is being observed, there is no need for it to shop around; for the next few years at least the bank is assured that it has a fair share of the corporate wallet.”
Clearly it is not all about the price. When seeking to explain how a corporate can derive value from a banking relationship, Durelius believes that the discussion should broaden out beyond a simple question of ‘how much’, to reach into areas such as how a certain product or solution can deliver upstream or downstream process efficiencies. “It might still be good value for money even if the naked cost is perceived as high,” he states. In this light, perhaps a refocus of priorities is required. “A company will pay a consultant hundreds of euros an hour in the blink of an eye, but an annual fee for a service from a bank may be deemed more challenging, even if it saves so much more over time.” This is the crux of the issue when considering fair fees: don’t just look at the price tag, consider the real value for both sides of the deal.