Chapter Twenty Eight

Banks and Service Relationships

MANY OF THE DISCUSSIONS ON transactions, balance sheet and liquidity, and risk involve the use of banking products and relationships. It can be said that the bank and the product and service capability and offerings differentiate two identically staffed and structured treasuries. Indeed, the same bank and service team can provide diametrically opposite service levels to different corporate clients. In this context, a discussion around managing the banking and service relationship, evaluating the bank’s performance, and picking the right banks with a long-term relationship in mind is important and the aim of this chapter.

SAMPLE BANK ORGANISATION STRUCTURE

Banks have evolved over time to streamline their organisation to maximise customer impact. A typical commercial bank is comprised of various functions, as shown in Figure 28.1.

FIGURE 28.1 Typical Bank Functions

Business-wise, commercial banks have a corporate and investment (or wholesale) arm, a consumer division that caters to individual banking needs, and a private banking division that caters to high-net-worth individuals.

The key support functions are:

• Risk management, which has oversight of the credit, market, and liquidity risks of the organisation
• Operations and technology, which runs the bank operations; these may be unified across the three businesses or separate, depending on scales and technologies
• Finance
• Control, which includes the middle-office function and audit/review teams
• Human resources
• Service (sometimes reports in to operations)
• Other functions, including tax and legal

Multinational banks that are listed as banking corporations in their home country can have their entities overseas in different structures, such as subsidiary (locally incorporated and hence treated as a local firm), branch (using the same legal vehicle of the parent bank), or representative or liaison office (only for purposes of liaison and business building, but not offering any banking products or services to onshore entities).

Offshore banks or branches are legally present in tax-friendly countries or financial hubs, where simple and efficient banking and tax rules or availability of capital and investment products and opportunities and liquidity make it convenient for firms to have their accounts and transactions resident with these banks or branches.

If we zoom into the corporate and investment bank structure (as shown in Figure 28.2), we find the businesses split into relationship management and products. The relationship manager (or RM) for each client has the final responsibility for the account and covers all aspects of products, services, structuring, solutions, and issues for that client.

FIGURE 28.2 Corporate and Investment Banking

Since specific specialist expertise is required for many of the banking products and services in a complicated and turbulent environment, the product teams were created with responsibilities for their respective products and to work with the RM to deliver solutions for the client. The key product groups are:

• Transaction services, covering account and cash management, trade and supply chain services, and custodial services.
• Capital markets and Treasury, covering sales, trading, and origination of capital market deals. The asset liability (Treasury) function of a bank should ideally report to the chief financial officer but can be housed in the capital markets room in smaller banks or branches.
• Investment banking and corporate finance, which does the advisory, mergers and acquisitions, and other capital-related deals.

We delve into the touch points for a corporate in the next part of this chapter. For interested readers, we also provide a figure depicting the sample organisation of a consumer bank business in Figure 28.3.

FIGURE 28.3 Consumer Banking

BANKING SERVICES AND PRODUCTS FOR A CORPORATE TREASURY

Table 28.1 lists some of the key banking services and products for a corporate Treasury and their likely touch points for both the firm and the bank. For reasons of consistency, we have assumed a reasonably centralised Treasury (including shared service centre activities) and a global bank with multicountry presence.

TABLE 28.1 Services and Products and Their Touch Points

Many of the products and services have been covered earlier in the book.

The interface with banks for banking solutions and services for transaction services is further articulated in Figure 28.4. The emphasis is on the transactions management function of corporate Treasury with some areas of balance sheet and liquidity management (such as supply chain finance and cash concentration and pooling).

FIGURE 28.4 Transaction Services—Interface with Corporate

The interface with banks for banking solutions and services for capital markets and investment banking and corporate finance is provided in Figure 28.5. The emphasis is on the balance sheet and liquidity management and risk management functions of corporate Treasury.

FIGURE 28.5 Capital Markets and Investment Banking and Corporate

BANK SELECTION AND RFP PROCESS

We went through the request for proposal (RFP) process for a system service provider when moving to a new system. Why do we need to do the same with banks? There could be different reasons for doing so.

• Treasury design. The Treasury could be reengineering its design elements, such as systems, processes, and centralisation, based on process reviews or project implementation proposals.
• Pricing. A bank review or significant pressure on the bottom line could trigger a review of banking services pricing and hence the opportunity to look at the banking service provider itself. I usually prefer to have this as a more proactive measure during regular review—doing so eliminates the need to be reactive about a pricing decision and the need to change banking partners based on that decision. Some of the pricing elements to bear in mind are:
  • Transactional cost. Throughput-based pricing versus volumes-based pricing
  • Value-added services
  • Commissions
  • Benchmark-linked pricing and the liquidity of such a benchmark
  • Hidden interest and costs
  • Payment costs and float
  • Foreign collections
  • Foreign exchange and risk management spreads
  • Electronic banking charges
• Organisational changes. A new acquisition or takeover can trigger the need for larger operations, and a banking solution might precede a more important Treasury design review and solution.
• Nonperformance or large operational or service issue with existing bank. Usually, banking relationships are strong and unlikely candidates for serious misunderstanding. However, I have seen cases where a large operational issue, or the withdrawal of certain credit facilities (without going into whether the withdrawal was justified) have caused companies to issue RFPs and change banks in a short span of time.

REVIEW PROCESS

Figure 28.6 shows a self-explanatory figure of a typical bank review process.

FIGURE 28.6 Bank Review Process

The selection team here is more Treasury focussed, with representatives from the supply chain side (if supply chain finance is a criterion), technology (for linkages and information security), and financial control (for linkages with accounts payable/accounts receivable and bank accounting entries) usually participating. Also, a business manager and the chief operating officer could be a part of the committee.

The needs analysis is important since it also puts into perspective the revised requirements in terms of the market and banking sector developments. Criteria are ranked or rated in terms of importance and weightage. Table 28.2 shows a typical set of criteria with weights for bank selection. Weights can vary depending on the requirements of the firm. The Excel sheet provided on the accompanying website (www.wiley.com/go/treasuryhandbook) gives a template that the reader can amend to suit company requirements.

TABLE 28.2 Bank Selection Criteria

Current relationship banks and market leaders are factored in for the request for information (RFI) part of the process, with strengths and weaknesses of each being an input into short-listing for the RFI itself.

The inputs from the banks on the RFI serve two purposes: They help to hone the final RFP document and provide enough information to short-list the banks for the RFP process. It is usually a good practice to call all existing banks unless there has been a serious issue with one.

Some of the decision points and degree of relevance across multi-country and single-country operations are given in Table 28.3.

TABLE 28.3 Some Decision Points Between Multi-Country and Single-Country operations

The RFP stage comes next. Preparation of the RFP document is a challenging but interesting project. The RFP contents should include:

• Products and services
• Pricing and execution
• Bank performance and relationship management
• Technology
• Banking implementation
• Outsourcing
• Value-added products
• Geographical coverage

The coverage must be the scope of products and services required by the firm. Potential areas (those envisioned in the future) must also be covered, and functionalities in support, such as technology and information security, must be addressed. Next we list sample product/service inclusions in an RFP:

• Account structure
• Electronic banking: information, access, information security
• Payments
• Collections
• Cheque facilities: payable at par, Foreign Currency (FCY)
• Capital markets services
• Credit facilities
• Trade services
• Foreign exchange execution
• Investments coverage and product availability

Table 28.1 shows a typical suite of products and services.

The evaluation or selection process then comes into play, when each bank parades its wares and presents to the committee on its capabilities. Some of the aspects to remember are:

• Compare apples and apples. Not all banking offerings are standardised. A strong RFP document will articulate the requirements unambiguously, so banks’ responses will be standardised.
• Pricing is not the only aspect. Attractive pricing may not always be a differentiating criterion; it is easy to run with the cheapest bank, but coverage is critical—service quality, reliability, and credit are some of the factors for which payment of a premium is worth every penny.
• References make a difference. Talking to references, including ones who have had issues, is always good to do.
• Look at the failures and information learned. No bank has a 100% track record. Banks that are honest up front about areas in which they have failed in the past could be more transparent and honest with their approach, and sometimes this reflects the desire to work harder.
• Access to bankers. Irrespective of how good a bank is, the banker makes the difference between service and great service. Likewise, for a pan-country or global solution, it is important to have round-the-clock access to someone in the bank who can address issues and solve problems—in a global firm, issues do not tend to time themselves to occur during daylight hours at central Treasury. Hence, access to empowered bankers is a must-have.
• Benchmarking and comparison. It is important to be fair and unbiased and to look at all aspects as a team.
• Consider the total cost including time. Time for implementation and turnaround has a cost element and is a critical component for comparison.
• Credit ratings. The banks’ credit ratings are very important. Longevity of the banking partner is a given, and sometimes the more attractively priced banks, especially for investments, are not always the most attractive from a credit point of view.

SERVICE AND RELATIONSHIP MANAGEMENT

Once the banking implementation has been done, it is important to benchmark and continuously review the bank’s performance. Service reviews every quarter and senior management reviews annually are important. For this, feedback must be taken across every point of contact, and feedback has to be honest, with the aim of ensuring seamless delivery that the banking partner has to promise and deliver.

We next go through a case study of a corporate that was evaluating banking partners for an RFP.

SUMMARY

The banking partner remains the most critical of the external agencies with which Treasury interfaces. The banking industry, even as it transforms itself, is aligning itself more and more to be a solution-centric, advisory, long-term service partner to the multinational organisation, which makes the selection of banks even more important to the financial success of the firm around the world.