Managing the Bank Relationship

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Managing the Bank Relationship
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Objectives of Relationship Management

• Access to Credit and Other Financial Services.
• Management of Costs and Quality
• Monitoring Risks
• A Partnership Approach

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Services Provided

• Collections
• Payments
• Information
• Credit
• Investments

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Collections

• Coin currency
• Standard check processing
• Lockbox services
• Electronic collections
• Deposit reporting service

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Payments

• Demand deposit accounts
• Zero balance accounts
• Controlled disbursements
• Payroll
• ACH
• Wire Transfers

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Information

• Balance reporting services
• Account reconciliation
• Electronic delivery systems
• Positive Pay
• Advisory or consulting services

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Credit

• Shifting from a direct financing role
• Moving toward role of risk-sharing or guarantor

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Investments

• Repurchase agreements
• CDs
• Commercial paper
• Corporate agency services
• Trends

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Bank and FSP Selection Criteria

• Qualitative factors
• Geographic considerations
• Ability to fulfill specifications
• Personnel expertise, including customer service
  and product support
• Knowledge of specific industry

• Ability to customize or create new services and
  meet future needs
• Adequacy of internal controls, backups and
  disaster recovery plans
• Willingness to provide credit on flexible terms
• Quantitative factors
• Pricing
• Financial strength
• Cost of switching providers

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Selection Process

• Request for information (RFI)
• Vendors ability and willingness to provide
  service or solve key business problem
• Justify existing vendor or narrow field for RFP
• Request for proposal (RFP)
• Formal outline of companys objectives and
  needsrequests bids
• Some government entities must use RFPs
  periodically to ensure competitiveness
• AFP and BAI standard formats for computer
  analysis

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Examples of Selection Criteria

• Knowledge of Industry
• Quality of Service
• Pricing
• Financial Strength and Stability
• Ability to Customize Services
• Depth

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Issues in Relationship Management

• Creditworthiness - Financial Analysis
• Number of Relationships a business needs
• Within a single financial institution
  Amongst multiple institutions
• Negotiation and Pricing
• Documentation
• Audit and Control
• Performance Measurement Evaluation

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Number of Bank Relationships

• Multi-state or international operations
• Costs of multiple relationships
• Lead institution
• Banks relationship profitability measures result
  in lower costs for use of multiple services
• Pricing of loans
• Pricing of depository services
• Relative strengths of each bank
• Organizations credit needs

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Financial Institution Compensation

• Fees
• Compensating Balances
• Combination
• Frequency

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Bank Compensation Practices

• Regulation Q interest prohibition
• Some allow excess to be carried forward or to
  offset charges in another account
• Fee vs. balance compensation
• Company perspective
• Fees preferred when investment/debt payment can
  generate greater ROI than earnings credit (EC)
• Balance compensation allows excess balances to
  earn a return banks price loans more favorably
  not as visible on statements banks sometimes
  make balances more attractive option
• Bank perspective
• Fees preferred because deposits are a liability
  because fees are low-risk source of recurring
  funds
• Balances used to fund loans and investments at
  rates over ECR
• Difficulties in comparing costs among banks
• Bundling, variable pricing, EC, availability
  schedules

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Account Analysis

• A Statement of services a financial institution
  provides its customers specifying services
  provided, volumes and charges.
• Analysis come in many formats.
• Settled by cash payment or compensating
  balances.

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Earnings Credit

• Where
• EC Earnings Credit
• CB Actual Collected Balance
• RR Reserve Requirement
• ECR Earnings Credit Rate
• D Number of Days in the Month

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Earnings Credit

• Assume the following scenario
• Average ledger balance 225,000Deposit float
  25,000Reserve requirement 10Earnings credit
  rate 5.5Service charges for the month
  1,000Days in month 30

Average Collected Balance Calculation Average
ledger balance 225,000 Less Deposit float
(25,500) Equals Average collected
balance 200,000
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Collected Balances Required
Where CB Collected Balances Required for
Services SC Service Charges ECR Earnings
Credit Rate RR Reserve Requirement D
Number of Days in the Month
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Collected Balances Required
Assume the following scenario Monthly service
charges 8,000Earnings credit rate
4.75Reserve requirement 10Days in month
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Banks View Advanatages of Balances

• Effect of increasing deposits for the bank
• Balances can be lent
• Form a cushion in case of loan default

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Corp View Disadvantages of Balances

• ECR is lt investment rate
• Fees are tax deductible
• Fees offer tangible expense that can be
  monitored
• Fees are generally fixed and thus comparable, ECR
  floats

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Optimizing the Banking Network

• Check list
• what is banks compensation rate and how will it
  be paid, fees or balances, etc.?
• if balances, over what time period?
• multiyear agreement available with capped price
• increases?
• compare a proforma account analysis statement

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Optimizing the Banking Network

• Check list
• who is the customer service rep?
• how will float be computed?
• what performance guarantees are offered?
• penalties for customer overdrafts?

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NonBank Service Providers

• Almost half of all consumer and business loans
  held by nonbank companies
• Third-party vendors of information between banks
  and companies

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Financial System Trends

• Nationwide banking in the US
• Economic unification of Europe
• Both of these will be catalysts for an ongoing
  drift toward concentration and globalization in
  the banking industry.
• Imaging