The long-run war for bank supremacy will be fought in many theaters. One of the largest battlefields will be on the pitch of treasury management with many banks in a geographical and customer segment area striving to capture that lucrative corporate customer. Banks going after medical professionals or homeowner associations, for example, already face intense competition. Competition is growing for other highly profitable customers such as hotels, car dealers, distribution companies, insurance companies and manufacturers. The problem is banks can often be myopic in their approach focusing on products more than solutions. In this post, we provide the context and some of our ideas on how community banks can design themselves to be more competitive in the future.
For starters, the average corporate treasurer or controller is overwhelmed with a patchwork of spreadsheets, third-party applications and bank products to manage their cash position. These positions handle multiple bank accounts, accounts payable, accounts receivable, cash forecasting, investments, financing and compliance. For many companies, treasury management also includes international services such as foreign exchange, letters of credit and trade management. Add to that the increasing complexity of business systems such as accounting combined with the additional regulatory burden that many industries face and you end up with the conclusion that there is still significant pain that banks can help reduce.
Banks are in the ideal position to help solve many of the above pain points. Currently, only the top 25 banks offer a suitable solution but as we layout below, there is no reason why a community bank can’t offer the same solutions as banks like Bank of America, Citibank, JP Morgan Chase and Wells Fargo. These are banks that we consider the best in this area (in that order) and who we use to track and benchmark against.
Step one is to invest in your treasury management platform in order to stay relevant. International services, accounts payable management, accounts receivable management, lockbox, payroll, corporate credit card and business-to-business payment options are capabilities that every commercial bank should either have or have plans to have.
Get A Partnership
The parallel step is to partner with a treasury management solution or enterprise resource planning (ERP) solution. SAP, Microsoft, Oracle, NetSuite, SunGard, Ariba, Kyriba and several others have been popular with banks. This is very similar to the tactic that the larger banks mentioned above executed and the incremental cost basis between a large bank and a community bank isn’t that much different. While a community bank will not have exactly the same economics as our nation’s largest banks, the difference is relatively slight when compared to the overall profitability of gaining a lucrative commercial customer that typically has a 300% or better return on equity due to balances, balance performance and fees.
Community banks can size their partnership to the size of their desired commercial customer. Large small businesses and mid-sized businesses can use one solution while banks in the $5B or greater range can partner with a larger provider such as Oracle with more capabilities.
Having a single cloud provider allows a bank to integrate and offer a comprehensive solution on either a co-branded or white label basis. Having a variety of modules or tools on the same platform allows for a single integration point for the corporate customer and allows them to utilize only the capabilities that they need. This not only makes treasury management immensely simpler but aids in corporate activities such as liquidity forecasting, budgeting, and capital planning. With fewer gaps between systems, errors get reduce as does cyber security risk. All this adds up for a safer and more profitable customer while putting banks in the middle of the solution.
The use of international services and having a customer of above average profitability is more than 60% correlated by our estimation and it has become a focus at our bank. We look for customers that either import materials from overseas, manufacturer overseas or export their finished goods overseas. These businesses almost all need a foreign exchange solution and unfortunately, in 51% of the cases we have found go right to large banks for the sole reason that they believe “community banks do not offer the products that they need to manage their international needs.”
This is a combination of a product offering problem and/or a marketing issue for community banks. CenterState Bank is just one of many providers that make their international services available to all community banks for very little upfront cost so there is little excuse to not add this service to your treasury management platform. As can be seen by the Deloitte study below, commercial treasurers have challenges that banks can easily solve by offering an international solution.
We have already written extensively regarding different payment strategies for community banks (HERE, for example) so we will skip over this section but banks have tremendous opportunity offering a comprehensive payment solution to their business customers either separately or as part of a larger treasury management solution.
A common shortfall in community bank treasury management sales is the lack of coordination with credit. Banks, no matter how small, often tend to operate in silos. Businesses, on the other hand, are looking for a comprehensive solution in treasury management that often includes credit extension. Lines of credit, receivable financing, supply chain finance and letters of credit are often needed and should all be included in marketing materials and solution positioning whenever possible.
Risk Management and Compliance
Probably the most overlooked area where banks have deep expertise but often fail to bring it to bear is in the area of providing leadership with compliance and risk management. Every treasury solution should demonstrate some mastery and appreciation for risk management and compliance. Banks can play a huge role in helping a company understand and manage counterparty risk, for instance. Know Your Customer (KYC) and Anti Money Laundering (AML) regulation are second nature to banks and often needed by commercial customers as well.
Credit underwriting is yet another skill that banks have expertise in that could be exported to commercial companies. For one corporation, we were able to help with a scorecard and pull credit reports on their counterparties to facilitate their credit counterparty risk management. It was simple from an underwriting standpoint but created a significant impression and value.
Banks should play up their skills in this area and bring technology and services to the table to further win commercial customers.
Investor Owned Commercial Real Estate Coordination
Finally, a famous tactic we learned from one competing bank is negotiating the ability to offer discounted treasury management products to tenants within a commercial development. Retail centers, medical office buildings, and industrial parks are all prime candidates to bring banking kiosks, ATMs, cash recycling machines, cash vaults or other treasury management services right on premise. This is particularly true for new construction where tenants may be moving away from the service area of their primary bank or just starting up. If nothing else, leveraging armored courier runs to a property and provide discounted economics to many corporate customers may be enough to allow tenants to switch banks to yours.
Putting This Into Action
Opportunities abound in treasury management and with design, community banks can architect themselves to be formidable competitors. Given that it is long-term planning season, banks should consider devoting more resources to this profitable and strategically important area. This area is particularly important for banks that need to grow inexpensive deposits in the future. This is too important of a battle to sit out and banks must strive to remain relevant or risk being replaced by more astute banks or worst, by fintech companies.
Submitted by Chris Nichols on September 27, 2016