by Tamir Shafer, Managing Director, Treasury and Banking Services
Changing banks is painful. You know it and so does your bank. In fact, they count on it. But every relationship has its breaking point. Recent trends suggest that yours may be closer than you think.
In Economics 101, we learn about supply and demand, elasticity, and diminishing marginal utility. We also learn about the ease (or difficulty) with which one ‘product’ can be replaced with a similar ‘product’. This consumer decision is called ‘substitutability’, and the economics behind it drive decision making by all consumers.
Think Pepsi vs. Coke and imagine this scenario: you are a fanatical Pepsi drinker, its 95 degrees Fahrenheit (35 degrees Celsius) and you are at an outdoor mall. You are very thirsty, and a cold can of Pepsi is the cure to quench your thirst. In front of you are only two vending machines: Coke and Pepsi. If the price of a can of Pepsi was $0.25 more than Coke, which brand would you buy? Probably the Pepsi. What if it were $1 more? Or $5 more? At what price-point does Coke become a substitute for Pepsi? We’ll get back to this in a minute.
When it comes to banks, it is an understatement to say it has been a difficult few years. On top of severe market force headwinds over the last 24 months, the government has enacted continual regulation during this timeframe; most of which are meant to protect consumers. These regulations also pose fee constrictors to the banks, and hence, banks have to find creative ways to mitigate the impact of these regulations.
For example, with the advent of the Credit Card Act of 2010, many banks have been forced, by law, to reduce or eliminate some of their ‘bread & butter’ credit card fees, including:
- No rate increase during the first year a customer has a credit card
- Limitations on how large a credit card overdraft fee can be
Due to this, many banks are being pressed hard by their shareholders to find other ways to keep their margin intact. They are developing creative methods that are becoming hard for individuals and corporations alike to keep track of and manage. More than at any time in the recent past, banks are increasing many of their fees by 10%, 50%, and sometimes by 100’s of percent. In one egregious and recent development, there has been media frenzy as a few banks have raised ATM fees to $5 per transaction.
Among the many reasons, banks feel they can increase fees because their clients are loyal. Historically, this loyalty was based on long-standing inter-personal relationships. Treasurers and CFOs now claim that these same banks have become impersonal, and this has led to fading client loyalty. Couple this lack of interaction with the now defunct belief that that ‘Big is Better’ when it comes to banks, and you begin to understand the changing landscape. When it comes to bank size and balance sheet, Dodd-Frank regulations have leveled much of the playing field. For example, all checking account (DDA) balances are now guaranteed fully by the FDIC to an unlimited dollar amount, irrespective of which bank this money is in (*provided the checking account is not earning hard dollar interest). Bigger banks are certainly feeling the pressure.
At a corporate level, especially for companies with complex entity arrangements, monthly fees can easily run into the tens of thousands of dollars. Even a small increase in fees hits these companies hard. A seemingly insignificant 10% fee increase on only a few transaction types also stretches the limits of client loyalty, provided clients are aware of their fee structure and the monthly variability of these fees. Clients have been forced to go on the defense, trying to figure out why their fees have skyrocketed:
- Is my bank providing new services?
- Did the bank just hike up their charges across the board?
- What is this transaction type or that transaction type?
And it begs the question, like the soda scenario above:
At what point does your bank become substitutable?
The Best Defense Is A Good Offense
Due to the aforementioned Dodd-Frank legislation, bigger banks are scrambling to redefine their differential benefit. It used to be that their huge balance sheet was the differentiating factor for their clients. Corporate clients would leverage this by utilizing enormous credit lines from their banks. The monthly bank fees they were paying, if they were paying anything, were a small pittance in order to have active access to credit. Plus, in higher interest rate environments of the recent past, earnings credits were substantially exceeding fees, so customers were not charged anything out of pocket. They didn’t feel the pain so bank fees were not a concern.
Times have started to change. As clients are paying out of pocket for fees, a new awareness is taking hold. They are looking more closely at their current banking relationships and they are starting to understand the impact of these new federal regulations. Clients now find that the old arguments are no longer valid. Smaller regional and boutique banks have become more appetizing by offering reduced fees, improved yield, and better customer service, easily replacing the big balance sheet and credit lines that were once so critical.
Not only do corporations have to recognize bank fees as an expense line item, banks often circumvent the entire Accounts Payable process. Whereas most vendors have to submit a bill or invoice to a company’s AP department to be paid, banks auto-debit a client’s account for whatever fees they feel like charging each month. Now that is a business model anyone would love, except if you are the client of course.
To make matters worse, many clients are not even provided with an account analysis from their bank that details their volumes, transactions, fees, and yield on their long balances. Are you receiving a detailed monthly statement analysis? Ask for it if you are not. If the bank refuses to provide monthly statements or account analyses, that should be a huge red flag.
Monthly statements or analyses provide some level of transactional volume and detail. Depending on the bank, there can be 50, 100, or even 200 different transaction types that a bank reflects on these statements. The fragmentation of fees and transaction types has become incredibly elaborate and convoluted.
Banks have become adept at confusing clients with so many different fees and non-obvious nomenclature, that many Treasurers and Cash Management departments are lost. The best they can do is to perform a reasonability check between this month’s and last month’s analysis. If current earnings credits generated and total bank spend is in the ballpark of last month’s, they put the statement it in the folder and forget about it. No detailed review or analysis is conducted.
The mind-set is changing. Commercial clients are no longer merely accepting the fees their banks are charging, and they have begun en masse implementing some type of detailed review beyond just a reasonability check. They are becoming more vigilant:
- What is our earnings credit rate?
- Is one bank providing a better rate vs. another?
- Am I being double-charged?
- Have new fees been passed through to us without us confirming them?
- Have any individual fees changed significantly?
With a little extra effort and some expertise, commercial clients can get to the bottom of their total bank spend and begin calling out their banks on unfair charges, questionable fee practices, and inadequate yield.
Get The Whole Pie, Not Just A Piece
It costs a service provider a lot more to keep a current client than to obtain a new one. Banks know this more than any other. They are masters at playing a psychological game with their clients, offering them ‘a piece of pie’ in the form of manufactured benefits or ‘no bank fees’ and thereby convincing their client that they are more special than other clients. The piece of pie tastes good enough for most and they leave it at that. The truth is, most corporate clients are in no position to understand what the whole pie looks like, no less how to get it. What prevents Treasurers, CFOs, and Cash Managers from doing this is a lack of expertise around bank fees and more importantly, yield potential. Commercial clients have no way to know what their peer companies are being charged for similar transactions and what they are earning on long balances at the same bank. They have even less awareness of the fee and yield structure potential with other banks.
How do you measure up versus your peer companies in terms of your bank spend and yield? Do you know? What would it take for you to make a move? Thousands of dollars? Hundreds of thousands? Millions? Your breaking point is in there somewhere.
One thing is for sure, simply asking your bank for fee and yield improvements won’t get you very far. You have to take it from them.
The first step toward getting the whole pie that is deserved is knowing what your banks don’t want you to know. The bad news is that most companies don’t have resources qualified enough to reveal these upside opportunities. The good news is that there are firms that can help you do this. However you proceed, taking action today could result in some very substantial gains tomorrow.
It’s up to you. It’s YOUR money in the bank’s pockets — or it could be in your own.