Bank Relationship Management: Quantify It!

by Hugo van Wijk, CEO, Vallstein, and Robert Dekker, Senior Manager KPMG, The Netherlands

An active approach to bank relationship management can have positive effects on a modern firm. With the right actions and approach buyers and sellers of financial products will benefit.

Bank relationship management (BRM) is nowadays regularly named in the top three priorities of CFOs and treasurers alike, along with liquidity decision support and risk management. That is no surprise. Since the financial crisis started, the importance of the financial function within companies has gained further priority – and visibility. This in turn mandates the ability to demonstrate, internally and externally, that one indeed has management control over the bank relationships. That BRM has gained such prominence is explained easily enough if one takes into consideration that financial supervisors and regulators themselves have openly admitted that they “cannot see everything” and that market participants need to take their own responsibilities as well. There is a real supplier risk in the procurement and continued availability of financial products and services that needs to be managed, contrary to prior to the crisis when it was simply assumed any bank would simply always be open for business. ’Risk’ in the bank-client relationship was understood to be unilateral: the bank taking a credit risk on the company. That relationship has now become more balanced. Banks understand the important business value clients represent for them. Clients want to understand and manage the risk from interruption in relationships with their banks because they may not always be able to provide the products and services that the client needs.

We’re conscious of that the fact that Basel III is being implemented, albeit with sometimes apparently local flavours from country to country. The fact that banks need to strengthen the size and quality of their capital buffers has caused a lot of attention to be given to finding alternatives for banks, at least in product areas such as financing. Such solutions can involve capital or money market debt, private placements and peer-to-peer funding. For banks, the advantage could be less usage of their balance sheets whilst earning arrangement fees, thus boosting returns. For companies, it could bring diversification in funding. However, the requirement for increased financial disclosure usually does not sit well with non-public firms, and size and flexibility requirements also pose relevant constraints. And markets can be as unpredictable as financial institutions, necessitating the need for back-stops. Also, past banking crises have often provided only temporary distortions in bank funding.

In all, we are in no doubt, therefore, that banks will continue to be relevant and necessary providers of funding, alongside their role as providers of all the other financial products and services that are essential in the day-to-day operation of any company. Banks will continue to be key suppliers, and thus involve strategic relationships that should be managed in the best way possible.

The latest financial crisis has provided an incentive for a further step on the path of ever-increasing size and complexity in bank regulation, just as Herstatt led to Basel I, and the emerging market crisis in 1998 contributed to Basel II. This increased complexity means that financial management has to improve its own knowledge and tooling in order to be able to maintain (or achieve) level playing field discussions and negotiations with the banks. This knowledge is required not just to assess how the (new) regulation is of relevance, but also whether it is of relevance in a specific individual client relationship in the first place.

In summary, this is what BRM in 2013 and beyond is all about: you will continue to need banks as key suppliers so you will need to know how to deal with them, but dealing with them becomes steadily more complex.

BRM is defined as analysis of the bank relationships, applying the insights from this analysis in the procurement of the right product from the right banks under the right conditions, and ensuring a monitoring process is in place to provide for on-going and pro-active management.

Let´s dissect this bit by bit:

• Analysis: before you can decide in which direction you need to go, you need to know where you are right now. But what does this analysis involve? An extensive overview of fee conditions per bank? Insight into bank charges per year? An overview of credit facilities per bank plus volume data on side business in products like cash management? Getting a BRM analysis correct, involves more, but sometimes also less, than meets the eye. A ninety per cent correct reconciliation of bank charges is indeed relevant for accounting and control objectives but could sometimes be overdone for a good banking landscape assessment. Likewise, applying RAROC calculations without relevant corrections can result in over-engineering an analysis while bringing an end result that does not really allow like-for-like application across all banks. Having the right focus and a sound approach will bring the right result in a BRM analysis. Sometimes less can indeed be more. With a technique called WalletSizing® one quickly achieves the required transparency across all bank relationships, in one uniform method of calculation that allows comparison across all banks, irrespective of their internal cost levels, and only taking those bank revenue areas into account that are truly attributable to the client relationship. Furthermore this approach will also help in taking only the relevant areas of Basel II and III regulation into account and its impact on the client is assessed correctly. Basel has costs, but as the Basel Committee itself pointed out, there are three places where those costs can be placed: client, the bank’s own operating costs, and shareholders.
  
  
• Once the initial analysis of the banking landscape is complete, relevant benchmarks will guide the insight into possible optimisation opportunities and how the bank relationships could best organised. This usually involves strategic considerations as well as pragmatic execution.
  
  
• Strategic considerations centre around the optimum number of banks given total banking requirements, geographical scope, risk management considerations and what kind of banks (global, regional, local etc) and how to identify the appropriate product solutions given the banking requirements.
  
  
• Pragmatic execution deals with tasks like determining the right share of Wallet mix (cross-buying), determining the appropriate approach (relationship reviews, an RFP, existing banks, new banks?).
  
  
• Having on-going monitoring and a regular review process in place helps to facilitate internal reporting and demonstrate on-going compliance with the banking strategy, as well as ensuring that the bank is provided with sufficient assurance that the agreed Share of Wallet objectives are being observed.

So what is needed to do it effectively (well) and efficiently (fast)? The choice is either to make or to buy. ’Making’ your own BRM could be re-inventing the wheel, while still not being sure you are getting it right. It is certainly not fast (you will have to read a good deal on and about Basel I, II and III and you can’t yourself carry out cross-pollination market benchmarks etc). The alternative is to buy it off the shelf. In the next section we will give an idea of how our mutual approach works. We will also answer the question: how will BRM contribute towards turning an ordinary company into a modern firm? [[[PAGE]]]

A phased approach

KPMG and Vallstein have developed an approach to applying BRM. The method is based on broad expertise; cross-links can be explained and specialised knowledge built in is an art in itself.

Figure 1 summarises the phased approach we are using. It consists of three main phases: Foundation, Building the knowledge base & Transforming knowledge into business value.

Phase A: Foundation

In Phase A, we add knowledge to the modern firm in three steps.

Step 1

Banks assess the relationships with their customers on an aggregate level. The core of the argument is therefore how much capital the bank is willing to hold on its own balance sheet to provide the customer with products. Of course there must be a certain benefit for the bank in return. The questions that will arise include:

• How can you as treasurer/CFO know how much ‘capital requirement’ your business caused for the banks?
• What (changing) rules should I use to calculate that, and also what not?
• What kind of return for the bank is competitive or acceptable?
• Do or should all banks have the same returns? and
• How are these returns achieved, what products are involved, what products are of interest to the bank and which yields of products can I attribute to the bank?

To create a level playing field with the banks the right approach is crucial. Through the combination of insight and current developments, the treasurer / CFO gets a stronger bargaining position based entirely on substantive arguments.

Step 2

How can you tell the wood from the trees if all the information from banks is increasingly presented as ‘facts’? What is already regulated and in effect and what is still at the draft/proposal stage? What rules affect the banks and in which products is that relevant for you? The focus is first of all on the ‘banking needs’ of the modern firm and what implications these may have in terms of possible associated product solutions. On this basis you can then decide how these characteristics can be applied to optimise overall rates and conditions.

Step 3

The result is that the modern firm is in control of its banking relationships by strengthening its information stream regarding the banks and making discussions with the banks transparent. Based on this knowledge of their own Wallet and the improved understanding of the effects of Basel , the modern firm is well prepared to sit at the table with the banks. The modern firm can assess the relevant proposals of the bank and is able to add value themselves by bringing in new opportunities and perspectives to the discussion. Almost always this leads to a significant improvement in the rates and conditions, which means cost savings, while at the same time ensuring a fair Share of Wallet at a reasonable return for the banks.

The banks’ proposals can be readily assessed in terms of the overall impact on the Wallet, allowing rapid and objective comparison.[[[PAGE]]]

Phase B: Building the knowledge base

In Phase B the needs of the modern firm are analysed, with regard to banking relationships, through the eyes of the banks, and plotted quantitatively in a WalletSizing® analysis.

We also establish a training programme to make BRM an integrated part of the modern firm. The desire of a modern firm is to take into account the following objectives to be achieved during the training programme.

1. Knowledge Based Objectives

• Update and increase the knowledge of BRM subjects which are relevant for the treasurer/CFO;
• Discuss the most recent developments in the knowledge areas; and
• Get a better understanding of the relationships between those subjects and the roles banks can fulfill.

2. Competence Based Objectives

• Being able to understand and discover the requirements of the modern firm, in particular in the domain of the corporate treasurer;
• Being able to relate to the banks’ products or solutions with these requirements; and
• Improve specific consultative procurement techniques to become the banks’ ’trusted’ counterparty.

3. Behaviour Based Objectives

• Being able to develop a bank relationship based on ratio: quantify it!
• Truly share the ambition to become a cost leader in BRM; and
• Display a pro-active and trustful attitude towards bankers.

Phase C: Transforming knowledge into business

After obtaining insight and knowledge in Phases A and B, in Phase C we achieve the optimisation potential of bank relationship management and apply the insight and intelligence of the WalletSizing ® analysis. This analysis is part of the business case (where there are opportunities for improvement), including advice on negotiating with the banks. This advice includes the actual improvement regarding products, fees and conditions on a cross-buying basis, the associated revenue value for the banks and the qualitative and quantitative arguments with which this is achieved. Attention must also be paid to the negotiating approach (consultative procurement).

Through our extensive benchmark database, knowledge of Basel and experience with complex procurement and negotiation processes, we can use our expertise in a very effective way: the modern firm is optimally prepared for negotiation with the banks.

Conclusion

In this article we have explained the relevance of bank relationship management and the fact that this market will become more and more professional with quantitative WalletSizing® methodologies.

We have provided insight into the development of the bank relationship management market. Our final conclusion is that it will become as common and professionally accepted as for instance having a good functioning Customer Relationship Management system in place.