It Takes Two to Tango

Optimising Bank Fee Negotiations

Not every corporate treasurer will question the fees being charged by their banks. But for Dino Nicolaides, Managing Director, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory, working on right-pricing services should be part of the job description. He explains why, and how.

If there are savings to be made, treasurers will often be drawn into action. However, having worked over the years with many organisations that have failed to properly renegotiate their bank fees, some leaving them unattended for a decade or more, Nicolaides declares this as a duty calling out for more attention.

The key to apparent treasury reticence may, in part, lie in the lack of urgency underpinning this mission. “Bank fees, FX fees, and yield on credit balances, for instance, are rarely KPIs for treasurers,” he explains. “So, beyond the occasional casual conversation with their banks asking them to try to do something a little better, bank fee renegotiation is not usually given the consideration it deserves.”

Indeed, Nicolaides reports that a number of corporate treasurers believe that their strong bank relationships mean that no renegotiation is ever necessary. “In my view, this is a myth.” He explains that a corporate that renegotiated and agreed fees with its banks five years ago did so on the basis that the agreed pricing grids reflected the volumes and activities at the time of negotiation. “But bank fees are always a function of volumes: if you transact X, you get a price Y. If you transact double X, you get a price significantly lower to Y. That in essence is how it works.”

As most commercial organisations are dynamic, if they have not renegotiated in five years, it’s highly likely where volumes have risen significantly, that they are not on the right pricing grid, suggests Nicolaides. “By failing to respond, they are possibly submitting to unfairly high prices, while also facing average annual price inflations of about 5%. Simply, many corporates are overpaying.”

Response required

But it’s not just a matter of renegotiating the pricing grid to secure the right level of fees: companies also need to regularly review the bank services they have contracted into. As a business evolves, the services needed will probably change, with some existing services possibly becoming redundant. Paying for unused services is clearly a waste of money. “It’s important to look from time to time at all the services that the company is paying for, and explore how, as the business evolves, those services should be adapted to the new reality of the organisation,” advises Nicolaides.

Another area of suggested exploration is that of FX transactions, and in particular quoted exchange rates. “Every time a corporate makes an FX transaction, an arbitrary bank margin is applied. Online multi-bank dealing platforms do not guarantee optimal FX margins, so it may be worth renegotiating these margins with your bank directly, and fixing them, by pairing or tenor for example, in order to achieve better pricing.”

One further aspect that should be investigated is yield on credit balances. “In a period of falling interest rates, banks rapidly adjust credit interest downwards,” notes Nicolaides. “However, during periods of rising interest rates, the bank response is often a lot slower – unless the corporate engages in renegotiation.”

Reinforcing relationships

Engaging in bank fee conversations every three to five years may already be part of treasury policy. Where it is not policy, Nicolaides cautions against trying to renegotiate while a pricing agreement is running its course. The reason is simple: unless there has been a significant change to the level of business within that negotiated period (for example, a major M&A or overseas expansion significantly increasing share of wallet) pushing early for lower fees may signal to the bank that it is dealing with “a painful client”, which could destroy any goodwill built within that relationship.

However, outside of that period, asking for a fair pricing review is perfectly reasonable. “It’s a common myth among corporates that requesting a fee review with a bank at any time will cast a shadow on that relationship,” states Nicolaides. On the contrary, he believes doing so “reinforces the connection”.

A bank that has developed a strong relationship with a client over a number of years would have no incentive to overcharge because doing so would harm established trust and credibility, he explains. “Over the years, numerous global banks have told me they support regular checks that clients are paying fair market rates, based on up-to-date volumes, and that a review or renegotiation is always aligned with the long-term strategy and interests of the bank. It’s why most banks will listen and respond reasonably to fair treasury challenges on fees.”

Benchmarking fairness

Some bank relationship managers will, of course, proactively offer account reviews for their clients. However, notes Nicolaides, these reviews tend to be piecemeal – by function – rather than an all-encompassing, and therefore optimal, holistic review of account service fees.

Of course, he continues, the pursuit of fairness means it’s important to negotiate fees on the basis of what the market is offering similar clients – those in the same or comparable industries and sectors, with similar volumes of business. But there is a slight issue here for banks. Although most are usually willing to review their pricing, Nicolaides observes that in many cases, banks do not have full visibility of market benchmarks in order to achieve the right answers.

“Their own account data will give them one perspective on current market pricing, viewed through the lens of their own processes, policies, KPIs, and profitability standards. But if a corporate has access to wider market benchmark data, it will be empowered when it comes to negotiation,” he explains.

The opposite, he warns, is such that corporates negotiating fees in isolation typically achieve savings that are “significantly lower than if they had engaged an external adviser [such as Redbridge] with access to a comprehensive benchmark on fair market rates driven by volumes”.

Recognising friends

It’s worth reiterating the point that timing of renegotiation should be driven by the countdown of existing contracts, unless there has been a significant change in circumstances. Outside such a development, the three- to five-year cycle should be a sufficient guide for most corporates.

Negotiation then applies across the board, covering pricing grids for cash management fees, FX margins, interest on credit balances and so on. The aim should not only be to ensure right pricing for the business as it stands today but also to offload redundant services and ensure additional service requirements are being priced fairly.

“Within that three- to five-year period, it should also be acknowledged that where certain banks have been notably supportive, it typically means they are serious about building and reinforcing that relationship,” comments Nicolaides. Where that is the feeling, he suggests that renegotiation may be made more effective if more ancillary business is reallocated to those banks. In addition to potential economies of scale, he notes that increasing share of wallet “helps build an even stronger foundation for the future relationship”.

Similarly, if during that period there has been an acquisition, and the acquired business has been using a bank that is not on the new ownership’s panel, it can be an appropriate means of rewarding a favoured bank by giving it the contract for some or all of the acquired business’ banking needs. 

Data driven discussions

Negotiations usually benefit from the presentation of key facts. “This means there is some homework that the corporate needs to do,” asserts Nicolaides. Indeed, to make the best headway in bank fee negotiation, he says treasurers will need to have a detailed analysis of their fees paid, considering the whole of the business, because certain aspects might not be visible by an individual bank where the company is using different banks. It is also desirable to have data covering at least the previous 12 months of business, to ensure any seasonality is covered.

By determining where and how wallet share is being distributed, in addition to helping the company define the number of banking partners it needs, when guided by objective benchmarking of pricing points across various banks and regions, treasury will be able to allocate its total wallet with more efficacy. This increases the potential for improved pricing where volumes can be consolidated.

However, the data that treasury can use may be somewhat confused by the banking codes used across the world. In 1986, the Association for Financial Professionals (AFP) in the US defined and created a list of bank fee codes for every service that a bank can offer. But it has two code sets: the US code, and the global code.

In the US, banks are obliged by law to provide billing data under the US code, explains Nicolaides. This makes it relatively easy to acquire the information. The same cannot be said for the rest of the world where the capability to provide bank fee data in the industry standard format is at the discretion of the individual bank.

“What we find is that even among global banks, capabilities vary, as indeed they do between regions. So, in one instance the information may be easily accessible, yet in another the industry standard detailed reporting framework is nowhere to be seen.”

Despite the obvious challenge this presents in terms of collation and comparison, all banks, in all regions, should be able to provide billing data to their clients, even if in some cases the depth is lacking, perhaps due to a lack of investment in technology, which in itself may be a red flag for some treasurers.

Because gathering and analysing bank fee data can be an onerous task, Nicolaides reveals that Redbridge has built a web-based software solution, HawkeyeBSB, to help corporates monitor their bank fees globally.

It should be pointed out that Redbridge was instrumental in helping the AFP develop its US and global codes. This means that all the mapping is available to help consolidate both sets; where different descriptors are used for the same product or service, they can be easily matched, “enabling apples to be compared with apples”.

For the longer term

Any treasurer keen to bring bank fee billing into line will need to start somewhere. While the data challenge persists, it is encouraging that behind-the-scenes work – including the annually updated AFP code sets and the development of tools such as HawkeyeBSB – is helping to facilitate this important but often neglected area.

However it is achieved, the goal should not be to try to secure the lowest possible prices for every service, cautions Nicolaides: the process should be tackled with realism and sensitivity, and be based on facts. “It’s why I strongly believe that negotiations should aim for market rates, not below them,” he states. “The main objective of this exercise is to improve the relationship. Banks are strategic partners to corporates, and both parties should be seeking to build for the longer-term, not score quick wins over each other.”

Indeed, if the bank is overcharging, it will harm the relationship in the eyes of the corporate. If the corporate pushes the bank too hard, the bank will take a dim view of its client. As Nicolaides says: “It takes two to tango”.