“Keep your eyes wide open before marriage; afterwards, half shut.” While Benjamin Franklin famously spoke these words, he was never legally married. The mother of his childhood sweetheart felt his financial prospects were too poor and turned him down.
There are parallels to be drawn when it comes to relationship banking. Not least the importance of financial prospects in making a good match from both sides of the relationship.
“We all know that a bank’s balance sheet is committed at a cheap cost because it opens the door to a corporate’s ancillary business,” says Neil Garrod, director of treasury at Vodafone.
“There’s a debate to be had around whether it would be better for banks to price that balance sheet commitment more fully, and then reduce the fees on the ancillary business. Realistically, though, I don’t see that model changing any time soon,” he adds.
Joanna Bonnett, group treasurer at PageGroup, agrees that, for now at least, “banks continue to be under pressure to competitively price debt products”. For treasurers, she says, the challenge is to divide ancillary business across all lenders in a facility in order to facilitate a good working relationship.
What if one of those banking relationships isn’t exactly good any more, though? How easy is it to drop a relationship bank or switch to another – and is it advisable?
In Garrod’s view, it is sometimes best to let things remain as they are. Since bank facilities are cheap, it’s unlikely that a corporate would change relationship banks – certainly not before the facility has reached its renewal date.
“Unless your annual commitment fee was so high that it warranted a change, you’re better off leaving that bank alone and letting the arrangement run its course, even if the bank has disappointed in the service delivered to date,” he adds.
Rick Martin, group treasurer at GasLog, takes a similar view, saying that for a bank to be “placed in the penalty box by a corporate, there would need to be some very serious issues”.
The more likely scenario, says Martin, is that the relationship withers on the vine. Perhaps the bank has some balance-sheet issues, or is looking to refocus its strategy towards certain types of business, such that there is no longer a good match between need and capability.
You will need to ensure that the bank wants to be in the relationship for the long term, so that you aren’t having to switch at each refinancing
If, or when, a bank relationship does start to peter out, best practice dictates an open and honest approach. Most companies have banking relationships that have become lacklustre, says Damian Glendinning, treasurer at Lenovo, whereby they are not giving the bank enough business to cover the cost of managing the relationship, so service suffers.
Glendinning believes this is a waste for all concerned and that the fair thing to do is to limit the number of banks, so that the ones in the panel can make a decent return. After all, banks are businesses, too.
Of course, ties might not always be neatly severed, as there may be some residual trades or local cash management relationships to consider.
The key here, according to Michelle Dovey, director at MJD Treasury Solutions, is to ensure that you either move these pieces of business or work hard to maintain an ongoing, albeit much smaller, relationship with the bank.
A relationship having run its course is by no means the only driver for establishing a new bank relationship. “There are good reasons why you might choose to add a new bank to your panel, such as entering a new geography that your existing banks don’t cover, or undertaking ‘exotic’ transactions that require specialist support,” says Garrod.
Whatever the reason for choosing a new relationship bank, it is always useful to keep some guiding principles in mind during the selection process. In Dovey’s view, it is vital to decide how a new bank will fit into your existing relationship group.
This is especially important when looking to build sustainable, long-term connections. “Often,” she says, “UK-headquartered businesses will have all four clearers in their banking group, even if they do not have much UK-based ancillary business. This will just become a problem later, as I have previously discovered, with the banks all wanting the same ancillary business.”
Dovey recommends honest dialogue with a new bank as to your expectations and theirs. “There is no point bringing in a new bank that expects three bond mandates over the next three years if you expect to give them only one.
“By the same token, you will need to ensure that the bank wants to be in the relationship for the long term, so that you aren’t having to switch at each refinancing. No promises need to be given on either side, but transparency and trust need to start from day one.”
Similarly, Martin believes that during the courtship phase, it is important to go in with realistic and transparent expectations on both sides.
“For example, we are very open about the fact that we aren’t yet publicly rated, and that we’re probably not going to be publicly rated until year ‘x’, so we tell the banks up front not to expect rated debt capital markets income from us,” he comments.
Another topic that it may be useful to discuss with any potential new banking partner relatively early on is the Know Your Customer (KYC) process. “Adding new banks is always easy – or, at least, it used to be in the days before KYC.”
Martin agrees. “[While] KYC is a fact of life, it is a complete headache and it does create a barrier to entry for adding new relationship banks. There are a couple of instances where we have stopped the onboarding process because the KYC has simply been too difficult,” he adds.
Making this process less painful – obviously, while still complying with the law – would be quite helpful from a relationship perspective, Martin says.
John Salter, managing director, global corporate and financial institutions, global transaction banking at Lloyds Bank, says there are steps that can be taken to both anticipate and reduce potential hold-ups relating to KYC and documentation.
He recommends keeping corporate records, mandates and resolutions up to date, as well as identification for signatories, as this can save a lot of time when working through KYC requirements.
Another option is to get a KYC package pre-agreed with the new bank before formalising the relationship. This should help ensure there will not be delays further down the line.
It’s also important to understand how your treasury strategy, and the overall corporate strategy, matches the capabilities and strategy of any potential banking partner. If, for example, your FD and CIO are planning on centralising functions, it is vital to choose a partner that can proactively challenge and join you on that journey, whether it be ERP consolidation or IT security.
As well as ensuring the current and future needs of the company are covered in the request for proposal (RFP), a treasurer must also ensure that the project plan for switching providers is robust, says Bonnett.
This includes allowing ample time for technology testing and implementation, while challenging the business to deliver the best possible outcome.
Minimising KYC obstructions could not be more important than when switching part of the ancillary business, namely cash management, to a different provider. Being unable to open accounts would be challenging to say the least.
The hurdles of switching cash management banks don’t stop there, however, as many corporates found out when RBS announced in 2015 that it was going to exit its European cash management business – leaving thousands of treasurers to switch banks on an extremely tight timeline.
One major challenge when switching cash management banks, especially in haste, is that these relationships are often far reaching and complex, touching many parts of the organisation beyond treasury. “Understanding the downstream implications of changing these set-ups is key to minimising disruption and getting it right first time,” says Salter.
Dovey also highlights the need to consider the impact beyond treasury. If the business is paid directly by its customer, then the switch needs to be managed so that that customer isn’t lost due to unwanted change, she says.
What’s more, funds can also go astray, taking credit control departments time to try and locate them. “Further challenges are in internal systems, which will generally lie on the shoulders of the purchase ledger departments,” she says.
On the topic of systems, building new connectivity channels, ERP changes and development of file formats can be time-consuming, costly and will likely require specialist resources, Salter says.
IT development budgets are often fiercely contested, and being able to sell the value benefits of changing from an existing, working practice to a new one can be a challenge in any organisation, he goes on.
Indeed, getting internal buy-in from many departments can make these projects tough to manage from a group treasury perspective. Furthermore, “the risk of non-performance by the new bank can also leave you vulnerable for strong internal criticism, something that I don’t think banks always appreciate”, says Dovey.
So, how can treasurers go about picking the right cash management provider and minimise these risks? A well-structured RFP that starts with the fundamentals and works up to the bells and whistles is key.
“As obvious as it might sound, if you are looking to change your cash management provider, you absolutely need to know which services and products you use today and the ones you will need to add in the future,” says Bonnett.
A final piece of advice for successfully switching banks is to speak candidly, across the business, about the drivers and possible outcomes. “I think the pitfalls are best avoided by the work that you do aligning your group treasury department with the rest of the business,” says Dovey.
It is important to know all the key departments within the company, communicate with banks regularly on why you are changing, get them involved with the decision-making process and have them meet the bank.
Treasurers, she says, also need to be transparent with the rest of the business on what could go wrong (since no bank is perfect), and outline how any potential hiccups can be mitigated or dealt with as and when they arise.
In summary, when it comes to switching cash management banks, or adding a new relationship bank, forewarned is very much forearmed. And perhaps, most importantly, as Franklin also once said, “honesty is the best policy”.
Eleanor Hill is a freelance corporate treasury writer.
This article was taken from the Jul/Aug 2017 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership