Written by Karen M. Kroll
This article first appeared in the June 2008 issue of Business Finance
Clearly, the mortgage meltdown and the credit crunch it has helped to create are transforming the ways in which banks and their corporate clients work together. Most notably, of course, many loans are more expensive and harder to come by.
At the same time, however, longer-term and broader shifts, including globalization and advancing technology, also are prompting changes in the bank-corporate relationship. For instance, about one-seventh of midmarket companies now operate internationally, says Suzanne Hurt vice president of banking and financial services with Bottomline Technologies, Portsmouth, N.H. “Globalization is going down-market,” she says.
As a result, banks are boosting their product offerings geared to global business, such as multicurrency accounts, says Jose Mantilla, national sales director for global treasury management with Key Bank, Cleveland.
Moreover, globalization intensifies many companies' need to rationalize bank accounts. (This is in contrast to the credit crunch, which is prompting treasurers to hold on to banking relationships to ensure that they have funding.) The need to right-size their banking structure is most acute for firms that expanded via mergers and acquisitions and have accumulated an unwieldy number of relationships, notes Peter Cunningham, director of treasury sales for Europe, the Middle East, and Asia with Citi.
However, any reduction in bank relationships requires thinking through the ramifications. For example, moving to a local bank in another part of the world may reduce transaction costs. However, if that bank lacks sophisticated reporting tools or imposes settlement times that restrict the operating window available to treasury, the net impact might be negative. You don't want to “be blind to the fact that rationalizing costs here may drive up costs elsewhere,” Cunningham notes.
One of the most significant effects of globalization concerns the technology that banks and companies use to interact with each other. The greater the number of banking relationships, the more communication standards that many companies must use. This adds complexity to their processes.
The model for corporate access to multiple banks that's available through the Society for Worldwide Interbank Financial Telecommunication (SWIFT), called SCORE, for Standardized CORporate Environment, is an effort to help companies move from bilateral electronic relationships with each bank to instant access to all banks, says Cunningham. Currently, 224 financial institutions and 40 corporations are part of the initiative.
SCORE helps to reduce the complexity inherent in maintaining multiple banking relationships, although challenges remain. “While there are a lot of standards (with SWIFT), each bank interprets them differently,” says Elizabeth Eriksen, assistant vice president of accounting with Raymond James, St. Petersburg, Fla. Even within standard file formats, some fields are freeform or optional, so banks can choose different characters to populate them.
In addition, banks use different methods of transmitting data. Some push the data to their clients, while others require clients to go to an online site and pull the data, Eriksen says. Similarly, some banks' GUIs are easy to navigate; others are more cumbersome. To work with disparate systems, Raymond James uses a solution from Bottomline that enables it to operate in a standard way across bank platforms. “We want a technology that's bank-agnostic,” she notes.
Some companies with multiple banking partners have an integration application for each. “The integrations are custom-built, brittle, and costly,” costing upward of $25,000 due to the custom coding required, says Jim D'Addario, director of the financial solutions marketing group with SAP. “In the U.S., there's a lot of electronic connectivity, but it's not standard.” Last year, SAP released several applications that allow companies to combine multiple banking interfaces into a single solution.
As more companies cross borders to do business, they've also become more vocal in their demands for standardization. “There's more democratization of bank-corporate communication,” says John Snyder, director of business development with Chesapeake System Solutions, Owings Mills, M.D. However, some banks are leery of moving away from the proprietary interfaces that can tie a company to the bank. To continue to add value and maintain relationships, banks increasingly are offering services in areas like accounting or treasury operations, which fall outside the traditional lending or cash management relationship, says Snyder.
Lisa Broom, CTP, is principal cash management consultant with Xcel Energy Inc., in Minneapolis. Last fall, Broom and her colleagues implemented a system that allows them to convert customers' payments to electronic transmissions, drastically reducing the need to process paper checks. As a result, Xcel's banking fees dropped by six figures. The company's banker has been upfront about the need to try to make up that revenue. “Like any company, they have goals and want to increase their revenue base,” Broom says. “It's a very fee-based business.”
Some companies can use their bank to supplement the accounting staff. This is the case with the University of Colorado system. The university maintains 40-plus bank accounts, all with one bank. “We use them for accounting controls,” says Joseph Tinucci, the Denver-based assistant treasurer. Each of the system's three campuses has its own settlement account. Money flows from the bank to the account, where campus personnel, rather than treasury staff, can post the funds to the appropriate department. While many treasury functions are centralized, the treasury staff isn't large enough to handle all of the accounting for each campus's departments.
To streamline the accounting, funds go directly to an account that's dedicated to a distinct project or department. For instance, federal regulations require that money and expenses for all research projects be separately tracked. So, each research project has its own bank account. Campus personnel further allocate funds to subledger accounts.
Tinucci acknowledges that there's a cost involved in managing the number of accounts; he estimates that he spends about 20 percent of his time on banking relationships. However, it's more cost-effective — and politically more palatable — than hiring additional staff.
In fact, the average number of bank accounts maintained by an organization varies from about 22 among government agencies to more than 1,700 for retailers, according to The TreaSolution 2008 Treasury Survey. Because manually overseeing numerous bank accounts is time-consuming and expensive, not to mention error-prone — it's not unusual to find former employees listed as signers on accounts years after they've left a firm — some companies are turning to bank relationship management technology. About one-third of respondents to the TreaSolution survey have a bank relationship module. Nearly all (87 percent) monitor bank fees, with about two-thirds keeping tabs on a monthly basis. However, 83 percent use spreadsheets for this task.
While spreadsheets are workable, they can get unwieldy. An application specifically focused on managing bank relationships can give treasurers a better grasp of all that's occurring across their companies' bank relationships, such as account balances and the names of those authorized to open accounts, banking fees, and credit lines available, says Glen Solimine, chief executive officer with Speranza Systems, a provider of process-based bank account administration.
Admittedly, Solimine can be expected to say this, as his company develops these solutions. However, others have found them useful. At Xcel, Broom has been using software from Chesapeake System Solutions to analyze banking fees. Before installing the system, Broom had to wade through a 140-page report each month to figure out what was going on. Moreover, most charges are based on a per-unit rate multiplied by the volume generated, leading to thousands of data points.
While Broom wasn't worried that her bank was trying to surreptitiously extract money from Xcel, she also recognized that because Xcel was the product of several mergers, the charges probably didn't always reflect the most updated service agreements between the companies. In fact, since launching the software about a year ago, Broom has discovered processes that Xcel was engaging in, such as requesting manual investigations or faxing reports, that previously went unnoticed and boosted the company's costs. “Now, I can find out what area is doing that and get the process changed,” she says.
THE CREDIT CRUNCH
Along with these macro-level changes, the credit crunch is exacting a more immediate and dramatic toll on the bank-corporate relationship. About 55 percent of banks have tightened lending standards to large and midmarket firms, according to the April 2008 Senior Loan Officer Opinion Survey conducted by the Federal Reserve. Even “garden variety” corporate loans are difficult to obtain and often come with stricter terms, says attorney John Babala, referring to such loans as asset-backed loans and commercial mortgages. Babala is a partner with Dreier Stein Kahan Browne Woods George, LLP, in Santa Monica.
Moreover, just because a company has credit available doesn't mean that management can rest easy. Bankers are looking for ways in which companies can decrease the proportion of debt in their capital structure, says Mark Sullivan, chief executive officer with WhitmannHart Consulting in Chicago. The reason? This boosts the bank's chances of getting back its money if the company defaults.
Bankers also have become more aggressive in calling the shots when companies hit a rough patch, Sullivan says. He's seen some strongly suggest that companies sell a particular product line or division to raise cash. He's also noticed lenders taking a heavier hand when it comes to technical defaults, such as an inadvertent violation of a loan ratio. In the past, most would overlook this or charge a fee. “Now, technical defaults are being treated like payment defaults,” Sullivan says, with banks quicker to raise the interest rate in response. This is especially the case if the bank's overall loan portfolio is exhibiting signs of trouble, he adds.
Even so, companies with strong balance sheets can find credit, their finance folks report. ODW Logistics, Inc., a third-party logistics provider based in Columbus, Ohio, was able to renew its operating and lease lines of credit at favorable prices, says Dave Hill, chief financial officer. Hill credits this to ODW's long-term relationship with its bank — they've worked together for a half-dozen years — and the company's financial strength. While ODW isn't immune to an economic downturn, its services help clients cut costs.
To keep the relationship solid, Hill talks with his bankers at least weekly and meets with them monthly to discuss current performance and the outlook for the next few months. He's upfront about potential trouble spots. “They know what the numbers are going to say before they get the financial statements,” which he sends quarterly, Hill says. So, when the volume of business from a customer in the housing sector came in lower than initially budgeted, reducing the need for a planned capital equipment expenditure, the bank agreed to roll over the lease commitment until the following year.
“There's been a fairly significant shift from a volume-based mind-set to a quality-based one” on the part of bankers, says Sullivan. A year or two ago, they were chasing just about any business. Now, they're looking more closely at companies' projected abilities to repay their loans.
In many ways, the relationships are reverting to the kind that prevailed until the mid-1990s, says Peter J. Nigro, associate professor of finance at Bryant University in Smithfield, R.I. This was when credit scoring and loan ratings became more common, taking the emphasis from personal relationships and placing it onto quantitative models. Today, “a movement to relationship lending is definitely taking hold,” he says.
Liborio Markets is a Pasadena-based grocer specializing in Hispanic foods, with nine locations in California, Colorado, and Nevada. Management plans to add three more stores this year, using both the corporate bank account and a line of credit, says John Alejo, senior vice president and general counsel. Fortunately, the management team had negotiated the line about a year ago, before the markets went into a tailspin.
Even so, Alejo and his colleagues have kept their bank informed of their progress and cost-cutting measures through monthly financial statements. Over the last year or so, Liborio and its bankers also have instituted biannual business review meetings. “It may be an indication that they're paying closer attention even to companies that are doing well,” he says.
While financial execs take care to stay in their bankers' good graces, they're also watching their banks' performance. “The Bear Stearns bailout was a real signal to business people that there's some significant risk in this sector,” says Keith Maio, president and chief executive officer with $6 billion National Bank of Arizona (NBA). While NBA is sound, senior execs still have been fielding questions.
In particular, firms holding large balances with their banks want to make sure that they understand the bank's financial position, says Dubos J. (D.J.) Masson, Ph.D., associate professor of finance at Pepperdine University in Malibu, Cal. “If you have millions at a bank, the $100,000 that's covered by FDIC insurance doesn't mean much.”
It's not only write-downs that concern treasurers. Hill of ODW quizzes his bankers about takeover rumors, which could mean a shift in bank management out of Columbus, Ohio, where ODW is headquartered. “We like our relationship local,” he says.
Market conditions in the banking sector also have dampened many treasurers' interest in drastically reducing the numbers of their banking partners; previously, this was viewed as a way to cut the cost and time involved in maintaining multiple relationships, says Hurt of Bottomline Technologies. “While it's a noble goal to rationalize the number of banks to one, I don't think that we'll really see this,” Hurt says. “It's a risk that's not wise to take.”
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