Most banks with less than $25 billion in assets live off the spread between the money they pay on deposits and the interest they receive on outstanding loans. But in an environment when businesses and consumers alike are very hesitant to borrow due to uncertainty in the economy and banks are under scrutiny to make only the safest loans, banks need to look to fee income opportunities such as cash management to boost revenues.Cash management services have been dominated for years by larger banks that have built up a nice annuity of cash management revenue. This dominance has caused large banks to be somewhat complacent and vulnerable to attacks from focused competitors. Smaller banks are looking at areas where they can attack both on price and the level of service offered to cash management customers, especially on the lower end of the market.
To date, many small and mid-size banks have not yet built their cash management businesses into profitable ventures. They don’t understand what their prospects and customers want today from their cash management provider, and, as a result are not pricing their products to drive appropriate levels of market share growth and profitability. Some community banks have been so simplistic in their desire to show growth that they are all but giving it away.
Banks don’t have to give it away. Sales guru Zig Ziglar said, “You can get everything in life you want if you will just help enough other people get what they want.” Mr. Ziglar’s advice could come in very handy for bankers who are looking to add or expand on a profitable line of business.
Prospective cash management customers will typically say they want everything you can offer them – but they don’t want to pay for it, providing two challenges for the financial institution’s cash management department.
While the prospect/customer may want “everything,” it’s highly unlikely that he will need it. The executive within the company making these cash management decisions is likely the owner, or, for a company with more than $25 million in annual sales, the chief financial officer, though the business owner is still likely to have some input in the decision.
The local retailer is unlikely to need an international letter of credit. Even if he sells online he may not need wire transfer services, but would greatly benefit from innovative merchant processing services. On the other hand, the owner of a micro-business, a firm with less than $1 million in annual sales, could benefit from remote deposit capture, card processing and similar merchant services, but might not understand the value of anything more than simple business checking. The micro-business may errantly feel new cash management services are too sophisticated for their basic needs.
After our recent Great Recession, business owners are keeping a tighter hold on their money than ever before. So in order to sell cash management to the business owner, the banker will have to demonstrate the value.
The minimum product offering for cash management is online business banking, one that includes separate modules for balance reporting and basic ACH/ wire transfers. Other features and functionality can be offered to the business that needs them, but business owners don’t want products and services they don’t need – especially when they have to pay for them. Too many financial institutions new to cash management are trying to force feed comprehensive cash management packages to the small business owner who’s on a restricted expense diet. Other smart competitors have created tiered or menu-based offerings that gear pricing only around the solutions that the cash management customer needs.The business owner certainly values his money, but the smaller the business, the more that time is incredibly valuable to the owner as well. Remote deposit capture is in the mass adoption stage – but others have yet to have a banker educate them to the value of the service and “hand-hold” office staff enough to drive strong penetration in a business deposit base. Some smart competitors have realized that the bookkeepers and office managers at small companies often drive decisions about where to bank, and they are often resistant to new cash management offerings that threaten their way of doing things. These competitors are reaching out to these “gatekeepers” with education, personalized service and thank you gifts to win over their loyalty.
Another cash management feature that many businesses will find to be valuable is a system that not only scans the checks, but automatically updates the information in QuickBooks or another accounting/bookkeeping program. This provides the prospect/customer with another time-saving, value-added feature. In fact, many smart competitors are winning business in specific industry niches because they have developed interfaces and knowledge of popular accounting and management programs in that particular industry.
Proactively showing customers the value of managing liquidity is also a key loyalty builder. Internal repo sweep accounts can provide ways for prospects/customers to earn credits for deposits that can offset some fees rather than letting their money sit idle. These deposits also provide the financial institution with extremely low-cost funds as well as an additional relationship with the customer. The more relationships the customer has with the financial institution, the less likely he is to leave, even if another institution offers slightly better pricing.
This type of value-based approach to selling cash management services can help keep mid-size and community banks out of irrational price wars for services. For example, most municipalities are purely price shoppers. Knowing that, it’s likely not worth the cost-cutting time and effort to maintain these accounts. Another financial institution is likely to undercut your pricing, and a price war doesn’t do anyone – outside of the municipality – any good.
The opportunity to boost revenues through cash management certainly exists, but to do so at a profit requires understanding what cash management products and services will be valuable to your customers and the pricing level(s) necessary to make those offerings profitable for the financial institution.
At Cornerstone Advisors, we believe a key to disciplined growth is setting performance benchmarks that go beyond ROA, efficiency ratio and “making budget.”
We help banks and credit unions improve processes and implement formal scorecards that “strip the onion” across all major institutional functions.
Armed with this type of information, financial institutions can work on fundamental improvements establishing a sound foundation for higher performance levels and future growth.
Visit our Web site to explore all the ways we can help your institution achieve maximum efficiency and competitiveness.