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Cash Management: Banks Have Offer CFOs Can’t Refuse

Bankers are becoming a lot tougher with their clients about bundling transaction services with their loans, a financial-industry expert says.
David KatzNovember 13, 2008

With credit in such short supply, banks will soon be asking CFOs to hand over their cash-management business if they want to get a loan, a banking industry research consultant says.

Although corporations and the banks that service the companies’ cash transactions aren’t changing partners very much these days, lenders will place a lot more pressure on their clients in the next year, predicts Robert Statius-Muller, a managing director and head of the London office of Greenwich Associates, a financial-services industry research firm.

Even now, bankers are becoming a lot tougher with their clients about bundling their loans with their cash-management needs, according to Statius-Muller. Those needs can include wire-transfer products, balance-reporting-clearinghouse services, treasury outsourcing, some foreign-exchange transactions, or liquidity management.

During the ongoing credit crunch, the consultant says, finance chiefs should make sure that the banks they borrow from also provide good cash-management products, “so you don’t get stuck being beholden to a credit bank whose products you don’t respect and who you don’t think can deliver for you. Be very selective [of] those banks you do your credit business with, is what it boils down to.”

When it comes to comes to credit alone, companies that hadn’t renegotiated backup lines early in the year are in trouble, he told, because banks “are asking for much stricter terms and much higher fees and much higher spreads than before.”

But that’s not all. “What we’re also hearing is that banks are much more insistent on getting ancillary business,” he added. Bankers are saying to commercial borrowers that “if we make our balance sheet available to you, we’re really going to insist to the maximum extent possible that we get your FX, your cash management, your debt capital-market business, etc.”

Statius-Muller forecasts that the lending and cash services will become increasingly intertwined in the coming year. “Whenever cash management mandates come up, the banks will say: We’re your major credit bank, we want more of your cash management business; we want preferential treatment.”

Currently, though, corporations haven’t been doing much switching of their services providers because doing so can be a costly, complex, and time-consuming affair, according to the consultant, who characterized cash management as a “very sticky” for those reasons.

During the current crisis, Greenwich is advising its banking clients to take a counterintuitive approach to spending on their cash-transaction-services business, “one of the few sources of revenue growth for large banks facing an otherwise dismal outlook,” the firm wrote in a soon-to-be released report.

Acknowledging that most banks are being forced to make budget cutbacks, the firm “is recommending to [banks] forced to limit costs in theirtransaction service businesses to first delay spending on technology” and not to cut back on sales and client services.

Based on an analysis of data culled in 2007 from about 1400 interviews with cash managers and treasurers of banks in Europe and Asia, the consultants conclude that financial institutions get a bigger near-term bang for their buck by servicing their clients, rather than spiffing up the banks’ computer systems. (Greenwich had done about 800 interviews with U.S. cash managers and treasurers through August 2008, but hasn’t yet broken out the data in a way that would enable the firm to replicate the current study, according to Statius-Muller. But based on other studies the firm has done, he thinks, the situation in the United States is likely to be similar to that of Europe.)

“While cuts in spending on technology platforms will have little short-term impact on cash management revenues,” according to the report, “budget reductions that affect the quality of sales and client service have the potential to result in relatively rapid declines in revenues.”

That’s because there’s little to choose from in terms of the quality of most cash-transaction products, according to Statius-Muller. In such a market, banks can only steer revenue their way by offering top-flight service.

To be sure, providers of cash-management services must have a minimum level of technological capability to even be players in the market, according to Statius-Muller. “If you can’t clear a check in Kenya for them when they need to do business in Kenya, end of story,” he says.

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