WITH TREASURY MANAGEMENT SERVICES

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1 westmonroe DIVERSIFY YOUR INCOME AND DIFFERENTIATE YOUR BANK WITH TREASURY MANAGEMENT SERVICES BUSINESS CONSULTANTS DEEP TECHNOLOGISTS

2 With a crowded middle market vying for credit relationships, treasury management services can be a strategic asset for banks. Not only can these services help diversify income to manage balance-sheet risk; they can help build stronger relationships by serving a greater share of commercial customers needs. Despite the opportunities, though, smaller and mid-sized banks often lag their larger counterparts in realizing the diversification and differentiation advantages of treasury management services. This article discusses how smaller and mid-market banks can use treasury management services to build stronger and comprehensive commercial relationships in particular, by using fee-based revenue to develop relationship pricing that offers customers attractive and differentiated credit terms. Despite the opportunities, though, smaller and mid-sized banks often lag their larger counterparts in realizing the diversification and differentiation advantages of treasury management services. 2

3 Treasury management services: A strategic asset for today s commercial relationships and a key opportunity for income diversification A rising interest-rate environment is generally positive news for commercial banks, as lending yields improve when rates rise but rate fluctuations can limit the potential upside. Indeed, interest-rate risk is one of many market dynamics driving banks to diversify revenue combining sources of interest income with robust, consistent, predictable non-interest income. Given the challenges of projecting when and how interest rates will influence the economy and financial services market, leading banks are taking a more proactive stance to manage factors they can control. One of those factors is non-interest income and, specifically, income from treasury management services such as remote deposit capture, receivables, disbursements, cash-flow management, and other related services. But some banks are underutilizing this key ingredient Despite the growing focus on diversification, there are notable differences in asset composition between larger and smaller institutions. For example, small to mid-sized institutions (below $5 billion) have increased their share of longerterm assets even among core commercial and industrial (C&I )loans and shorter-term rate sensitive liabilities at a much faster rate than larger (above $5 billion) institutions (see exhibit below1). Whereas the largest institutions ($10-50 billion) had a higher percentage of longer-term assets in their portfolios than $1-3 billion banks in 2005 (22.5% vs. 18.4%), today that has reversed (30.8% for $1-3 billion banks; 28.6% for $10-50 billion banks). 35% 30% LONG TERM ASSETS (% OF TOTAL) Often seen as low-hanging fruit, treasury management income has evolved from an undervalued nice to have to a strategic asset for banks looking to serve the entire commercial relationship and manage balance sheet risk. Yet many banks, particularly small and mid-sized banks, have some work to do before they can realize the potential diversification and differentiation advantages of treasury management services. 25% 20% 15% 10% 5% 0% $1-$3B $3-$5B $5-$10B $10-$50B 1 3

4 Overall, fee income is a key component of a stable and sustainable revenue stream. But the statistics above suggest that mid-sized banks have not utilized the full potential of treasury management to drive noninterest income and augment their competitive advantage against larger lenders. Several barriers keep mid-sized banks from developing treasury management capabilities There are several reasons why mid-sized institutions may lag larger regional and national counterparts in developing capabilities that enable them to serve the entire commercial relationship effectively: w Some banks assume a reactive approach to the treasury management business, implementing products and services that are table stakes in their lending market or that key clients explicitly request. w Immature banks lack a clear sales and operating model they simply try to keep pace with commercial portfolio growth. w Executives do not recognize or appreciate the value that a commercial cash management product set can contribute to revenue and profitability. w Banks with a less-developed focus on treasury management can t match the client experience of more mature banks and thus struggle to convert these services into a competitive advantage. The risk of getting treasury management wrong : Losing the entire banking relationship Research shows that middle-market companies are much more likely than larger companies to move their entire banking relationships to a new credit provider (see below2). For institutions that serve middle-market companies, therefore, the missed opportunity from operating treasury management as an ancillary line of business rather than a competitive differentiator could end up being particularly acute. 70% 60% 50% 40% 30% 20% 10% 0% LIKELIHOOD TO MOVE CASH MANAGEMENT BUSINESS TO NEW CREDIT PROVIDER SOURCE: 2013 PHOENIX-HECHT SURVEY Mid Market Large Corporation How can mid-sized banks make treasury management a differentiator? Improve relationship pricing. Community banks have an opportunity to use treasury management as a competitive differentiator to retain existing customers and source and close new commercial relationships that stabilize revenue and offset increasing 2 4

5 compliance costs. To do so, they will need to refine or develop strategies for: GROWING NON-INTEREST FEE INCOME EXPANDING WALLET SHARE DEVELOPING DEEPER, STICKIER CUSTOMER RELATIONSHIPS IMPROVING RELATIONSHIP PRICING This final point, in fact, is often the biggest blind spot, even for banks with mature treasury management operating models. Serving the entire commercial relationship presents the opportunity to price credit more aggressively by augmenting total customer income.2 Eliminate the blind spot in developing comprehensive and more profitable relationships Banks can maintain and likely improve effective yield on the client relationships with feebased revenue, even while accommodating a lower interest rate. Importantly, they can serve customers better as a lender can present pricing scenarios based on the entirety of the relationship rather than solely on the loan relationship. A critical and evolving--trend for community banks is valuing the deposit relationship accurately. This requires: w A structured pricing model that incorporates treasury management fees w Waiver and exception governance and reporting to monitor actual requirements for and usage of treasury management services w Relationship profitability management that is, generating incentivized loan volume with target yield/cost spreads and treasury management fee income to support a more complete picture of relationship profitability Distinguishing your treasury management capabilities can diversify your financial opportunities With a crowded middle market vying for credit relationships, a distinguished treasury management services can do more than differentiate leaders and laggards in fee income; it can help banks manage the risks associated with interest-rate fluctuations. Servicing corporate cash needs is a tool for doubling down on a key competitive advantage for community banks the ability to deliver a complete relationship banking experience that, in turn, offers larger and more diverse financial opportunities for the bank. 5

6 About West Monroe Partners West Monroe is a progressive business and technology consulting firm that partners with dynamic organizations to reimagine, build, and operate their businesses at peak performance. Our team of more than 800 professionals is comprised of an uncommon blend of business consultants and deep technologists. This unique combination of expertise enables us to design, develop, implement, and run strategic business and technology solutions that yield a dramatic commercial impact on our clients profitability and performance. For more information, please visit West Monroe Partners westmonroepartners.com