Transaction banking push forces relationship consolidation
Transaction banking is one of the most lucrative areas of corporate wholesale banking, helping the sector as a whole generate returns above the cost of capital, but the intense pressure banks are putting clients under in this business is forcing them to consolidate banking relationships.
In their co-authored wholesale and investment banking report in March, Morgan Stanley and Oliver Wyman bank analysts wrote that some 60% of large company corporate treasurers they had interviewed “felt that they were visited or called upon too often”, with “several commenting that they are looking to consolidate banking partners as a result.”
Similarly, some 60% of the 30 treasurers interviewed said the dialogue they had with their wholesale banks was of low quality, and 30% said they were too often the recipients of generic “product-push” pitches.
Banks’ corporate clients often bemoan the attention they receive from their relationship banks, but the intensity with which some banks are now gunning for transaction banking business, and the ancillary fee income that can come from it, is such that it is beginning to infuriate their clients.
The report should come as a warning to almost all banks that are trying to secure transaction banking business with a view to winning more lucrative banking business, whether in foreign exchange and trade finance, capital markets or big-ticket M&A.
“I realize banks are damned if they do and damned if they don’t, but I’m literally bombarded by sales calls and product meetings by our banking group and outside, and it’s beginning to wear pretty thin,” says the corporate treasurer of a large European manufacturing company.
Although banks are aware of this and many have, as a result, introduced client-monitoring systems to keep a check on how many times bankers across business lines contact key clients, Morgan Stanley and Oliver Wyman say the real issue is too many banks competing for business.
“Too many banks are striving to offer a full-service, full-cost corporate banking proposition globally. Only a handful of at-scale globals can make this work,” wrote the analysts in the report.
They added: “The drivers of success in the CFO-down business, around trade, payments, debt and hedging, are very different to those in the CFO-up business around strategic transactions and capital markets events. Yet pursuit of top-line income often still leads to banks competing for businesses in areas where their own economics are not advantaged.”
For example, they argue that many “regional universal” banks commit balance sheet and coverage to clients in the hope of winning M&A or equity capital markets mandates, but lack the scale in those businesses.
In analyzing corporate finance activity between 2009 and 2013, the analysts found that global investment banks achieved cross-sell across corporate finance and debt and derivatives with clients that represented some 45% of balance sheet extended – in turn generating about 60% of their fees.
However, for “regional universal” banks both figures were around 30%.
Those findings echo recent Deutsche Bank analysis on the structural unprofitability of marginal bank loans to large European companies.
Matt Spick and Nick Burns, Deutsche strategists, found that the amount of additional profit needed to justify a loan from businesses such as M&A, FX and cash management was implausibly large, implying there is not enough cross-sold revenue to make these loans into “go do loans”.
This is tricky for banks, because according to the treasurers Morgan Stanley and Oliver Wyman interviewed the amount of credit extended by a bank is the most important factor in how ancillary spend is awarded.
Increasingly, however, transaction banking is seen as just as important as credit in securing the client relationship over the long term, and Morgan Stanley and Oliver Wyman see plenty of further upside in this business.
“For many banks, transactional banking products are the source of value that makes relationship economics ‘whole’, particularly if they are closely integrated with the banking and markets businesses,” they said.
At the same time, the analysts argue that banks could improve their approach and execution in mining data on trade and payment flows to improve portfolio management and identify new sales opportunities.
“The corporates we spoke to are crying out for banks to provide them with benchmarking data on their competitors’ levels of straight-through processing, error rates, payment processing efficiency – all data that banks are sitting on,” the analysts said. “Developing this data into a client service will have the dual benefit of differentiating a bank’s offering whilst also increasing client stickiness.”
Indeed, liquidity management and data provision are particularly in demand among corporate treasurers, with over three-quarters of those interviewed by Morgan Stanley and Oliver Wyman saying they would like to see benchmarking of finance-related performance against their peers, position forecasting or real-time liquidity management products.
Deepak Goyal, managing director and principal, and Sumitra Karthikeyan, principal, at Boston Consulting Group, argue that a data-driven, advice-based approach to wholesale banking, and particularly in transaction banking, was one of the best business models to aim for.
“In one case we observed, for example, a wholesale-banking client was having problems determining how to invest its short-term cash,” they say. “End-of-month balances routinely spiked, and the client ended up not investing fully one-third of its free cash.
“Using a data-driven, advice-based approach, the bank analyzed the client’s cashflow and average daily balances to determine the minimum amount required for conducting routine business. The result was a win-win situation in which the client earned higher returns and the bank earned higher fees by demonstrating the scope of its cash-management capabilities.”