One treasury team tallying up the fees it pays banks in exchange for their commitments to the company’s revolving credit facility recently added a new category to its bank scorecard: deemed compensation on cash. Calculating it involves comparing the interest rate the corporate receives on cash held at a given bank to a benchmark rate such as fed funds.
- A member of NeuGroup for Global Cash and Banking explained the change at the group’s fall meeting in San Francisco in a broader discussion about bank scorecards, which some treasury teams use as they make share-of-wallet decisions. That’s the slice of the total pie of fees a company pays individual banks for being in their revolver.
A comprehensive scorecard. In addition to deemed compensation, the member’s scorecard tracks the fees the corporate pays to banks for capital markets transactions, custodial services, trust services, FX, the revolver, payment processing fees and other charges.
- “We total all that up and compare it to the revolver facility for each bank,” the member said. “Then we gauge what should their wallet share be. Then, are we over or under? And some of that is business driven, but some is more in our control.”
- The scorecard impressed other members, several of whom mentioned its comprehensiveness. One called it “super cool” and another said, “I wish we had that as well.”
Behind the scorecard. The member makes the scorecard in Excel after pulling data from the company’s treasury management system. But establishing that process took some work. “Our bank wallet was a very manual process. At a treasury all-hands meeting we discussed how much time we were wasting manually gathering bank wallet inputs from each area of treasury,” the member said.
- “We then discussed what an ideal bank wallet process would look like and made a commitment to automate. Most of the information was already feeding into our TMS, Quantum. We just needed to find it and build a query that we could easily run each quarter.
- “That was a huge lift for us, being able to get the data ourselves instead of relying on banks.”
- The member added that the scorecard is a work in progress. “We’re constantly looking to make iterations to this. And figure out ways to improve it.”
Bank fee discrepancies. In response to a question from a peer, the member said finding discrepancies in bank fees and doing bank fee analysis is not easy. “We do not have a bank fee analysis tool implemented yet, so it’s very manual,” he said. “And so yes, there are discrepancies in there.
- “One of the things that we’re hoping to alleviate by implementing Redbridge later this year and into next year is getting rid of that manual work. But then also being able to take those data points to the bank very easily and say, ‘Hey, this is what we negotiated, this is what you charged. What’s going on? You know, help us understand.’”
More on deemed compensation. The member elaborated on the deemed compensation calculation that treasury is doing on a quarterly basis. “We take the difference between the average benchmark interest rate for the quarter and the average rate the bank paid us. We then take that difference and apply it to our average balance at the bank; that dollar amount is ‘lost interest’ to us and deemed compensation for the bank.
- “We’re calling that compensation for them because they’re earning money off of us. And so we’re going count that as a bank fee.”
- He added, “To the extent that we aren’t receiving the full fed funds rate, for example, we can always move funds elsewhere or make the case the bank is underpaying us when compared to their peers.”
- Asked by NeuGroup Insights what prompted this move, the member explained: “There was a business decision made to set aside a portion of funds that would not earn interest—customer funds being held for KYC compliance, legal holds, sanctions, etc.
- “Our leadership frequently asked how much interest we had given up over a period of time, so we started tracking it. The banks were very keen to hold these funds for us as it was pure profit for them. That’s when we had the idea to quantify the lost interest, call it compensation for the bank and add it to our wallet.”
Interest income. A related but separate issue is whether banks are walking their talk on returns. “We track interest income very closely,” the member said. “We’re making sure that what the bank is saying they’re paying us is actually what they’re going to pay us and when they’re going to pay it.
- “We found there was actually a quite a bit of discrepancy between what they said and what they did. Banks automate interest payouts so when there were discrepancies they really had to dive deep into their processes in order to explain exactly how they were calculating interest.
- “It really seemed like just as much of an eye-opening process for our banking partners as it was for us. So that is something we used to help strengthen the relationship and help make sure we were putting our funds with the with the correct partner.”
Qualitative scoring. In addition to quantitative measures to make share-of-wallet decisions, many members are using, beginning to use or contemplating more systematic qualitative evaluations of their banks. Surveys and questionnaires are common. Some teams are going outside treasury to ask other functions that interact with banks about the quality of service and the value of insights banks bring business units or business development teams, for example.
- Others, like the member whose scorecard created buzz, are limiting the input to treasury functions. “We have a questionnaire that we circulate amongst treasury annually and so it asks each person within treasury to rate the relationship, rate customer service resolution management, perceived cost any kind of technology issues, things along those lines,” the member said.
- “There’s a big buy-in from our treasurer,” he added. “If I’m getting bad service and it’s not getting better, that’s a lever and you move funds from bank A to bank B. And my treasurer has been very supportive with that.
- “If we’re having problems with the bank, even if they provide us the best price, we can make a change. It’s just having the data to back it up and being willing to have those difficult conversations with the banks.”
