Treasury Management Opportunities

 Treasury Management is one of the important sources of fee income in 2012. As you contemplate your strategy for the business, consider the value of approaching each market segment with a specific product offering and sales style in mind.

1.   Money service businesses. I can hear you gulping as you read this. MSBs represent an (uncontrollable?) risk that the great majority of banks have shied away from. Following the "know your customer" regulations, the risk of banking businesses which, in turn, "bank" other customers, exposed banks to an unmanageable risk. As an unintended result of the regulations, banks felt they were forced to exit this segment. This is particularly unfortunate since many MSBs serve unmet need in their communities.

Does this really make sense? Some banks believe there are ways to bank this business while complying with the regulations. It is expensive, but most MSBs don't mind paying for the banks' extra compliance cost. Others need deposits in order to restructure the liability side of their balance sheets, and MSBs are generally depositors, not borrowers.

If you are considering serving MSBs, you will need the following:

• A specialized sales force is needed, comprised of bankers that are well-known in the industry, knowledgeable about the regulatory expectations, and have an operations background
• An effective risk rating system for the MSBs
• An expert audit unit, reporting to Risk, Compliance or another control unit other than Treasury Management, which audits the MSB for full compliance with BSA and other regulatory expectations monthly. The group should engage in surprise audits of high frequency, and all costs should be charged to the MSB. Full documentation is needed.
• A price for the service that is commensurate with the risk
• Service charges that will cover the increased servicing and compliance costs
• Banking MSBs "by the book" to minimize regulatory risk, including full documentation, centralized underwriting and a formal escalation process
• An experienced audit staff to audit the MSBs regularly to ensure their compliance with CIP and other regulations
• Regular screening of branch transactions for large cash orders and numerous unauthorized debits
• An assessment of an ACH Settlement Risk fee - it's a valid fee income source.
• A limit on total exposure to MSBs
• A requirement of cash reserves or bonding from MSB customers
• A list of MSBs you will NOT bank. Examples:
  • Businesses with too much cash
  • International exposure
  • Businesses that have frequent wire transfers, including internal bank transfers between accounts
  • Foreign ownership
  • Out of footprint

You can buy software that will identify behavior outliers and amount anomalies that can indicate they represent higher risk than you're comfortable with.

2.   Treasury management Services for Small Business. Most TM product lines today are geared toward middle market and larger corporations, thereby excluding thousands of small and micro businesses who have Treasury Management needs that are simpler than their larger brethren.

As you evaluate your product line, keep in mind the following:

• The larger the upfront fee, the less likely a small business can afford the product. Make entry barriers small (fixed cost), and get paid on the variable component. This will better match your pricing model with the prospects' interests.
• Consider bundling ACH, wire and information reporting as part of the deposit account set-up.
• Include a small enough number of free transactions to exclude middle market and larger companies and prevent cannibalization. Charge handsomely for transactions above the minimum to improve matching of the product with the right customer.
• Consider giving your small businesses a free RDC scanner (the most basic type).
• Consider bundling positive pay with all small business deposit accounts.
• Offer customers several ways to get the product for free: average balance, debit card usage levels, RDC or ACH transactions etc.
• Don't nickel and dime - a fixed monthly fee works, so long as it's not too high. Then add an amount per additional service (e.g. ACH, wire, RDC, sweeps, payroll cards, etc.), in addition to the cost of the software and installation cost. Hard charges are accepted in this market segment.
• Offer free balance alerts
• DO NOT OFFER FEE WAIVERS.
• Offer pre-funded ACH option when credit risk is too high for comfort.
• Combine business and personal accounts for minimum balance requirements to improve your penetration of the personal side of your small business clients.
• Give your online banking away, but don't squander it. If a small business needs more than one user, they should pay a fee per additional user. Also, charge inactivity fee, and couple free online banking with mandatory eStatements.

3.   Municipal banking. Some banks are exiting Government Banking, or at least significantly reducing their exposure to the segment. Banks are flush with deposits, municipal deposits are often put up for bids, which makes them expensive and less relationship-oriented, plus many municipalities require collateral, which further increases deposits costs.

Don't throw the baby out with the bathwater here. Deposits will become beautiful in the future, and then competition will be fierce just like it was up to 2007. Seek true relationships vs. RFPs and bids, and cross sell to the full range of municipal needs.

Further, municipal banking offers attractive opportunities for payments services, including bill origination, lock-box, reconciliations and even collection. County Treasurers welcome the controls, process simplification and lessened headaches associated with passing this work on to the bank, and the fees are significant. Being a one-stop shop for large billers is a good business for Treasury Management if you have strong back-office capabilities.

I remain a proponent of Treasury Management as an important relationship cementer and fee income generator for banks. Forum discussions reaffirmed this belief, and continue to highlight the huge variability in individual performance and production across our members. Those that expect more and pay greater incentives for full relationship building continue to meaningfully grow revenues in this business both efficiently and profitably.