Smaller Banks Move into Treasury Management Services

There are literally hundreds of services and sub-services provided to companies by bank treasury management functions, ranging from wire transfers to automated clearinghouse payments, deposit services and investment sweeps, merchant processing and anti-fraud aids — even instant payments.

Yet treasury management is a function that many banks, especially community banks, have not touched historically. But now a growing number are exploring the opportunities.

What’s the attraction? Non-interest income for many, but also a rich source of funding for some. Fintech has also exerted a gravitational pull, both as competitor and enabler.

“Treasury management is a fee-income play, but it’s also a balanced, low-cost deposit generator,” explains Greg Lewis, chief deposit officer at Encore Bank, a business bank with $3.9 billion in assets, based in Arkansas with business branches in seven states. In fact, Lewis, a veteran of the treasury management business from years with a megabank, explains that for a bank the treasury business is a balancing act between fees and deposit generation.

“We don’t have brick and mortar on every corner, so treasury management becomes the focus of driving low-cost deposits and the funding engine for our loan growth and being able to grow the bank,” says Lewis. In fact, there can be a multiplier effect — while a bank might make $1 in fee income on a given service charged explicitly, it could make $4 or $5 if it obtains lower-cost deposits and gives the treasury management client earnings credit for those deposits, to offset fees for services.

“We deliver technology and value,” explains Lewis. “Companies want operational efficiencies in their businesses, they want optimization of working capital, and they want risk mitigation. So, they are not worried about getting the highest return on every dollar on deposit.” In exchange for the services, he says, Encore gains wider net interest margins.

When deposit rates drop, earnings credit rates — noninterest return on balances — also drop. While the bank doesn’t make as much with the deposits as loan fuel, fee income rises because the return on balances is lower, and more fees must be paid to the bank, Lewis explains.

As recently as a few years ago, most banks below $10 billion weren’t offering broad treasury management services, according to Mac Thompson, founder and CEO of consulting firm White Clay. “But now, most banks north of $3 billion in assets are getting into treasury management.” Even some smaller banks have found they have to explore treasury management for competitive reasons, he adds.

The good news is that starting out doesn’t have to be the equivalent of getting a college education in a day. Lewis says vendors can set a bank up with the basics, an online platform that brings many payment and management services together in one place. To that, “a bank wraps in a good service model, industry knowledge, really being an advisor to clients,” he says.

Service is a key. Beyond the deposits and the fees, banks that add treasury management services to their roster — and learn to tailor offerings to each company — can enjoy improved account retention, according to Thompson.

By virtue of the many facets of treasury management relationships, the bank becomes more integrated into the financial operations of the customer company. Think of the stickiness seen in retail banking transaction accounts when they are connected to wallets, automatic payments and more, but at an exponential power, on the business side.

Also driving demand is the risk of fraud, according to Alicia Robertson, EVP and chief treasury management officer at b1BANK, a $6.7 billion institution based in Baton Rouge, La. Banks spend a lot of time pushing education about commercial fraud risk, but companies frequently don’t pay attention until they’ve been burned.

Robertson says treasury management offers tools that can help. An oldie-but-goody is “positive pay,” which, simply put, compares lists of checks authorized by a client company to checks submitted on that company’s accounts. When something doesn’t match, further investigation can keep the fraud from succeeding.

Increasing Business Complexity Drives Demand for Treasury Management

Another influence on interest in treasury management: Demand for elements of these services is being seen further down the business food chain. Typically, a company must be of a size and sophistication to avail itself of treasury management — one criteria is that its financial affairs are being run by a CFO.

“Small businesses are looking to be able to bank more cost efficiently, for sure,” says Robertson. Where they aren’t candidates for full treasury management, companies like b1BANK are offering small business bundles. Robertson says the bank created a bundle product several years ago and it’s proven quite popular.

“It lets them dip their toe into treasury management at a much more economical price than going all-in on full-blown commercial analysis checking,” says Robertson.

“We identify as a community bank, but we’ve got a sophisticated treasury management product set that competes with very large banks’ offerings,” says Robertson. (She, like Lewis, spent years at JPMorgan Chase.) And the bank has been working on ways to bring treasury management to more in-between companies.

The benefits to customers and the banks themselves have caught on so fast that treasury management sales teams are in high demand.

“Banks are raiding other institutions for treasury management sales teams,” even to the point of lifting out entire teams, says Thompson. They want to ramp up or expand quickly and there is both a wide range of product knowledge necessary to serve customers properly as well as a fair amount of complexity to be mastered. Robertson points out that multiple products, some newer, some older, that can meet various needs and the bank has to match its menu to what the customer wants.

Thompson adds that often it is sales teams that get raided, and he suggests that some subject matter experts should be poached too, because they have the technical knowledge to deliver the best for treasury management clients.

Banks Need People Who Know the Treasury Management Ropes

With apologies to Liam Neeson, treasury management also requires a particular set of skills.

“Historically, most commercial bankers have been commercial lenders,” says Thompson, “and they don’t really understand deposits nor treasury management services much.”

In fact, Lewis says business lenders usually don’t make the best treasury management officers. It’s a matter of what’s in the DNA.

“A lender may be going after a manufacturing company, but the lender is thinking about getting the loans,” says Lewis. “They wind up leaving a lot of return on equity and value of that extension of the bank’s capital on the floor.”

But if they work with a specialized treasury management staffer, the bank can pick up that value. Ideally, Lewis says, lenders and treasury management staffers can refer business to each other.

Ideally, banks should be selling treasury management services on a relationship basis, not à la carte, says Thompson.

“Pricing treasury management isn’t optimal,” he explains. “You should be asking, ‘Do I have all the operating accounts, all the excess cash, the lending relationships, the company purchase card program, all of those factors.” Treasury management sales staff frequently get paid via incentives and management must make sure the incentive program is driving the best behavior for the bank’s long-term interests.

Thompson also points out that customers are intent on getting the best deal so savvy treasury staff help balance pricing and marketing. Getting government entities’ treasury management business is also important, both for the volume it brings and the reputation advantage of being the government provider, says Thompson.

But there’s lots of experience on the other side in negotiating price.

“They’ll go through our fees really aggressively, and you’ll have to discount heavily,” Thompson says. “Size doesn’t necessarily mean profitability in treasury management.” Much the same is observed in such cash-rich sectors as homeowners’ associations. Lots of deposits, and they know their value.

At Encore Bank, a specialty is serving the needs of the real estate business, which can be a strong source of deposits through such needs as maintaining escrow accounts. Greg Lewis says that players in that field know other players: “They’re connected to an ecosystem that has tons of deposits.” Treasury sales staffers who are good at person-to-person relations can use such contacts to get entrée to other potential treasury management customers.

This is one way that smaller institutions can compete with the biggest players in treasury management. The bigger the bank provider, the more advanced the tools, but also, the more standardized the approach. In addition, the more likely that resolution of inevitable problems will begin with an 800 number — a pain point smaller institutions can salve with white-glove service and being a face, not an anonymous quantity.

“We shine when something breaks,” says Lewis.

Fintech Plays a Dual Role in Treasury Management Competition

With the sheer numbers of potential treasury management services that can be provided, few banks can develop it all. Fintech companies and banks’ processors provide a wide menu of add-on services that treasury management leaders have to weigh.

“You walk a fine line,” says Alicia Robertson. “As the head of treasury, I would love to just have a blank check and implement everything that’s out there, and be able to say, ‘Look at us, we can do it all.’ But if there’s not a demand for it, I can’t build a business case to justify an investment in something new.”

“I get people calling on me every day with their latest and greatest solution,” says Robertson. “And it’s all great — but it might not make sense for us right now.”

Fintechs are both an ally and an adversary in the treasury management area, these experts say.

These companies sometimes offer a slice of treasury management and sometimes more than that, even offering business checking as part of the mix, says Robertson. “They’re acting like banks, although they’re not true banks.” Their activities create additional pressure to add products, out of concern that having a hole in a bank’s menu gives competitors a toehold that could make an entire relationship vulnerable.

Complicating matters is that fintechs are also suppliers to banks, as Robertson noted. Treasury management also needs to connect with business software as a service offerings that businesses are increasingly taking up. The larger the company, the more likely that it obtains banking services, including treasury management, from multiple providers. Each bank involved may find that its offerings serve as embedded elements in the company’s overall financial management — which puts an additional emphasis on service quality.

Getting Started in Treasury Management

Mac Thompson warns that as lucrative and helpful as adding treasury management to your operation can be, it can’t be made to happen overnight. Profitability could be seen in 12 months, if the bank tackles the new activity aggressively, but more realistically, it could take as long as two years, he says. In addition, be prepared for surprises. Companies often promise to move their entire relationship to the treasury management bank, but sticky relationships work in two directions, and incumbency naturally counts.

Here are some guidelines from Thompson and the bankers:

• See treasury management as a holistic pursuit. A new program stands the best chance of a good start when commercial lenders and branch staff get educated in what treasury management can do for customers and receive instruction on how to make referrals.

• Think in terms of specialized needs. Lewis likes to hire treasury staff that know specific markets. “It’s all the same basic product,” he explains, “but there are unique aspects that create nuances for an industry.” Case in point is one of Encore Bank’s specialties, title insurance companies. The bank knows how to deliver services — and last-minute help — the title firms may need when their reps are sitting at the closing table.

• Don’t press new products on customers that don’t need or want them. Take instant payments. Demand is muted right now and for many customers, older products suit them at present. Robertson points out that same-day ACH service was the payments darling not so long ago, yet many companies still get by without it.