Gross fees for treasury management (TM) services are starting to fall across the industry, putting pressure on financial institutions to recalibrate the relationship between TM pricing and earnings credit rates (ECRs).
The trick is to align pricing so that banks are agnostic about whether their clients are paying with fees or balances. To get there, banks need data, tools and processes to create better pricing visibility, as well as strong governance of controls and policies to inextricably link ECR and fee decisions.
In the end, every pricing decision — from individual clients to entire portfolios — should be considered as an opportunity to grow primary relationships.
TM Fee Growth
The two major drivers of recent high gross fee growth and capture rates are now unwinding with the unprecedented pace of central bank rate increases.
TM fee growth has often been above 5% during the pandemic, driven by large increases in deposit assessment fees (DAF). Now that growth, which was already below the low double-digit level experienced in the 2010s, is tapering off as surge deposits flow out of the system. The average U.S. bank (and those that are below average) notched 2% growth or less in the second quarter of 2022 as compared with the first quarter. (See Figure 1.) And although net fee levels after earnings credits remain historically high, the industry is near an important inflection point because standard ECRs are starting to rise as well. Lower fee capture rates will negatively impact commercial banking performance in the near-term.
Despite these pressures, TM services are still at the center of the value exchange between banks and their commercial clients. And they will continue to be critical to commercial banking performance in this cycle. Banks that are successful in optimizing the balance between the pricing for TM services and the pricing for commercial deposit, specifically ECRs, will be able to drive value for both their clients and the institution in any rate cycle.
Figure 1: Average Gross TM Fee Growth By Quartile, 2Q22
The TM Relationship
A treasury management relationship brings strategic value to commercial clients across many service lines by increasing visibility and access to cash to support operations. Effective treasury management helps to reduce short-term borrowing costs and can have a direct impact on important financial metrics like Days Sales Outstanding. Curinos believes this is why the highest portion of many companies in all revenue segments define their primary bank as the bank with the primary operating or payment account. (See Figure 2.)
Because of these dynamics, banks consider the value of treasury management relationships to go beyond just the fees that are collected. Primary treasury management relationships are a valuable source of stable, low-cost balances, which will become increasing important in the coming 12-18 months. Curinos research shows that primary relationships hold higher deposit balances, have more accounts, greater loan penetration, yield stronger credit performance and use a higher number of treasury management products. (See Figure 3.) In addition to higher balances, additional accounts and treasury management products used by a commercial client increase the complexity and cost of switching banks. As a result, treasury management relationships have a much higher tenure than other types of relationships.
Figure 2: Definition of a Company’s Primary Bank
Figure 3: Value of Primary Relationships
Since they can be a source of such valuable balances, banks should view treasury management clients as paying for their services either through fees or with their balances. To properly align pricing to support this approach banks must:
- Position fee pricing across a full spectrum of checking packages, product bundles and account analysis to ensure that the infrastructure and controls are installed to place clients in the right pricing approach
- Structure fees so that clients are encouraged to adopt efficient, low-risk services or pay a premium for manual, paper-based or risky services
- Set ECR and TM fee pricing in tandem, so that the full set of tradeoffs are considered
While these three objectives seem simple in theory, they can become complicated in execution and misalignments often become limiting to commercial banking performance. Some common problems for banks include:
- Arbitrage between account analysis and checking packages: Because the pricing of small business bundles can be very attractive to clients who are large enough to have accounts on analysis, savvy clients (or even bankers) will use them as a way to arbitrage higher pricing for the same services on analysis. The opportunity cost from this can often wipe out the benefits of increased adoption from lower-end clients.
- Over-complication in bundles: In an effort to give lower-end clients flexibility, bundle lineups can end up being too complicated, either by having too many options or too many ancillary fees. As a result, adoption is either low or there are high levels of fee waivers to get clients to accept these bundles.
- Misalignment of pricing to risk: Because the clients who request complicated or customized processing are often considered to be “good” clients, they often receive deep discounts for those and other services. Some smaller banks don’t even charge these clients for customized processing. While the relationship may bring valuable balances, a bank can’t ensure an efficient value exchange if it doesn’t fully charge for all services that it delivers.
- Double-dipping: TM fees and ECR pricing are often set in a vacuum, with the net result being that the bank leaves value on the table. For individual clients, this may mean they are getting both deep fee discounting and exception ECRs. At a portfolio level, this may mean a bank pursues a premium ECR strategy but it’s not charging the full array of fees at the right levels to ensure it will capture the optimal level of balances it is seeking.
A Three-Pronged Strategy
The path to optimally-balanced pricing between TM and ECR is three-pronged.
First, better data, tools and processes will bring more visibility and reduce sub-optimal decision-making that occurs when there isn’t a full view of relationship and service value. We have seen banks make marked progress in this area this year. Indeed, the number of banks that use or intend to use client scoring or service segmentation has jumped between 2021 and 2022. (See Figure 4.)
Second, governance can be made strong to inextricably link ECR and fee decisions. This includes putting in the controls and policies to ensure that analysis clients don’t have access to small business packages to arbitrage portions of their analysis relationship.
Finally, further instituting primacy scoring into everyday decision-making is critical. Every pricing decision from individual clients to entire portfolios should be made in context of the opportunity to grow primacy.
Developing this level of pricing discipline across TM and ECRs will benefit commercial banks, not only in the current rising-rate cycle, but it also will prepare the institution to optimize value in all cycles. Banks currently have an opportunity to re-baseline TM fees as rates rise and clients will see relative decreases in their hard-dollar fees. The increases that come from enhanced decision-making and governance will also help lock down balances that are at risk of rotating away from DDA accounts as rates rise.
When rates fall again, these approaches will position the bank to collect more fees. A more rounded and coordinated approach to TM fee and ECR pricing will benefit the bank in all cycles and environments.