Walking away from the banks

INFORMATION and insight is power. The key to fixing bank relationships starts with that. And if there is one thing that´s clear from the Financial Director survey on bank relationships, it is that bank relationships indeed are in need of a serious fix.

Amid all the insight provided by the survey, there was one thing that particularly surprised me. Although financial directors feel that now, more than ever, it is time to consider moving their bank relationships, they are hesitant to do so because of the costs and the uncertainty of whether shifting will actually leave them better off. That is in itself quite a mindboggling observation: huge market dissatisfaction and but essentially no alternative.

To me, that sounds like there must still be something really rotten with the state of banking today. If it’s any consolation (although I doubt it is), finance directors across Europe find themselves in the same boat. Vallstein’s own Annual Banking survey conducted in The Netherlands with financial newspaper Het Financieele Dagblad, found that since 2008 satisfaction with banks has been heading downhill fast.

Amid growing dissatisfaction, companies in the Netherlands are starting to vote with their feet; last year’s survey showed that these companies have already started to shift their relationships as a result with 15-20% of market share changing hands in 2010. However, the question remains whether shifting has made them happier. Despite the defections registered in 2010, satisfaction with banks has failed to improve. Perhaps it is too early to tell what the longer term impact will be. We await the results of the 2011 survey with interest.

What’s clear is that while voting in a survey may help to vent frustration, voting with your feet is certainly not an easy option. But if changing the relationships is not easy, what can and should be done? Simply sitting it out is not an option. A recent survey from PwC showed the finance function had gained significantly in importance and visibility since the credit crisis. But any FD who had identified a clear problem and then left it untouched and failed to act would, surely, lose all professional credibility.

Ultimately it boils down to shifting the balance in the bank relationships. We know it is difficult to change from one relationship to another, and there is uncertainty of the benefits to be gained. Why not then rise to the occasion and change the existing relationship itself. Support for this view comes from an unexpected corner: the chairman of the Basel Committee, Nout Wellink. “There is only so much supervision can do,” he has stated publicly. “Market participants [including customers] have to recognise their own responsibilities, and act according to them.”

Bank Relationship Management is more than just procuring the banking services at the cheapest possible price. That’s probably a good thing, if a piece on investment banking fees in a February issue of the Economist, is anything to go by: “Haggling over fees seems almost distasteful, especially for squeamish Brits who tend to pay what is asked and resent it later.”

Since the credit crisis, diversity between banks in terms of performance on operating costs, compensation policies and returns promised to shareholders have increased quite dramatically. This diversity provides opportunities for customers to have interesting discussions with their own banks. Instead of talking about the numbers, like Net Debt /EBITDA in the context of credit facility renewal, you should also make time in the meeting to invite the bank to explain why they are still aiming for 25% return on equity, whereas peers have meanwhile settled for a more modest number. Someone has to pay for that after all. Will it come out of reduced bonuses?

A detailed understanding of the banking wallet of the company itself, also in the context of risk rating and applicable regulatory capital calculation, certainly may provide that required quantitative insight into convincing the relationship manager that a spread of 1.25% over Libor for the credit facility is heavily overpriced when viewed in the context of the entire business relationship.

Information and insight are power. Once armed with the information you need, you are in a position to start to lay out what you consider to be fair terms and conditions. In today’s economic climate, where businesses are looking to all areas of the business to make improvements in supplier terms and conditions, can you really afford not to act?

Hugo van Wijk is co-CEO of Bank Relationship Management (BRM) solutions provider Vallstein