Articles on Banking Issues

Date

Article Title

January 1999

Electronic Banking - Cost effective, but for whom?

June 1998

Bank Charges - How to control and reduce them

Electronic Banking - Cost effective, but for whom?

Do the High Street Clearing Banks think we are all stupid?  Or is it just that they want to have their cake and eat it.

Old clichés seem peculiarly appropriate to their attitude to electronic banking.

Businesses across the board have been bombarded with free trials and so-called incentives to try out Bankline, BusinessMaster, Royline, Lloydslink or Hexagon, but, look for long-term logic or cost justification for the products' use and you will find the cupboard empty.  Has electronic business banking taken off?  No, its still labouring after critical velocity on the runway.

Compare the expansion of the Internet, which over the past five years has grown exponentially, in stark comparison to electronic business banking.

Why has the Internet grown?  In many respects the potential benefits of the Internet are more nebulous than electronic business banking but the mechanism of its expansion is crucial.

The mechanism is basically that of "suck it and see" at a nominal cost to the consumer.  The secret has been volume.  If the barriers are perceived as minimal consumers will try it on spec and the more that try, the better the products on offer and more cost effective the service becomes.  

Internet service providers give their software away on the basis that this will encourage high volumes of users whose nominal subscriptions add up to a viable income, which along with additional transaction or access charges finances the service.

Electronic business banking is a far safer bet for this sort of approach.  Yet currently it is sold as a premium service over the far more costly and inefficient manual payment systems.

In addition to buying a computer and modem and the security smart card (all acceptable expenses) customers have to pay for the software and pay monthly access charges, which are far from nominal.  Users also have to convert suppliers and customers alike to BACS type payments and set these up in house.

The net effect is that the new systems are just not cost effective or the savings are small compared to the potential savings in manpower and cheque processing costs that the bank will enjoy when its customers take over all these processes using electronic banking.

This reflects also in the greed that certain banks have reflected in their monthly and per transaction costs, passing on little or none of the savings.

For many businesses, this is just not a viable proposition.  Remove the start-up software costs, reduce the monthly fee to nominal levels and reduce the transaction costs and any bank with a functional electronic banking system would revolutionise the market. Customers would then see the genuine benefits of their taking over the costs of processing from the bank branches, while the banks could rapidly reduce their local presence and overheads to "holes in the wall" and credit management.

But these are banks we are talking about, so we must wait for one to catch on to what other businesses have been doing for years and have the courage to break ranks and lead the way.  After which the rest will follow quickly like the proverbial sheep.

Only then will electronic business banking really take off.
January 1999

Synopsis

The secret to controlling and reducing your Bank Charges is in understanding how the charges work, how your bank levies them and what is available in the banking marketplace generally. This feature lays the ground for initiating this process with your own business banking arrangements.

Introduction

Controlling and reducing Bank Charges is no different from doing the same with any other business cost yet all too often Banking and Bank Charges are seen as a law unto themselves - a view that some bank managers seem happy to perpetuate. In reality Banking is no different from any other commercial service supplier except that its history and product mix often make it difficult to deal with on normal commercial terms. So how do you go about controlling and reducing your bank charges?

Understand your charges

1. How many services does your Bank supply you with? Transaction processing is distinctly different from borrowing. So analyse the different services and how they are charged for:
 

2.  What is the service being supplied and how does your bank charge you for the service? The basic charges types are shown in the above table. Whilst some of these are straightforward others tend to be more difficult to get to grips with, particularly Account charges.

Interest is charged or paid according to agreed rates although you need to be careful with regards to what rates (and other fees) are charged if you exceed your normal facilities. These are not a foregone conclusion and can be negotiated.

Arrangement fees and Management fees generally relate to the setting up and monitoring of loans and overdrafts. Arrangement fees are usually charged as a percentage of the borrowing or at an agreed rate. Management fees are usually charged only in exceptional circumstances unless they are charged instead of an arrangement fee.

Electronic banking charges vary enormously from bank to bank. The main problem is that the banks perceive electronic banking as a premium service from which they can both save money by having their customers perform work they previously had to do themselves, and for which they can still charge relatively high fees for its use and transactions. The key issues are whether it saves you money over all and whether you are receiving adequate recompense for the cost being saved by your bank in lower charges.

International Charges have always been high in the past due to problems of past international communication and the manual nature of the transactions. Today more transactions are being effected electronically and charges similarly are coming down where this is so. There is still though ample room for negotiation if your transaction volumes are significant.
Account charges are generally paid monthly or quarterly and can be charged in any of the following methods:

Only one of the above methods (2.2) allows you to effectively control and compare your Account charges and so reduce them. The banks sell the others as being simple and straightforward - they are, but not when it comes to control!

It is important that your charging method reflects changes that you make in the way you handle your transactions.

3. What do other businesses or the market in general pay for these services? If you have asked another Bank for prices you will know how difficult it is to gain good market information. One of the problems has been the secrecy with which banks have surrounded much of their charging. Account charges have often been described by banks as "the charges for running your account" with little further explanation. In the past this has often covered a multitude of hidden charges for services which you would not normally pay for and charges that are there merely because you have not complained about them or challenged them vociferously enough.

Tariff based charging methods are the only ones that are comparable bank to bank and account to account. However, once all your charges are tariff based, there is another problem and that is the tariffs themselves.

Unlike the utilities industries, there is no raft of tariffs applicable to different groups of businesses. At best there is a "standard" tariff, which is inevitably at the top end of market pricing, and any other lower tariff needs to be negotiated. The banks have internal guidelines to assist them in negotiations but these too tend to result in tariffs that are higher than those that are actually achievable.

As a result it is important that you research what other businesses are achieving and shop around to see what other banks will offer in a competitive situation. The best way to gain this information is to deal with different accounts and deals on a day to day basis and to have inside knowledge of bank costings. For most businesses this means using an independent contractor to provide the necessary market information as it is usually not cost effective to research the information yourself.

Negotiations can be carried out without market information but they are inevitably more difficult and do not benefit from the accuracy with which negotiation targets can be set when well researched market information is available.

4. How does your bank distinguish itself from its competition in quality, consistency and flexibility? Your bank will justify its high charges by quoting these attributes, but are they true? Bank service varies from branch to branch and from manager to manager. Service is rarely consistent across a whole network and, in truth, there is often little to choose between banks.

Some banks are more suited to particular types of business particularly where international trade is concerned.

Although it is becoming increasingly difficult, most businesses still base their decision on which bank to go to on the perceived quality of the manager. In this connection it is important that the manager has sufficient lending authority to meet your needs or you will find that you are dealing with faceless decision maker who does not have first hand knowledge of you and your business.

Understand your Bank
All banks are different yet in many ways they are the same. They are all having to deal with the tide of electronic banking and find themselves with too many staff and branches. They also have to deal with two distinctly similar but different markets - Personal and Business. Charges vary wildly between the two and help confuse the distinction between the cost of borrowing and the cost of day to day transactions - the reason can be found in the different borrowing habits of individuals and businesses. As a result individuals in credit rarely pay bank charges.

Why do bankers reduce facilities when you need them most and offer you them in profusion when you do not? Why do your charges increase when you can least afford them and decrease when you can most afford them? These conditions are partly a result of escalating risk but, more importantly, reflect your bank's perception of your reduced negotiating strength. When business is tough for you, you need your bank to stand by you not just in maintaining facilities but also in maintaining or reducing charge levels - you have to convince them that increasing your charges is in fact escalating the risk and putting repayment further in jeopardy. All too often bank managers are more focused on their internal procedures and guidelines (and personal performance targets) than on the effect these are having on their customers.

Why is an interest earning current account so illusive? Business demand for such a facility has not been forceful but it is increasing and slowly products and accounts are appearing. The key factor though is to ensure that all your credit balances are earning respectable rates of interest.

Overall your bank will be taking a total view of your account with them. You need to do the same. An easily won deal in one area may mask an expensive deal elsewhere. If you are offered free banking, for example, check out why and ensure that you can afford it! Your bank needs to make a profit from your account. You need to make sure that this profit is not too large.

Learning to distinguish bluff from truth is the key to negotiating a competitive deal with your bank. Bank managers appear to be well versed in reasoning that appears sound but is actually side-stepping the real justification which is in your favour.

In addition to competitive pricing you should also be seeking a deal that leaves mutual respect, and you with the initiative in the relationship.

Inside knowledge and market knowledge are crucial to a successful negotiation and a successful relationship. Your bank may not willingly give up the initiative but perseverance and the knowledge that you are sure of your facts will overcome any initial display of indignation.