The Customer is Always Right - Finally
Interestingly, it’s not just the tier one large corporates that are getting their way now in the banking relationship but also tier two and middle market customers. If their bank won’t give them what they need, there’s always another bank that will. Call it the corporate liberation movement. But it’s been a long road to freedom.
Back in the early 1990s, all of the big banks began pursuing ‘total quality management’ (TQM) or similarly named quality service programs. They spent millions if not billions of dollars on staff training, customer relationship management (CRM) systems, marketing, etc. Since all bank services were basically commodities anyway, the banks thought that “quality service” was what would differentiate them from other banks. The mantra was “the customer’s always right”, or at least we have to make them feel like they are. But the banks didn’t really want it to be true. Having these programmes, and putting up quality of service posters at the retail branches made them feel better whilst still raising fees, and continuing to offer single-bank systems to their customers. All of those quality service and management by objective courses, re-engineering projects, and marketing campaigns bank employees were sent on may have improved ratings on customer service surveys but was anything new really offered to customers? The only way banks differentiated themselves was in how “customer focused” (touchy-feely) their ad campaigns were.
Then, around 2001, the new buzz phrase was “perception is reality”, which meant that whatever the customer thinks is true, and it is true because they think it is. Banks had to respond to that perception whether right or not. What a tide change for the banks. Like it or not, they could no longer afford to ignore what their customers were telling them. Transaction services such as automated clearing house (ACH) and lockbox are commodities, and banks don’t make much money from these transaction services, especially if they outsource the processing. The price point is too low and the competition is too high. Meanwhile, customers started centralizing their treasury operations and consolidating banks like never before. Bank relationships used to be sacred, built up over years and years of wining and dining. Not anymore. Now, less is more when it comes to bank relationships.
So, what are corporates looking for in the way of services that the banks have responded to? It started with services like positive pay and reverse positive pay. Banks had to respond to the increased level of fraud that corporates were experiencing by putting systems and services into place to curtail it. Meanwhile, with the age of the
Internet in full swing, dial-up balance reporting became a heavy burden for the banks. Many banks began developing web-based reporting methods. The good news was that the manual process of dialing the banks via a TTY connection was decreasing because it was fraught with technical problems and delays. The bad news was that if you had a treasury workstation, it couldn’t handle web reporting. Now the corporates had to get their software vendors involved too.
Traditionally, the banks and the treasury workstation (TWS) vendors don’t play nicely together because banks view the TWS vendors as competition. They want to keep their customers to themselves, by giving them single-bank solutions, and enmeshing them so deeply in their services that the customers can’t easily move to another bank. Treasury workstations are a threat because they’re multi-bank systems that allow the corporate customer to transact with other banks and change banks more easily. Banks have made corporates pay a high price for balance reporting transmissions that run outside of their bank-based solutions. The banks used to encourage customers to pay not only for BAI reports for their treasury workstations but also readable text format because, they said, you can’t trust the TWS to check everything correctly – don’t you want an audit report? Most corporates figured this fee trap out soon enough.
On the flip side, the TWS vendors don’t like working with the banks because the banks make it so difficult for them, although it’s not always intentional. Adding a new BAI code to a report can throw some treasury workstations off pretty easily. Often, corporate customers have to run interference between their banks and their vendor. Responding not so much to customer demand but to the need to get rid of dial-ups, many banks are now offering FTP based file transfers, so that corporate treasury workstations can get their much-needed downloads. And the monthly bank statement serves as audit to the daily BAI reports as intended.
Moving ahead to the year 2005 the current craze is straight through processing (STP). Yes, I know you’ve been hearing about STP for years now. No one seems to agree on what it means exactly, but we all know we want it, right? In order to provide STP, everyone agrees that a standard protocol is needed. The banks are still holding on to BAI for dear life – don’t expect that to go anywhere for some time to come. XML looks to be the next great hope in terms of a financial protocol that everyone agrees on but we’re more than a few years from general adoption, especially by the banks.
Despite the lack of cooperation from banks, customers are starting to define their STP needs. Let’s look at FX transactions, for example. At a high level, the transaction flow is that a trade is executed between two counterparties, the trade is confirmed, a payment is made, and the trade is settled. If only it were that easy in STP terms. The usual number of systems involved in this simple transaction is quite large. And making them all share information in “real-time” in order to provide STP can be quite tricky. Many customers would be satisfied with file uploads and downloads between their systems, banks, and vendors. But in this day and age of SOX and FAS133/IAS39, the points of failure these manual processes bring are becoming unacceptable to many corporates.
In response to this need for STP and compliance, forward thinking vendors would create solutions at every point along the FX value chain. Start off by offering trade execution, then add confirmations through a neutral third party, now initiate a payment and confirm it, see the impact to the corporate cash position, and reconcile the cash flow – all within a single portal. Can the banks pull this off? An awful lot would have to change to make this happen. The banks would have to be more open to offering multi-bank, multi-vendor services and they would have to invest in new technology rather than continue to patch their legacy systems.
Corporates these days want easy access to all of their services through a single platform or portal. They want a single system to pull in yesterdays’ balance reports from all of their banks. They want a single software vendor, whose software “talks” both to their banks and their ERP system. What they don’t want is to get involved in a big implementation project with their IT department and they shouldn’t have to anymore – not with today’s technology. The answer for the banks and for the vendors is to develop solutions that address all of these needs. What makes the most sense is to provide corporates with a single, integrated portal to their application and transaction needs, regardless of which banks, vendors, or ERP systems they use. Banks have to start thinking outside the box or outside their four walls so to speak, and provide secure, multi-bank, open architecture solutions to corporates or risk losing them to a bank that will. Vendors have to start offering transaction and application services beyond the traditional installed software solutions, develop technology partnerships with best of breed vendors, and develop good liquidity relationships in order to provide true STP services to the corporates.
So, to answer the question of whether or not bank relationships are changing, we can safely say that they are. However, banks aren’t providing new services unless they’re forced into it due to market pressure or their own technology requirements. But that’s good news for the corporates because they don’t have to accept the same old commercial offerings anymore. They can walk away and look for banks and vendors who will listen to their needs. And then, finally, the customer will always be right.