Banking Fees: Perspectives, Pricing and Policies
The world economy continues to tread on a path to recovery following the 2008 economic crisis, the causes of which have been analysed, dissected and as a result regulations tightened. Business fundamentals, especially in the financial sector, have been tested and many financial institutions have indeed bitten the dust. As most businesses within the financial industry went through stress tests, banks and investors alike realised the importance of stable annuity businesses such as cash management, trade finance, and custody services collectively referred to as global transaction banking within their suite of banking services. The transaction banking business is now on the agenda of virtually every bank’s chief executive officer (CEO) because it has offered steady annuity base, relatively low risk and reasonable growth linked to GDP of the regions that the banks operate in.
As interest and borrowing rates were cut by central banks around the world in a bid to keep the economies from floundering post the crisis, there was a great impact on the transaction banking business of most commercial banks as margins thinned and consequently annual growth of top line revenues started to look anemic even as transaction volumes grew.
This was a wakeup call as banks realised that a steady fee component in their revenue streams was imperative to ensure robustness and immunity to external rate environments, which they had no control over. The market has since seen an effort by banks to re-price and tweak fee models in an effort to bolster annuity fees linked to volume and usage of services.
While there is now a realisation that fees should have a larger contribution to the revenue bucket, the banks face a tough situation.
In the preceding years pre-crisis, interest rates were an all time high. Clients enjoyed fee waivers given the decent float margins. Re-instating fees for key clients already enjoying the waivers would be a tough sell.
Competition in the sector had intensified over the year. Post the economic crisis even more banks and traditional non-players were entering the global transaction services space. Most banking products in transaction services are commoditised and thereby lending itself to fee margin pressure.
Another big challenge banks are facing is from non-banking players entering the payments arena especially in the remittance space. By virtue of not being regulated as tightly as the banking sector; these players are often nimble, aggressive and have products with very short time to market cycle. They act as aggregators and ride on mainstream banking system and infrastructure to deliver convenient payment options thereby quietly capturing market share and revenues that would have gone to the banks.
More than ever, clients are well aware of what they are paying for and where they could get a better deal. Standard and preferential pricing from different banks are compared and scrutinised carefully by clients before deciding on a banker.
Regulators are also issuing guidelines on fees that can be charged by banks. For instance, Bank Negara Malaysia has issued fee guidelines and they are tightly enforced. In other parts of Asia, Reserve Bank of India has published guidelines for various payment and account service products; so has State Bank of Vietnam Although these are defined as ‘guidelines’ mainly to promote usage of electronic channels; banking fees is something regulators are looking into. This is certainly a consideration and deterrent for banks for pricing basic banking products.
Banks billing systems are far from efficient. But investing in new products has always taken precedence. There is now an attempt amongst key players in the space to streamline their billing engines, introducing transparency and arresting fee leakages
Transaction and payment volumes have grown over the years and the banks have invested heavily into middle and back-office systems and automation to ensure scalability. Fees however have not moved in tandem with volumes. Revenues did move in tandem till the interest margins started to erode.
As Porter’s five forces theory would agree, all these external and internal challenges add to the downward pricing pressure of banking fees.
Given the above challenges, the banks face a conundrum: How much to charge and for what type of services? Most basic banking services have become commoditised and the mercury is rising as banks compete to drive up market share. Leading banks have also moved up the value chain from pushing products to actually understanding client needs and crafting tailored solutions.
Solutioning holds the master key. Plain vanilla product pushes, be it cheque outsourcing, liquidity management, virtual accounts or import/export finance, are passé. However, bundling these to meet a client’s working capital needs in the most efficient manner is where banks can differentiate themselves and indeed charge a fee in the process. This essentially means a move and mindset change away from product push to client solutions and would also imply flexible technology and product platforms, sales teams with good understanding of clients and industries, quick turnarounds, etc.
Banks also need to focus on creating innovative products and add-ons that truly add value to the clients – to be in the forefront and creating the next wave instead of trying to catch it. The banks that are successful in doing this would be able enjoy a first mover advantage until others catch up and also to enjoy the goodwill of the clients. This would also enable banks to create new revenue streams. One such value added service that clients are increasingly demanding is a robust and reliable cash flow forecasting; this has become a treasurer’s Utopia and where banks with the right solution can make a difference.
Although the last decade was spent on driving efficiency and standardisation across products, customisation and flexibility have become the flavor of the day. Clients expect exception handling and flexibility. Banks need to walk the rope and strike a balance between these conflicting agendas.
Another essential that is much preached but seldom practised is the holy grail of Service Excellence. Regardless of how superior the product offerings are, they need to be backed up by efficient and effective client experience all through contact with the bank.
Cross selling across products and geographies also holds immense and often untapped potential. Given that with Basel III credit is going to get more expensive, banks need to insist on increased wallet share for the transaction banking business. As clients make the transition from being local to regional or global players, especially in the emerging Asian markets, banks with the network strength can seize the opportunity to cash in on greater revenues. The skill is to remain attuned to client visions and plans and sniff out opportunities.
The new non-banking entrants in the payments space are here to stay in one form or another. Alternate transaction modes especially in payment are gaining traction among retail and corporate clients alike. Banks could consider collaboration through joint ventures/partnerships (e.g. DBS Bank partnering with AXS) .Banks could also view such providers as an extension of their own network reach and thereby leverage these to their benefit. The regulatory and compliance issues from such alliances, however, need to be ironed out.
There is no need to reiterate that fees are an important driver in banks’ revenue to ensure stable and sustainable performance especially in the annuity businesses.
As plain vanilla banking services get commoditised, it’s imperative for banks to build scalable platforms to drive processing efficiencies thereby driving down unit processing costs and passing the benefits on to clients with innovative pricing models such as product bundling or volume discounting. At the same time, pure price play will not be sustainable; banks and their sales forces need to move up the client value chain by offering strategic future views and advisory on industry trends, regulatory changes, etc.
Such integrated advisory services with value added transaction banking solutions engrained with a true understanding of client needs to ensure solutions are uniquely tailored to a client/industry would guarantee that fee revenue streams will continue to be a major contributor to bank profitability.t