How should financial institutions measure success in cash and treasury management services?
Some financial institutions focus on costs, while others measure success purely by fee income from customers. But those tactics miss an important point. I believe financial institutions should also include the data point for revenue not attained when it should have been. I like to refer to that measurement as revenue opportunity lost or ROL, and could include waiving fees due for a service or for an entire relationship.
I believe the most accurate measurement of success in treasury management can be found by looking at a combination of cost (profit margin), fee income, ROL and yield on customer balances. The more a financial institution analyzes those four measures of success, the more accurate any resulting strategy will be. In the end, organizations should consider focusing on determining where account concessions make sense – and where they don't.
Financial institutions may ignore measuring cost data points if they think there aren't precise unit cost factors for services. However, a unit cost factor doesn't have to be true, it only has to be consistent so that accounts are measured on a level playing field. More sophisticated systems will likely have more than one cost per service – a fixed cost or variable, such as a set percentage of the unit price. And some systems may bring indirect costs into play with cost analysis – an add-on to a product family of treasury management services, for example.
Only when you combine the components of cost, fee income, ROL and balance yield will you have an accurate picture of treasury management services success.
ACH origination, for example, will have unit costs for each billing point – debits, credits and notifications of change, plus a possible added cost for the ACH product offering as a whole. Any or all costs available for comparing like products and services will aid in computing marginal profitability of a single service, a single account or an entire relationship of accounts.
Actual fee income from a financial institution's treasury management offering is an important component when measuring success by pure fee income dollars. Many financial institutions will regard their best customers as those paying the most in cash management fee income. However, I've witnessed a bank celebrate the sale of a lockbox service – the largest-ever revenue generating product sale for the organization. However, by the time all the people, equipment and real estate costs were paid, the financial institution soon realized the sale was their largest-ever loss leader.
Revenue opportunity lost – ROL – has to be considered as a success measurement but not for the reason one might think. Instead of focusing on the ROL value of the day, which can be caused by waivers, discounts, and concession pricing, look at the ROL trend over time. While concession pricing is often used in treasury management services sales, all too often it's without an end in mind. Incentive pricing should eventually go away, with standard pricing ultimately taking control. The ROL trend line across an organization often goes up when it should at least remain flat or be reduced over time.
Finally, one cannot overlook the importance of reviewing customer balance data, which can help your organization achieve its goals for acquisition of new deposits. However, success measured by balances alone is a slippery slope. If the earnings allowance rate is higher than normal, the analysis fees will be eaten alive – and the actual revenue from cash management will plummet. That gap is also trapped by good revenue opportunity loss reporting. Even concession earnings allowance rates create ROL.
While there were bottles of champagne being opened when the previously mentioned lockbox service was sold, the people involved were fooled by incomplete data. Today, those deposit accounts are all closed and every single person involved works for another bank. Only when you combine the components of cost, fee income, ROL and balance yield will you have an accurate picture of treasury management services success.