The Other Crunch: Bank Services

Companies that relied on their banks for data processing and other noncredit services have been strongly affected by the rapid shrinkage of the industry.

Banks have increasingly turned to noncredit services as a basic source of income, and the volume of activity has burgeoned.

But when a merger or acquisition comes along, the acquired bank's system is likely to vanish in favor of the dominant bank's, regardless of customer needs.

Speed in implementing the merger and reduction in costs mean more to top management than state-of-the-art service.

The corporate treasures who use banks for data processing have to worry about the financial risk inherent in the failure of the processing bank.

Better Big than Dead

This is why so many turn to big banks under the "too big to fail" doctrine, even if smaller institutions have better processing services. It is also a basic reason why "too big to fail" will have to be moderated, lest the big get bigger and the small banks get smaller in the years ahead.

But the question still arises: What should we do in evaluating banks for data processing service, forgetting the financial risk factor for the moment.

David Cates, head of Cates Consulting Analysts, a division of Washington-based W.C. Ferguson & Co., reported in a recent edition of his periodical The Bank Analyst that a corporate client put it this way:

"Our very retail business requires intense support from a few banks we carefully selected. In one sense, these services are cotter pins. If they snap, our wheels fall off."

Mr. Cates' response differs from that of the operations officers mentioned above. He believes that banks with credit problems often strive even harder to keep their processing clients happy, for he believes this is their best link to profitability and institutional good opinion, pending repair of the entire bank.

Mr. Cates adds that the ax usually falls lightly on the processing side. This is because fee income becomes the kingpin because it carries little or no credit risk, no funds risk, and little or no regulatory capital cost. Morale also soars because the processing people know they have become the bank's "crown jewels."

Mr. Cates then specifies four tests that a nervous treasurer can use to ensure that his bank's processing relationship still basks in management commitment:

* Has the error rate changed?

* Does processing remain important enough to be included in discussions in the annual report?

* Is there a critical mass of clients - indicating their importance to the bank?

* Is the service profitable, not just based on the small capital needs but on operating margins? This is the key to management's continued commitment at times of a change in bank structure and ownership.

What's a Relationship?

What the entire question highlights, then, is the old issue of "relationship banking."

As part of the new banking culture of the go-go 1980s, we saw many banks give up evaluation of relationships and instead evaluate each service, each loan request, and each month's activity on an individual basis. Corporate treasurers reported that the banks were quick to offer services that earned a profit and quick to turn down those requests that were more of an accomodation.

Such a policy earned no loyalty. Yet it has been the loyalty of depositors and service users that has determined the survival or failure of many institutions in the trigger-happy 1990s.

Data processing service is, of course, the ultimate relationship service.

A corporate relationship can survive for a while without new credit. But if the services that a company has come to depend upon are weakened or downgraded, corporations can't wait for the bank to get its act back together.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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