Introduction
In my early years in the banking industry as a personal banker at the age of 23, I quickly discovered how complex banking relationships can be. It was clear why new bankers underwent three months of full-time training before interacting with clients—banking products and services are diverse, overlapping, and often interdependent. Missteps in managing these can be costly, both financially and reputationally, for all parties involved.
Six months into my career, I had the privilege of working under one of the most skilled managers I’ve ever encountered. Not only was he an expert banker, but he also had a unique ability to communicate complex information in a way that resonated with both colleagues and clients. His approach shaped my professional growth, and ten years later, I was using the same principles to manage some of the most prestigious Capital Markets relationships, specializing in Treasury.
A lesson that has stayed with me throughout my career is this: to succeed, we must act as trusted advisors to our clients. This mentality—advising rather than selling—enabled my team to consistently meet and exceed targets year after year.
As I approached a crossroads in my career, I decided to take these insights outside the corporate banking world and help businesses optimize their banking relationships from an independent consulting role. The goal: transforming banking operations from a cost center into a profit center.
To my surprise, no consultants in the market had the will or expertise to help businesses realize the full value of their banking relationships. The reason is simple; anyone who knows how to do this will naturally do it on behalf of a bank employing them in the hopes of growing their share of wallet of their client’s holdings.
This is where Banking Optimization comes into play.
Banking Optimization Defined
Banking Optimization is the process by which a business structures its accounts, services, loans, investments, and banking relationships to derive maximum value—not just qualitatively, but quantitatively and measured in dollars.
Businesses often find themselves seeking optimization for a variety of reasons, including:
- Mergers and acquisitions
- Legacy banking relationships
- Unforeseen liquidity challenges
- Changes in interest rates
- Implementation of new treasury systems
- Dissatisfaction with current banking structures
- Recent fraud attempts or security concerns
- Changes in key finance personnel (CFO, Treasurer)
An unoptimized banking relationship disproportionately benefits the bank rather than the customer. By understanding how banking services are structured and priced, businesses can leverage this knowledge to create more favorable terms, even driving profitability.
At Sierra Consultants, we aim to foster mutually beneficial partnerships between businesses and their banks. Rather than adversarial negotiations, we emphasize strategic collaboration. However, when dealing with syndication banks, a relationship exit should only be considered as a last resort, as it often requires expensive and time-consuming processes such as Requests for Proposals (RFPs).
Optimization Framework
A typical Banking Optimization project evaluates two critical areas:
- Business Requirements (Internal)
- Banking Relationships (External)
Internal Business Requirements
This area focuses on internal factors related to treasury and financial operations, including:
- Liquidity management
- Working capital needs
- Cash flow forecasting processes
- Debt and investment management
- IT infrastructure and mission-critical systems
- Governance, risk, and compliance frameworks
External Bank Relationships
On the external side, we assess the business’s banking relationships by reviewing:
- Number and type of banks
- Number and scope of accounts with each bank
- Syndication agreements and obligations
- Fee structures (including payment processing fees, credit, and borrowing interest)
- Overall business relationship quality with each bank
- Reporting capabilities and service levels
Internal components or our Banking Optimization assessment will be focused on what the business does internally, regardless of its banking partners. While these actions still implicate the banks, they are typically planned and executed with non-committal, or agnostic attitude.
External components are bank-specific and will largely vary depending on the relationship’s quality, the banker’s discretions, the share-of-wallet (SOW), the liquidity, payments and borrowing volumes, territories, regulations and governing bodies over each bank.
A comprehensive review of both internal and external factors is critical to uncovering opportunities for improvement. The greater the banking footprint, the more likely there will be substantial annual recurring gains in optimizing it.
Case Study: Large Insurance Group
One notable example of our Banking Optimization process involved a large insurance group whose team was based in Quebec City. This company maintained relationships with two banks, spread across a dozen business units, each managing their banking independently. As a result, the company’s pricing for deposits and fees was inconsistent at best, and their negotiating power was severely diluted.
Working together, we assessed the situation and estimated the potential gains if the company consolidated its banking relationships into a single, all-encompassing pricing structure. By collecting all relevant information across business units and understanding our actual liquidity levels and properties, we were able to leverage the banking significance of the entire company to negotiate a new deal.
The result: the insurance group had approximately $900 million in total deposits, with $400 million in overall working capital across all business units. After negotiations, the client secured a deal that netted them $2 million more, annually. The project was completed within four weeks at a cost of under $25,000, delivering a substantial return on investment.
This example highlights the importance of centralized negotiation and leveraging the full financial weight of the organization to achieve the best possible banking terms.
Payment Optimization
One area that frequently goes overlooked by businesses is Payment Optimization. While banks often pitch payment optimization solutions, businesses are hesitant to act, fearing that these proposals primarily serve the bank’s interests by increasing its share-of-wallet. In reality, businesses can achieve significant savings and efficiency improvements if they approach payment optimization strategically.
By shifting payment volumes from costly or inefficient methods to better-suited alternatives, businesses can:
- Reduce payment processing fees
- Gain leverage in negotiating fees or incentives based on transaction volumes
- Extend Days Payables Outstanding (DPO) without harming supplier relationships
- Free up working capital, which can then be invested or used to earn credit interest
Despite the hesitancy that often surrounds payment optimization projects, they can be highly beneficial when integrated as part of a broader Banking Optimization strategy. Importantly, these projects can often be completed without the need for an expensive and cumbersome RFP process.
Liquidity Optimization
Liquidity optimization seeks to maximize the value of liquid assets while maintaining flexibility to address unforeseen events. The challenge lies in striking the right balance between securing competitive interest rates on treasury accounts and ensuring sufficient liquidity to meet operational needs.
While larger businesses can negotiate better rates with their bankers, there are limits to how much leverage deposits can provide. A common misconception is that higher deposits guarantee better terms, but as banks are focused on balancing liabilities and assets, large deposits may not always lead to improved rates, especially in high-liquidity environments.
Funds Transfer Pricing
Funds Transfer Pricing (FTP) is a critical concept that influences a bank’s internal pricing mechanisms for loans and deposits. Banks treat deposits as liabilities and loans as assets, and the rates for both are carefully managed to balance their overall financial position and profitability.
In environments with higher interest rates, banks may receive more deposits than desired, reducing their willingness to offer favorable rates on those deposits. Conversely, in low-interest environments, borrowing becomes more attractive, but margins tighten. Understanding this dynamic can help businesses approach their negotiations with banks more effectively.
There are obviously cascading effects of each rate environments in the supply chains that will trickle down to the consumer pricing on goods and services, but that’s beside our topic.
Large amounts of liability, coupled with simple deposit supply and demand understanding will explain how your large dollar deposit doesn’t guarantee you a better rate if it’s not in the overall interest of the banks.
Initial Conclusion
Banking Optimization offers businesses the opportunity to transform their banking operations from a necessary cost center into a potential source of profit. By reviewing both internal business needs and external banking relationships, companies can uncover areas for significant financial improvement.
As demonstrated by our work with the large insurance group, a strategic and well-executed optimization project can deliver substantial annual returns with minimal investment.
While this white paper focuses on the first steps of Banking Optimization, Part Two will delve into the macroeconomic factors influencing bank pricing and incentive structures, offering further insights into how businesses can enhance their negotiating power with financial institutions.