The 25% Approach: Bank Transaction Charges

August 06, 2014

We're in a series called The 25% Approach, focused on reducing costs from service providers. In the first post, we focused on legal charges. In this article, we'll look at how to save money on bank fees.
Manufacturing and distribution companies tend to shop for competitive pricing from suppliers every year or so. But as we noted before, this is not always the best approach to a service provider relationship. In fact, it usually does not make a lot of sense to change vendors every year. When it comes to intellectual capital, the longer the relationship, the larger the knowledge base. This encourages retention.
But that does not mean you shouldn't ever examine your current deals with lawyers, banks, or other service providers. We proposed three guidelines that should help you decide whether making a change is worth the hassle.
First, the gain from changing vendors has to be worth the disruptive effort. For the sake of this series, we're using a 25% reduction in annual charges as our goal.
Second, the savings needs to the sustained over time; no “one year wonder” is worth it.
Third, there needs to be CEO backing for this effort. There is likely to be a push back from the status quo inclined service users, so it's important to tie in the savings to overall company goals.
In this post, we'll focus on saving money from banking transaction charges. Companies usually do a pretty good job at shopping for competitive financing and focusing on the obligations that come with borrowing. What they generally don't focus on is the cost to manage transaction activities.

Bank transaction cost comparison

To determine possible transaction cost savings, you will need to prepare an activity report. Choose a representative month, and look over the volume of individual transactions from your bank statement and other sources. Multiply that by 12 to roughly project annual transaction costs.
Each bank will have a different method for calculating charges, but they usually follow this pattern:

Monthly Service Charge/Account Analysis

Some banks charge a monthly flat fee plus some activity charge for deposits and checks. For those with a lower activity, the charges might be offset by the earned credit from a positive balance on the account.

Treasury Management

These charges include the sweep account, lock boxes, ACH (Automatic Clearing House) payments, remote deposits, and positive pay (the protection against duplicate payments). Of these, changing lock boxes is the most disruptive feature to consider when changing banks. All customers need to be notified of the address of the new lock box and its new number identifier.
Some banks provide an earnings credit for positive balances as a sort of compensation. Research the history on this credit. We are in an unusual time of low interest rates, so adjust for future credits. The credit rate will rise as the interest rate rises in the next few years.

Hard charges

Wire transfers, EFTs, safe boxes, notary charges are all included in this section. If you use wires often, this may be a significant cost.

Merchant processing

Lastly, do not forget about merchant processing. The Visa or MasterCard program maintenance costs vary substantially between banks. Make sure you account for this cost when assessing the value of a change in bank vendor.
Once you have computed the annual net costs of maintaining a bank account, you are in a position to decide whether to change banks. Make sure you take a holistic view of the banking relationship. For convenience, most companies do business with a bank that has retail locations in their state. If you are accessing a credit line, there may be a stipulation that you bank with the lender.

A few more considerations

If you are dealing with derivatives or complex international transactions, it may be worthwhile to pay the extra charges to work with a national clearing bank. These banks will say they are price competitive with the regional or local banks, but they are not. Large national clearing banks have higher support costs and hence higher charges.
Be aware that some regional and local banks say they can handle complex international transactions and derivatives when they cannot. When we look at regional and community banks, we will find a wide disparity in the charge levels as well. Don’t be afraid of looking at a couple of banks to assess your current bank’s price competitiveness.
In the next posts in this series, we will look at what to consider when comparing insurance costs and audit fees. It's possible to find big savings for your business in both of these areas.

Topics: Featured, Management

Peter Duff

PDC Consulting

Peter is a seasoned financial and operational executive who is passionate about enabling  businesses to reach the next profit and cash generation level. He brings to consulting a broad experience of over 30 years as EVP, COO, and CFO roles in diverse consumer, industrial and technology businesses. Peter has been responsible for significant improvements in revenue, margins, expense as well as cash levels in manufacturing and service oriented businesses. He has a solid background in domestic and international settings with top 500 companies, middle market, start-ups and service operations. Peter is a trusted adviser to private equity and other fund managers.
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