grzegorz hansen corporate cash management transaction-oriented costing, mis and pricing...

Corporate Cash Management:Transaction-Oriented Costing, MIS & Pricing

Policies

Grzegorz HansenTransactional Banking Department

Bank Millennium SA, Poland

Prague, 18-19 October 2007

09-04-2023 Grzegorz Hansen, Bank Millennium SA, Corporate Cash Management: Transaction-Oriented Costing, MIS and Pricing Policies

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Millennium bcp – a very short introduction

Universal bank founded in Portugal in 1985 Leader in Portugal (ca. 25% market share) Operating worldwide in 20 countries

Group employing more than 20,000 employees

Network of 1,500 branches in all countries of operations

One of major contributors to Lisbon Euronext main index with EUR 10.3 BN market cap (as of December 31st 2006)


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International presence

USA

Angola

Mozambique

Macao, PRC

Portugal

France

Luxembourg

Poland

Romania

TurkeyGreeceSwitzerland

Brazil

UK

Venezuela

South Africa


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Bank Millennium SA: local bank, member of an international group


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CORPORATE BANKING:LARGE CORPORATES

Bank Millennium SA: example of Polish market’s segmentation

micro companies with annual turnover below EUR 0,8 M

companies with annual turnover above EUR 50 M

BIG CORPORATES

companies with annual turnover between EUR 7,5 M and 50 M

companies with annual turnover between EUR 0,8 M and 7,5 M

MID CORPORATES (SME)

RETAIL BANKING:MICRO BUSINESS

EUR 50 M

EUR 7,5 M – 50 M

EUR 0,8 M – 7,5 M

individual Customer (affluent, private and mass market)

INDIVIDUALS

< EUR 0,8 M


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A financial institution shall be driven by a business strategy, Company’s business strategy is a source of its selling

strategies/objectives, Management Information System (MIS) is the crucial instrument of

the business strategy, Costing system – a matter of relative independence – shall be at

least reconciled with company’s business strategy and so with MIS, Costing system and MIS are management and business support

tools. If they are to fit management and business needs, they should not be either more not less sophisticated (variable, detailed) than the business operations which they are to support

The question therefore arises: Who should define detailed requirements towards MIS and set up framework for an important part of the costing system?

There is only one answer to it: The interested party, the competent business unit responsible for income as well as for costs

General approach to MIS and costing


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In case of cash management – Cash Management (or Transaction Banking) business unit shall take the lead!

No budgeting/costing/MIS or any other supporting unit/department will have the right knowledge to define detailed cash management objectives towards MIS or proper framework for cash management-related costing,

It is Cash Management business unit which shall define its business view towards: flexibility of services to be offered to customer segments, possibility, power and competence to develop or acquire business-

supporting IT systems, the range of value-added functions which are to be implemented

This view should be translated into requirements for MIS and into costing system framework

Strategic business view determines MIS and costing framework


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by product (e.g. transfer-domestic, transfer-foreign, direct debit, etc),

by type of product (e.g. transfer-domestic incoming, transfer-domestic outgoing),

by channel of delivery (e.g. paper instruction via branch, electronic instruction via Internet, phone banking),

by channel of settlement (e.g. correspondent banking, STEP2), by cost-determining application of delivery channel (e.g. different

costs for clearing items dependent on timing of presentation), by Bank’s units (or outsourcers) involved, by process associated (e.g. foreign payments: SHA vs. BEN vs.

OUR), other ...

The choice and detailing of these drivers depend on Cash Management’s business view

Possible cost drivers for basic cash management operations


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Sales staff shall be driven by limited number of simple/simplified objectives/drivers

2 typical, ultimate sources of objectives/drivers for corporate banking sales staff:1. direct motivation system (Management-by-Objectives etc),2. MIS extracts presenting „profitability per customer”

Assumption: release of information results in action undertaken on its basis

Shall all costs - which can be allocated to individual customer level - be presented to a Relationship Manager? what about all variable, external costs (e.g. fee paid to clearing per

payment)? what about all variable, internal costs (e.g. branch cost per cash

withdrawal)? what about fixed costs? what about semi-fixed costs, like Central Processing Unit cost

allocation? ...

Difference between cost allocation and business usage of MIS


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Example: Central Processing Unit – costing considerations (1) How CPU works and so whether costing methodology reflects that?

multithread (parallel simultaneous) processing or one-after-another instruction processing?

how to calculate cost if multithread processing is involved? sampling issue, processing - impact on capacity (if scarce), how transaction volume increase impacts CPU cost increase?

Shall Relationship Manager be CPU cost-driven? CPU is the cost which RM cannot reduce but it can possibly be reduced

(not by RM), does the Bank have capacity problems, which require saving CPU time? what should RM (business line) do, if anything, in this matter?


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Example: Central Processing Unit – costing considerations (2) „escape CPU processing” or „outsourcing” strategy

if ‘CPU cost per transaction’ presented is considerable, RM decides to reduce operations of a client effected within the Bank so that customer does them elsewhere (other bank, outsourcer) and does not pay the Bank a price which supposedly does not fully cover CPU cost associated,

„pricing CPU cost” strategy if CPU cost presented is considerable, RM tries to price it to cover this

cost at particular transaction level what may cause ‘overpricing’ as compared to market (e.g. all internal transfers over EUR 0,18), whereby customer does not pay the Bank this price but sends the Bank incoming payments from other bank,

then ... in case of non-scarce capacity, we shall avoid miss-motivation: as CPU cost is kept anyway, we should avoid reducing Bank’s income

which could cover CPU costs at least in part, we shall not make other operations (as they remain in the

denominator) become more expensive as we bear semi-fixed CPU cost anyway,

we often have the operations anyway (e.g. if not as internal payments than as incoming), so we should not choose the way without cross-selling opportunity


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Example: Central Processing Unit – costing considerations (3) solution: in case of non-scarce operational capacity - deliberately

disregard CPU cost (and possibly similar ones) when acquiring new business: take more business to cover semi-fixed cost of CPU which Bank bears

anyway, in case of EUR 0,10 of hypothetical unit of semi-fixed CPU cost, it is

better to get EUR 0,02 to reduce this hypothetical cost to EUR 0,08 than to demand EUR 0,11 and to get nothing (so to be left with full EUR 0,10 cost uncovered),

do not present nor consider this cost on customer level

WARNING: consider CPU cost only in RfPs for 5-20 top-payments-volumes clients in your country, when capacity is really at stake


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Usually, various internal margins (or corrections) are applied by ALCO to define Internal Transfer Rates – given to business lines – for particular customer assets and liabilities,

These ITR are applicable in case of market intermediation (valuation) and risks involved,

However, in case of notional cash pooling applied to funds kept in the same bank (notwithstanding, whether it applies to the balances of one entity or to balances for different companies), the margin between ITR for current accounts and ITR for overdrafts must be propoerly eliminated from MIS reporting, otherwise making the solution improperly overpriced,

External asset-maintaining costs or other external deposit-keeping costs (if any) should be presented, but internal margins shall be – exceptionally – eliminated from MIS reporting for this type of product,

Risks of seizure of funds, imperfect collateral etc must be reduced or eliminated when defining the product or individually minimised case by case

Example of MIS special case: notional cash pooling


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+10 banks in Poland declare their universal character and +10% market-share targeted. In more advanced European markets usually no more than 5 banks declare fully universal ambitions (this always remains a matter of dispute over definitions),

Several areas of strongest competition today: large corporates, mid-corporates, residential mortgages etc. This competition inclines esp. newcomers to enter-by-dumping (esp. when they start with no MIS and concentrate only on volumes and market-share targets). Some banks subsidize a/m lines from other, not so competitive lines of business (retail deposits, retail operations, small-business etc),

These subsidies shall not subsist for long although the current dumping/subsidies and lack of proper MIS and cost reporting make this change difficult to become uniform and universal as below-cost prices create market expectations of customers. Yet, shareholders will force these banks to present more detailed return figures, down to particular lines of business, esp. those banks which will not be doing well overall

Key business/pricing choices (1): Transparency vs. Subsidizing


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Increasing costs of market share growth, The increased competition, increased customer expectation in case

of changing banks as well as promotions for new clients to get large scale market-share will increase substantially the cost of acquiring new clients. It is expected to triple over the next 3 years. This makes it less and less possible to endure cross-subsidizing,

Transaction banking pricing shall therefore not fall below cost to subsidize customer acquisition

Key business/pricing choices (2): Subsidizing Acquisition?


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Different customer segments (sub-segments) represent different needs and are prepared to accept different product-price matrixes,

Different customers of the same segment have different transaction volumes and different requirements for value-added services,

This allows for advanced ‘products packaging’,

Some delivery channels are much more costly and less effective than others. Some of them (e.g. branches for small-amount-transactions cash handling) are doubtfully attractive channel of delivery/dealing with corporate customers at all, esp. since they do not leave much room for segmentation,

Electronic and Internet banking systems allow for identifying particular customers and so for the practical application of individualised pricing

Key business/pricing choices (3): Towards Individualising


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Competences for individual pricing decisions: towards a System (1) The System for individual pricing decisions should reflect:

Bank’s policy towards particular products, services and channels Infrastructural/operational limitations:

in case of scarce capacity of branch operations (staff/space vs. client demand in peak day times) – uncontrolled price decreases can cause operational problems,

Costs of services: external (e.g. costs of: domestic settlements, foreign settlements, cash

processing, cash transportation, insurance for payment cards), internal (Standard Cost of Transactions),

Technical limitations: for certain products/services there may be no easily available technical

possibility to change the standard fee/commission (e.g for payment cards: commission for FX conversion, commission for cash transactions, etc)

© Mr. Wojciech Lukaszewski, Transactional Banking Department, Bank Millennium SA


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A minimum fee/commission - per transactional banking product/service - for particular competence level - shall be introduced,

These minima should reflect a mixture of: corporate banking policy towards products, services and channels, corporate banking policy towards customer segments, external and internal costs of products/services, market conditions and competition,

The System should allow for defining fees/commissions for products/services not included in the general offer,

Transactional Banking should „countersign” these minima as well as fees/commisions for special products/services

Competences for individual pricing decisions: towards a System (2)



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Example of product-competence matrix structure

Standard Low Level Higher Level

High Level Top Level

Product/service X X EUR X1 EUR X2 EUR X3 EUR X4 EUR

Product/service Y Y % Y1 % Y2 % Y3 % Y4 %

Product/service Z Z % min. V EUR

Z1 % min. V1

EUR

Z2 % min. V2

EUR

Z3 % min. V3

EUR

Z4 % min. V4

EUR

Standard pricing

Minimum price that

can be accepted by low (1) level

Minimum price that

can be accepted by higher (2)

level

Minimum price that

can be accepted by high (3) level

Minimum price that

can be accepted by top (4) level

Product/service list as per Bank’s Tariff Allowed minimum

price


09-04-2023 20Grzegorz Hansen, Bank Millennium SA, Corporate Cash Management: Transaction-Oriented Costing, MIS and Pricing Policies

Thank you for your attention

[email protected]. +48 22 5981351fax +48 22 5385747

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Transaction-Oriented Costing, MIS & Pricing Policies

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