MKGT 337 Exam 2

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What is Treasury Management?

Consists of products and strategies for optimizing a company's liquidity, maximizing profits, making investment choices, and mitigating any potential risks to the business and its reputation.

What is Information Management?

Account reconciliation and custom reporting, e-statements, online/mobile banking , automated BA12 / API

What is Cash Flow Management?

ACH origination, wire origination, zero balance accounts, cash sweep, loan sweep, ACH tax pmts, remote deposit capture, lockbox-wholesale/retail

What does treasury management provide in terms of risk management?

ACH positive pay, check positive pay, dual control, administrator control for user access, online ACH

What is the successful selling cyicle?

“AIDVNC” - Approach, Interview, Demonstrate, Validate, Negotiate, Close

Why would a prospective customer switch their business over to your bank? (Reasons for willingess to move)

Urgency, Timing, Attitude, Pricing, Location, Array of Products, Insitutional Image

In the context of the sells (and the selling cycle), what is urgency?

Imediate need to purchase.

How do bankers close deals on urgency?

• Be swift + prioritize your timeline

• Show you can deliver

• Mitigate competition, deliver on timeline

HM: Bankers give their clients the paperwork to sign off on loans with terms embedded in the documents. It is not uncommon for clients to renegotiate terms before signing. (Story about client who changed terms on doc sheet and sent it back to dwight to sign off on)

What comes into play when considering “timing” in sales/banking?

• There is usually a deadline involved

• Banks have an approval process, closing/transaction process, and funding process. This should be a high priority for bankers to ensure the transaction closes in a timely manner

• Failure to deliver on time —> Lost opportunity

• “Better to give a quick no than a slow yes”

• Note that prospects are working with other banks at the same time as they are with you, act quickly

• Risk your personal image as well as the banks if you fail to execute on time

What comes into play when considering “attitude” in sales/banking?

• A prospect disappointed with their current bank is an opportunity for you

  • Prospects that hold a good rapport with their current bank usually make a difficult sale

• Your likeability factor as a banker and person

• A good attitude with your current clients —> They are more likely to refer you to other business

• Prospects will be influenced by your demeanor, professionalism, dress, attitude and personality

What comes into play when considering “pricing” in sales/banking?

• High price brings higher expectations

  • Never apologize for your pricing —> use it as a selling point for being the highest quality

• Value you provide must always exceed the cost

• Unless a propsect is very price sensitive, most will pay a premium for greater value

What comes into when considering “location” in sales/banking?

• Location remains an important factor, especially to small businesses

  • Online banking + branch locations mitigate location issues

• Correspondent / Syndication banking relationships can be important and also help mitigate location issues

• Emphasize your strongest / most important selling points to the prospect to prompt them to move to your bank

Know:

• Chase Bank 500 additional branch locations nationwide

• Frost Bank added 25 branches in DFW / Houston

Why is instiutional image important for bankers?

• Bank Image/ Reputation is a major part in the marketing/sales success of a bank

• Similar to airlines, auto, and entertainment industries, banks have an established image to uphold

• Customers hold banks with a “high image to uphold” to a high standard and expect premium services

• Image/Reputation can also mitigate price sensitivity in a customer,

  • Customers will pay a premium for higher expectations

What factors influence pricing in banking?

Economy, Cost, Relationships, Competition, Risk, Percieved or Realized Value

How does the economy impact pricing in banking?

• Interest rates set by the fed impact profitability of banks (Net Int Margin)

• When rates are low, deposits flee from banks, making it harder for banks to lend

• NIM = Net Interest Income / Earning Assets

How does cost (of doing business) impact pricing in banking?

Target pricing for banks should allow for components like operating expenses and risk, while still leaving room for profit

How do relationships impact pricing in banking?

• Bankers should build strong relationships with their clients and prospects

• Relationships should be a long term vision

• Better relationship = More flexibility on pricing

Know:

• Corporate industries lose 20% of their customers each year while banks typically only lose 5 to 10%

How does competition impact pricing in banking?

Increased competition, driven by industry deregulation, interstate banking, and intrastate branching, has stripped away traditional pricing protections. This forces banks to price more aggressively to win or retain business.

Bankers counter by arguing for loan convanents in the deal. Also by giving customers earnings credit ratings, and compensating balance arrangements

How does risk impact pricing in banking?

• Bankers typically lend at higher costs when they deem the customer to be risky

  • Use of CECL (Current Expected Credit Losses) versus historical credit losses

• Banks use a risk rating system to determine target profitability (Higher risk must be compensated by higher reward)

• Bankers take on a lot of risk in grading the credit quality of borrowers

How does perceived or realized value impact pricing in banking?

• Value is intangible and can be difficult to be perceived by a prospect in a manner that impacts price.

• Value to the client is the total banking experience —> They will always be willing to pay for what they deem as worth it

Different types of costs:

• Historical average cost of funds

• Marginal cost of funds

• Pooled marginal cost of funds

• Weight average projected costs

What is Historic Average Cost of Funds and qualities?

• Based on historical averages of costs of funds

• Does NOT factor in anything forward facing like future rates rising

What is the marginal cost of funds?

• Cost of borrowing an additional dollar

What are pooled marginal funds?

A common pooled source of funds selected for pricing

What is the weighted average projected cost?

• A weighted average of costs at a specific price

• Also an estimated marginal cost of funds (using an average cost of all the funds to find out what the next dollar will cost)

How does risk impact a loan and its credit rating?

• Frequency of loan review depends on credit grading (depends on risk)

• High Risk = increased handling, monitoring, and reporting

• Loan pricing should compensate for loans higher risk

What are compensating balances?

A compensating balance is a minimum bank account balance that a borrower is required to maintain in their bank account as part of a loan agreement.

An example of compensating balances?

Customer leaves 10% of total loan amount in deposits at the bank. On the loan interest they pay a base rate + 1%

Customer leaves 20% of total loan amount in deposits at the bank. On the loan interest they only pay the base rate

What is an Earnings Credit Rate (ECR)?

Banks offer a service calling ECR or Earnings Credit Rate where they pay interest on deposits like a normal account. However, the interest is not deposited in cash to the account but it is directly/automatically used to pay service fees and other bank charges.

Banks use this strategy to attract deposits as a hassle-free account for the customer.

What are fixed rates versus floating rates?

Interest rates that are fixed for the maturity of the loan, or are floating (variable) and usually attached to a market interest rate. EX: 7% fixed versus WSJP + 1.00% variable.

What caused the S&L Crises of the 1980’s?

Banks had lots of low fixed rate loans outstanding and the interest rate economy made them pay very high interest on deposits, leading to a thinning or even negative NIM

Do bankers prefer fixed or floating rate loans?

Floating rate loans are preferred as they mitigate interest rate risk

Do customers of a bank (business owners) prefer fixed or variable interest rates?

They prefer fixed rates as it is easier for them to know what’s to come in the future —> rising interest rates in the future can interfere with their ability to service the debt

What are caps (ceilings) and floors of a floating rate and who do they protect?

Cap (Ceiling) —> Interest rate cannot rise higher than XYZ. Protects customer from paying “too high” of an interest rate in the future.

Floor —> Interest rate cannot fall below XYZ. Protects banks’ profitability (NIM)

How does pricing correlate with fixed interest rates?

Longer term loans with a fixed rate —> Higher fixed rate

(Banks want higher fixed rate to protect themselves from interest rate risk)

What is performative pricing?

Pricing that is tied to performance metrics of the company who is taking the loan.

• Rate is tied to these metrics

• Permits banks to change the rate without refinancing the entire loan

• Usually set up to optimize NIM where the customer will get a higher rate on their deposits than average, but will also pay higher interest on their loans. —> Price on loans can be brought down through high quality performance

What should bankers know about the products and services they sell?

They should know the features of the product or service (how it works) and how it benefits the customer

(How it is superior to the competitions)

What do Melancholy (Controllers) want to know about a banks products? What do phlegmatics (plodders) want to know?

• Controllers want to know how the product/service works and how it benefits them

• Plodders want to understand the details and process of a product/service

What is a mistake bankers make when offering products/services to prospects?

They fail to tie the product/service back into the prospect. How does it directly benefit them, can it be quantified, what are the desires and issues the customer is having?

What is the Export-Import bank (EXIM) of the US and what do they do?

The Export-Import (EXIM) Bank is the official U.S. government agency that provides financing, insurance, credit expertise, and loan guarantees to help American companies sell their goods and services to international buyers.

What are the qualifications for an American business to use the EXIM bank?

• Qualifications: 

  • 1 yr operating history ; positive net worth 

  • goods/ services must be exported from the U.S 

  • Export destinations cant be in restricted countries 

  • Exports must be non-military 

Note: Loan funds are typically used for working capital (inventory and labor)

What is a Business Letter of Credit?

A Business Letter of Credit is a bank’s written guarantee that a buyer’s payment to a seller will be received on time and for the correct amount, essentially replacing the buyer's credit risk with the bank's credit.

What is the issuing bank in the context of a business letter of credit?

The buyer's bank that creates the Letter of Credit and takes on the primary liability to pay the seller.

What is the confirming bank in the context of a business letter of credit?

The seller's bank that adds an extra layer of guarantee, promising to pay the seller even if the Issuing Bank fails.

What is a commercial letter of credit?

A primary payment mechanism where the bank is the standard way the seller gets paid once goods are shipped.

What is a standby letter of credit?

A secondary payment mechanism used as a "backup plan" that the bank only pays if the buyer fails to perform.

How do business letters of credit help U.S. exporters?

Ensures the American seller gets paid by a foreign buyer once shipping documents are presented.

How can a business letter of credit be used in a commercial lease?

Used by landlords as a security deposit; if a tenant defaults on rent, the landlord can "draw" on the LC to get paid.

What are some features and benefits of a business letter of credit?

• Features

  • Banks credit supports your business transaction 

  • Bridge a financial transaction between 2 parties

• Benefits

  • Serves as bond for performance 

  • Supported by banks credit 

What are the benefits and features of a business line of credit?

• Features: 

  • Pre approved for advances when needed 

  • Provides flexibility for seasonal credit requirements 

• Benefits: 

  • Provides flexibility for the business 

  • Take advantage of discounts/ temporary liquidity needs 

  • Line assist business with growth and expansion goals 

What are the benefits and features of a revolving line of credit?

• Features: 

  • Collateral : eligible AR or inventory 

  • Repayment from AR collections 

  • Allowable loan advances determined by borrowing base 

• Benefits: 

  • Provides business with operating funds pending collection on AR 

  • Gives business substantial flexibility

What are the features and benefits of a term loan?

• Features: 

  • Enables acquisition of expensive asset with repayment over extended period 

  • Enables equipment purchase w/o using available cash 

• Benefits: 

  • Preserves companies cash positon 

  • Enables company to grow w/o jeopardizing CF 

  • Repayment through stable long-term cash sources 

What are the benefits and features of a bridge loan?

• Features: 

  • Maturity tied to bridge 

  • Enables business to acquire an item before replacement item is sold 

• Benefits: 

  • Provides operating flexibility

  • Preserves companies CF during loan term until alternate property is sold 

What is factoring?

When a company sells their accounts receivable to a creditor who then pays them X amount for the receivables (a factor), less than 100% but allows the business to collect cash fast.

What are some benefits of factoring? (For a business)

• Retain ownership 

• Improves CF 

• Funding grows with your sales 

• Faster than traditional financing 

• Bridge to bank financing 

What industries most commonly factor their receivables instead of waiting to collect on them? Why?

Staffing and Transportation companies —> They need working capital quickly on hand

What is the biggest risk in factoring receivables? (From the factoring company/banks perspective)

Fraud - buying receivables that are not real or that they will never collect on

**Factoring takes more enquiry (curiosity and questioning) of the situation rather than credit risk (will the receivables be able to be collected on). This is why they won’t give a business 100% financing on their receivables.

How does factoring reduce risk for a business?

It allows the business to “collect” on their receivables quickly and helps them avoid bad debts, helps them improve their cash flow and cash collection cycle, and helps them avoid taking on additional/new debt to bridge the gap in collections.

How does a factoring company evaluate risk?

• Creditworthiness of a company's customers 

• Strength of receivables + invoice documentation 

• Looks primarily at business CF , not historical profitability 

How do talkers (sanguine) react to negotiation?

• need personal support working through decisions 

•  Important they buy from ppl they like 

• They fear social disapproval

• Often get financial approval from superiors

How do doers (choleric) react to negotiation?

• want to be convinced of “results” ; make their own decisions 

• Don’t have problem making decisions

• No fear of social disapproval 

• Will reveal you haven't proved how your product will lead to end result benefits 

How do controllers (melancholy) react to negotiation?

• Want “facts + documentation” 

• Will object until convinced your product will give them their desired performance 

• Have organized, logical minds you must satisfy 

How do plodders (phlegmatic) react to negotiation?

• Want details about product/ services features 

• Can’t be rushed into a quick decision 

• Negotiation must remove risks and must mitigate change from processes they're currently using 

• Resistant to change/ historical way of doing things 

What’s the most important thing to remember in negotiation?

Winners seldom make the largest single concession.

Losers in negotiation make the first concession

Winners force their opponents to offer their concession first

Concession being what they give up in negotiation as a compromise. Making/giving a concession = giving other person in negotiation more of what they want and less of what you want

What are the prior sterotypes and behaviors of a sales person? What have the traits of a salesperson shifted to?

Prior sterotype is that sales people are very extroverted, not scared of the moment or being rejected, very talkative and smooth talking

Modern day sales favor the ambivert, where the process is more collaborative and consultive rather than a “smooth talking” salesman. On going sales training is common in most companies and has evolved to specialized/complex situations.

What behaviors someone can partake in to self promote themselves?

• Position

  • Contacts, networks, who you hangout with or are seen with

• Style

  • What gets you remembered

• Consistency

  • Staying in the spotlight

  • Important aspect of modern career management (Don’t fly under the radar)

Where does a person’s behavior come from?

• Instincts: inclination and reflexes you were born in 

• Mimicking environment (learned behavior)

• Passive learning: repeated behaviors absorbed unintentionally

• Education and trading : acquired via systematic enterprises

• Synthesized learning: thing you think, feel , and do (Aggregate of the 4 above)

What is the greatest challenge for most leaders, as well as one of the best skills a leader can hold?

COMMUNICATION

What is fear of self promotion and what are the effects of it?

Fear of self promotion is the inability for a person to put their skills and work on display through either low self esteem or low level of care. Never let yourself fly under the radar, stay visible throughout your career.

80% fail due to lack of prospecting activity (in sales - fear of rejection)

Don’t put yourself in a vacuum = performance without promotion