Because the profit margins available from providing services to large MNCs are so fine, an increasing number of banks are turning their attention to middle market companies where it is expected that loan spreads may be more attractive. Whether this is true or not will remain to be seen. It seems likely that many of these accounts, especially those which are most attractive in terms of growth and the like, will be able to attract very fine rates like the larger multinationals as banks compete for their business. Nevertheless, in servicing these accounts it is important to recognize the differences in their treasury systems by comparison with those of large corporations.
Most middle market companies have a centralized treasury or finance department. This is generally small and similar to the elementary treasury organization, consisting of less than five people in the majority of cases. Many do not have a formal treasury at all, responsibilities resting with the company finance director and some of the accounting staff. In some cases the chief executive is supported only by the accounting function. Thus, as companies get smaller, a less formal approach to treasury management is normal and a small ad hoc team of senior company officials tends to deal with finance questions as they arise. These officials are often not financiers or bankers. It is therefore extremely important to recognize this difference and endeavor to communicate in a language appropriate to the customer and not in banking jargon.
Most treasury functions in middle market accounts are strongly centralized in terms of where the responsibility for decision-making resides. For most banking services, therefore, it is essential to gain the support and approval of the central office. Calling patterns which emphasize local or even overseas subsidiaries have only a low probability of success. A list of functions which are likely to be strongly controlled at the center and those where decision-making is shared or delegated is given below:
Centralized functions
• Company/group capital structure
• Subsidiary capital structure
• Company/group finance policy
• Subsidiary finance policy
• Company/group cash management
• Company/group working capital
• Company/group tax planning
• Subsidiary tax planning
• Company/group long-term financial planning
• Company/group investment appraisal
• Remittance policy
• Company/group foreign exchange
• Company/group banking relations
• Negotiation of domestic short-term credits
• Negotiation of domestic subsidiary bank relations
• Bank choice for domestic subsidiaries
Shared decisions
• Management of subsidiary foreign exchange
• Subsidiary capital investment
• Subsidiary float
• Domestic subsidiary cash balances
• Global invoicing
• Choice of overseas subsidiary banks
• Negotiation of overseas subsidiary short-term credits
• Negotiation of overseas subsidiary bank relations
Subsidiary-dominated functions
® Management of subsidiary working capital
• Management of invoices
• Stock levels
• Subsidiary bank account
• Overseas subsidiary cash balances
Decentralized functions all relate only to the subsidiary and also generally only apply to short-term financial considerations. Overseas subsidiaries receive slightly more freedom than domestic ones. For bank product design this position suggests that corporate customers might be interested in mechanisms that provide them with better or cheaper control system information to so allow greater decentralization.
The major factors considered by middle market accounts in choosing their lead bank are shown in Table 5.4 for a sample of around 160 such accounts in the UK. The most important factors are the breadth of services offered, the price of loans and an understanding by the bank of the company’s needs and problems.
The lower level of interest in international services is immediately apparent in middle market accounts, and this negates one of the key strengths of large international banks. These banks are also less likely to be able to provide the wide service range offered by local banks in overseas countries, are likely to have a higher-cost deposit base which reduces their chance of loan competitive¬
ness, and are less likely to understand local needs than domestic banks. Those international banks wishing to penetrate overseas middle market segments will therefore need to modify their marketing strategies and adjust to the requirements of local middle market accounts if they are to be successful.
Table 5.4:
Factors in the Choice of Principal Bank
Percentage saying
‘very important’
Can provide most services Are price-competitive on loans Understand our needs and problems Are fast on processing transactions Are flexible in tailoring services Are price-competitive on forex
Are efficient in international money transfers Are knowledgeable about our industry Have global branch network
Knowledgeable about wide range of international services We have used them before
79 76 70 50 50 36 29 20 21 19 17
Source: Centre for Business Research.
Account officer requirements by middle market accounts are also somewhat different. The main requirements expected of calling officers are shown in Table 5.5.
Table 5.5:
Middle Market Requirements of Bank Calling Officers
% company mentions
Prompt and efficient follow-up
Able to convince bank to meet credit needs Know company’s banking needs
Know company’s operating structure Make good use of time
Know full range of domestic credit services Know international banking services Personable
Have detailed industry knowledge Know non-credit services
* Applies to companies with international subsidiaries.
Source: Centre for Business Research.
93 71 60
53 59:
53 50
32 50
29 25 23
The most important factors are the prompt and efficient follow-up of promises made, an ability to convince the bank about the customer’s credit needs and a proper understanding of what the customer’s actual needs are. The second of these reasons is perhaps especially interesting, implying that selling takes place as much within the bank itself as it does to external customers.