AFP® EXECUTIVE GUIDE TO Rethinking Relationships in a Dynamic Environment

Underwritten by:

1 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment AFP® EXECUTIVE GUIDE TO Rethinking Bank Relationships in a Dynamic Environment

CONTENTS

1 INTRODUCTION

2 LIQUIDITY ACCESS: BUILDING RELATIONSHIPS

3 RELATIONSHIP EVOLUTION

4 NAVIGATING MARKET VOLATILITY

5 ACCELERATING DIGITAL ADOPTION

6 OPTIMIZING BACK-END PROCESSES

7 LOOKING AHEAD

8 KEY TAKEAWAYS AFP® EXECUTIVE GUIDE TO RETHINKING BANK RELATIONSHIPS IN A DYNAMIC ENVIRONMENT

Dear AFP Members and Finance Professionals,

CIT is proud to sponsor this AFP Executive Guide exploring the evolution of banking relationships in light of the COVID-19 pandemic.

In this guide, you’ll find important insights and takeaways, including:

− How the needs of corporate clients are evolving and what they are looking for in a banking partner to help support them now and in the future − The ways in which are becoming more strategic, consultative partners as they help corporate leaders react and prepare for the future − How the increased demand for remote capabilities may accelerate the digitization of banking and enhance the services offered − How volatile times can shine a light on back-end processes, inefficiencies and risk controls and create an opportunity for improvement

At CIT, we provide treasury and liquidity management and payment services that help optimize working capital for small and midsize businesses. Our goal is to understand your needs and opportunities and provide customized solutions to help you improve your financial operations, generate efficiencies and increase profitability. We’re committed to remaining agile and exploring today’s challenging questions to help provide tomorrow’s solutions.

We hope this guide will provide insights to empower your organization to achieve its goals. For more, visit us at cit.com.

Best regards,

James Gifas Executive Vice President Treasury and Payment Services

The views expressed herein are solely those of the authors and do not necessarily represent the views of CIT Group Inc. or its banking subsidiary, CIT Bank, N.A.

3 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment 1INTRODUCTION With the COVID-19 pandemic, treasury departments have seen the way they work—and even where they work—altered almost overnight, and customer-bank relationships have had to change to meet these fast-evolving needs. In a matter of weeks, entire workforces moved to a remote working model that required companies to initiate new remote back-end processes and adopt new digital platforms. With those changes came shifts in the customer/bank conversations from credit to liquidity. This Executive Guide, underwritten by CIT, explores how the relationships between treasury departments and their banking partners are evolving to help both sides prosper. “When times are bad—and that’s not just COVID-19, but in anything— that’s when relationships are tested,” said Fred Schacknies, CTP, former senior vice president and treasurer for Hilton and a member of AFP’s . “And I will say, as a corporate treasurer, my memory of relationships goes back, in some cases years, to include prior companies and bank relationship managers. And I recall which banks were there to support which companies—and which weren’t.”

1 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment be the primary driver in bank selection, 73% indicated the credit quality of a bank is also a deciding factor, suggesting they’re prudent when looking at the long term. “Bank deposits saw an increase for the first time in five years, and that’s not a coincidence,” said Jim Kaitz, president and CEO of AFP. “Although we performed this survey in the early days of the pandemic, financial professionals could see the gathering storm. With companies needing more access to liquidity and drawing down on credit facilities, their relationships with their banks will become more important than ever.” Indeed, a recent discussion on the AFP Collaborate practitioner community revealed that banks’ responsiveness and attentiveness can make or break treasury/bank relationships. A treasury professional who wished to remain anonymous explained that they are going through an RFP for their company’s treasury management services. Given the company’s size, the treasury department determined that it needed a top-tier bank to provide technology and services. However, the company’s incumbent bank—a major one with whom the organization has worked with for about 15 years—has been lacking a bit in terms of service. On the other hand, 2 the bank has everything the company needs from a LIQUIDITY technology standpoint. “Their technology has all of the capabilities we need, ACCESS: BUILDING our team knows it well, and they are responsive enough,” RELATIONSHIPS the practitioner said. “But they don’t seem to go the extra mile to make sure we’re always taking advantage of the latest technology offerings or optimizing our fees. Perfect example—as a result of the RFP, they suddenly As the pandemic has unfolded, organizations have found savings of about 10% off our annual fees.” reached out to their banks to help reconfigure business Several other practitioners responded that this is a processes and to access liquidity. As a result, many typical experience with a lot of major banks. And while companies have built trust in their banking partners as some shared positive stories about this particular bank, they rely on them to help establish new approaches for at least one other user agreed that it “typically provides day-to-day operations. the minimum service level and rarely goes the extra According to the 2020 AFP Liquidity Survey, mile.” They added that some of the bank’s employees underwritten by Invesco, 51% of treasury and finance do not appear properly trained and “it is often up to the professionals increased their short-term investments in client/customer to push or lead them.” banks throughout 2019 and into early 2020. This was the Even so, some practitioners recommended considering highest percentage in three years, up from 46% in 2019 the current environment when pursuing the RFP and and 49% in 2018 and a reversal of a downward trend that only switching banks if it is absolutely necessary. “An began in 2015. Although the survey was taken before the RFP during a pandemic will have its own challenges,” impact of the COVID-19 outbreak had set in, this flight to noted one user, who recommended completing a pro/ caution likely reflects concerns that the pandemic poses con/considerations list before moving away from the a critical threat to the global economy. incumbent. Another user noted that, “in an economy like While 93% of respondents to the Liquidity Survey today’s, a partner that won’t get spooked easily seems consider the overall relationship with their banks to very important.”

2 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment 3RELATIONSHIP EVOLUTION

Historically, bank relationships are driven by credit. However, in the COVID-19 environment, much about those relationships has changed, noted Bob McElyea, managing director of sales for CIT’s Treasury and Payment Services business. “Our corporate clients stepped back and started looking at safety and soundness again. They started looking at liquidity and a bank’s ability to help them through,” McElyea said. “We saw and continue to see a rush to liquidity and moving dollars around, placing with the banks that a corporate client feels are the most sound and able to help them.” McElyea believes corporate mindsets around bank relationship management are changing. “I think once that evolves, that’s going to stick,” he said. “At this point — and granted we’re just a few months into this — the conversations that we’ve had with clients are shifting more towards being more strategic and consultative.” Susie Kim, treasurer and vice president of investor relations for ABM Industries, admitted that there hasn’t been “true consistency” among her banking partners as the crisis has unfolded; some have been more attentive than others. “But generally speaking, what I will say is that banks are willing to help and that hasn’t changed,” she said. “Something that has remained very strong is that if I had a question about anything, I do feel like our banks are true partners where they access all of their resources to educate us, provide us with whatever we need, which is a really great quality.”

3 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment “ Clients wanted to ensure they had enough liquidity to get through the crisis. Initially, it was for a few weeks. But as we’ve all seen, this has gone on further as the “ shutdowns and COVID proliferation just continued.”

CREDIT DRAWDOWNS speak. There’s so much we still just very different. What may have Since the effects of the COVID- don’t know about it, so it’s been worked over the last 50 years may 19 crisis became clearer, many about preparing ourselves and not anymore,” she said. companies started drawing down being both reactive and proactive Looking ahead, Kim is hopeful on credit to ensure that they have during an unprecedented time.” that ABM will eventually be able capital for critical functions like She added that in the current to manage its cash “more like payroll, rent and commercial paper environment, it has become a lot historical times” versus taking the programs. According to CFO.com, more rigorous to execute these defensive position that it has over , Ford, Boeing and transactions. “What I’ve noticed the last few months. Shell each drew down more than has been that it took more time Hilton also drew down on its $12 billion from their revolvers. than originally anticipated,” she credit revolver. It had already Furthermore, JP Morgan Chase said. “There were certainly more partially drawn down on the revealed that its corporate clients questions, and more analysis was facility before the crisis hit, drew down more than $50 billion necessary to obtain more layers and ultimately drew down the in the first quarter. of approvals that were necessary remainder of the balance. Unlike ABM is one of many large from a bank perspective, given the ABM, Hilton is part of an industry corporations that has fully drawn environment.” that has been severely impacted down its $800 million line of Kim noted that the banks are by the crisis, and as of June credit, adding $300 million of seeing drawdowns from all ends announced a 22% reduction of capacity onto its balance sheet. of the spectrum—there certainly global corporate staff. This was largely a preemptive are companies that are looking Hilton has relationships with a measure; ABM is a provider of for emergency funding. And then number of different banks, most janitorial and cleaning services there are ones like ABM that of whom are lenders in its facility. with a highly diversified portfolio are projecting their positions As such, those relationships are of clients. As such, its business anywhere from six months to two prioritized, “and it’s also overlaid has continued to perform fairly years out. “That’s something that by considerations of capability, well throughout the crisis, even we’ve been trying to navigate,” she which is quantitatively what they as some of its client segments said. “And we’re bank funded, so can do, and how supportive they (aviation, technical solutions and our access to capital is reliant on are on those things,” Schacknies education) have been heavily banks holistically.” said. impacted. She sees banks working to Throughout the process, Hilton’s “We weren’t in a distressed partner closely with their clients, relationship banks have been very situation by any means,” noted but they also aren’t shying responsive. “They’ve all been very Kim. “We’re a facility services away from conversations about supportive,” Schacknies said. “I provider. We’re not overly diversifying funding. “I think any would say, by and large, our key penetrated in hospitality or retail. company should do a hindsight banking relationships have all So, for us, it was strategic and certainly on what their access to stood by and stepped up what preemptive versus distress, so to capital is. Just given the world as they’ve done.” we know it, operationally this is

4 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment DRAWDOWN TRENDS Like most banks, CIT has seen a lot of drawdowns of credit. “That’s been primarily defensive in nature; clients wanted to ensure they had enough liquidity to get through the crisis,” McElyea said. “Initially, it was for a few weeks. But as we’ve all seen, this has gone on further as the shutdowns and COVID proliferation just continued.” Most clients held their cash rather than investing in internal projects. To see some returns on that cash would be ideal, but the goal was really to remain fiscally solvent. “The rate environment got very crazy, and so I think clients quickly understood that if they could earn something on those dollars, great, but they weren’t fighting for the top rate,” McElyea said. “I think that goes back to safety and soundness; the banks that were offering super high rates were not being viewed as necessarily sound enough for corporate clients to move large amounts.” Another trend some banks are seeing is an inflow of dollars from drawdowns at other banks. The reason? Relationships. “Clients were looking at who their strategic partners were and shifting deposits to sit with the partners that were strongest with them,” McElyea said. It’s important to note that those clients weren’t necessarily ending THE MOST COVETED BANK their relationships with other banks. Instead, they’ve been shifting SERVICES DURING THE the wallet share toward the partners they believe are the strongest PANDEMIC to work with now and in the future. Any bank that has been reaching out to clients and having detailed discussions about how it is − Credit-syndicate drawdowns revamping internal processes to be more efficient is likely to see − Liquidity placement more of those inflows. of deposits Furthermore, with the cascade of new programs from central banks and governments to support businesses, many banks have − FX hedging and strategy been working with their clients to help them understand the options changes they have and which will work best. “I think what clients wanted to know is that we would help them synthesize those programs while − Moving from floating they were trying to understand the availability of credit,” said Scott to fixed rate debt where Satriano, CFA, head of financing and risk solutions at NatWest. “We appropriate spent a lot of time, really line-by-line with every client, to help them − Working capital maximization understand their needs from a liquidity perspective.” STP payments, moving Satriano has also been working with his clients to instill confidence • A/P: the banking system will be resilient and helping them understand from paper to electronic why this event is not like 2008. This is a health crisis that is severely • A/R: Lockbox changes disrupting business operations, rather than a banking crisis created within the financial system. Having weathered the 2008 crisis, Schacknies agreed. “Whereas the financial sector was at the center of the crisis in 2008, in this situation, its involvement has so far been indirect; I don’t see it profoundly impacting the banks’ abilities,” he said. He believes that it’s important for corporate treasury departments to understand that distinction. “You need to understand that the risks here, while they’re structural and long-term, they’re chiefly commercial and not broadly financial,” he said. “The primary risks are very specific to certain industries. Then of course, there’s a secondary, general GDP drag, which affects everybody to some degree. But the brunt of it is hitting certain industries very heavily, and others less so.”

5 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment 4NAVIGATING MARKET VOLATILITY

Since the pandemic began, the market has reached new levels of volatility. But although there is uncertainty, there is also opportunity. As Lane Newman, vice president of asset management and capital markets for CIT, noted, “Good banking partners can offer treasury departments advice to help them take advantage of the rapid fluctuations.” With interest rates at historic lows, Newman added, “Most loans and credits are floating- rate debt, and with global rates coming down, it’s really created an opportunity in the capital market space for clients to save money on their credit costs.” In the FX space, the U.S. dollar strengthened early in the crisis and was a safe haven. Eventually, though, the markets began to look past the initial numbers, and the dollar began to depreciate and relinquish its safe-haven status. Once that downward trend emerged, banks began advising their corporate clients to take advantage there as well. “That was certainly the way that we spoke to them because there are hedges in every sort of quadrant—exporters, importers— — they take advantage of a stronger or weaker dollar,” Newman said. “So having the platform for these clients to work remotely, they can take advantage, control their own destiny and decide how they want to manage their payments between dollars or euros or whatever currency they have exposures in. They can manage their own hedges and control their own risks, despite the volatility in the markets.”

6 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment 5ACCELERATING DIGITAL ADOPTION In order to maintain business continuity in help them understand their options and how to the remote working environment, treasury get these processes implemented rapidly to meet departments have been forced to rapidly move the demands of a workforce that became remote towards the digitalization of their back-end almost overnight. For some companies, offices processes specifically in accounts receivable (AR), were shut down and checks were piling up with no accounts payable (AP) and payroll. way to process them. Some large companies like Hilton were in good “Banks have had to be flexible in adapting to shape at the start of the crisis because they already client needs during this crisis by making more had a lot of automated processes in place. As services available in a remote environment,” previously noted, Hilton has been heavily hit and explained Joe Karkut, receivables and enterprise has taken action on staffing, operating under a digital group product head for Treasury and furlough for months. “Within treasury, we’ve been Payment Services at CIT. able to accommodate that thanks to the robust Some treasurers, like AFP Chairman Bob technology and workflow integration we’ve built Whitaker, CTP, senior vice president of corporate in recent years and to the resiliency of our team finance for DHL, believe this is the time for all members,” Schacknies said. companies to consider going electronic for Of course, many companies hadn’t implemented payments. As he noted in AFP’s recent Treasury such processes, and so it’s been up to the banks in Practice Guide on business continuity planning, to help them migrate to new solutions. McElyea there has been major concern over whether banks noted he has observed varying degrees of will still be able to process paper checks. At the adoption of digital electronification. “A lot of moment, lockboxes have remained open. But if our large corporate clients and mid-sized clients there is a major resurgence in COVID-19 cases have implemented electronic workflows and later this year or early next year, as scientists have processes around some of those back-end financial predicted, that may change. “Ultimately, when we responsibilities,” he said. come out of this, everybody needs to make an The bank has typically needed to take a more effort to push to electronic payments so that we hands-on approach with middle-market clients to can get rid of these checks,” he said.

7 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment “I think this pandemic provides an opportunity for corporates to reexamine some of their internal controls and perhaps better utilize their ERP systems,” she said. “If they have not migrated to an integrated ERP system, they may want to advance that forward. This is a great opportunity for a lot of housecleaning to be done, on the bank side and the corporate side, to get internal processes optimized.” To that point, some companies like ABM have put ERP implementations on hold to handle immediate areas of focus during COVID-19, such as health and safety of employees, client attention and financial nimbleness. As Kim explained it, ABM has 140 thousand employees who use a variety of systems as they manage thousands of clients. While digital transformation may have been an area of focus pre- COVID, business continuity has been prioritized during these first few months of COVID. “Because again, we’re all working remotely, so that in and of itself is clearly challenging.”

KEEPING AN EYE OUT Speaking of streamlining processes, this is also a time for companies to make sure their fraud controls are up to par. Anytime there’s a crisis, fraudsters will try to take advantage of it. Europol reported that a French pharmaceutical company transferred $7.25 million to a supposed supplier for the purchase of hand sanitizer and protective masks. The items were never received, and after the money had been transferred, the supplier became unresponsive. In actuality, a fraudster based had spoofed the identity of a legitimate company and advertised fast delivery OPTIMIZING of the supplies. Fortunately, authorities were able to BACK-END block part of the payment, identify the suspect and ultimately arrest him. PROCESSES Additionally, criminals have been exploiting the Paycheck Protection Program (PPP), which offered $659 billion in aid to help U.S. small businesses pay 6 their employees. In one incident, two men allegedly In this environment, treasury departments have also applied for nearly $544,000 despite having no been identifying any inefficiencies in their back-end employees at any of their businesses. processes to become more strategic. “As you saw across the PPP loan program, and any Corporates who are well-versed in electronic government program that gets launched in the time solutions may need to revisit their systems in this of a crisis, there’s an opportunity for fraudsters to environment. Eileen Schwed, vice president and move in and exploit that,” McElyea said. “And so it’s senior product manager for Treasury and Payment very important for the banks to have those kinds of Services for CIT, added that while the bank’s corporate conversations with their clients and for the clients to clients who use ACH and wire services operate well understand what steps they could take internally and in a centralized environment, several have had some what services they could utilize from their banking processing disruptions they were not prepared for partner to help control that fraud environment.” while working remotely.

8 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment ““Banks have had to be flexible in adapting to client needs during this crisis by making more services available in a remote environment.”

7LOOKING AHEAD

Although there are still many unknowns, if your banking partners have been reliable throughout your relationship, you should be able to trust them to help you work your way through this crisis. If you feel that trust is lacking, then it’s time to consider looking for a new bank. Either way, it’s important to remember that this crisis is an entirely different animal than 2008 and impacts the overall economy. “Over the last couple of months, the banks have done a great job of stepping up, doing what they can,” Schacknies said. “And I think they’ve been abundantly helpful in providing guidance and insight, not only for the company and specific tactical issues, but what’s going on in the world. The number one problem affecting everybody is uncertainty, and I think they’ve done a good job of helping where they can. I don’t think we’ve noticed any disruption in terms of a bank’s abilities to provide core functions, whether it’s cash management and payments or liquidity management and financial risk.”

9 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment The wallet-share concept has changed. KEY TAKEAWAYS 4 Treasury departments should no longer base wallet share on the pre- COVID understanding of it. What As your treasury department seeks to has worked for the past half century navigate through the pandemic and in the may not be relevant anymore. post-COVID world, consider these factors:

Strong bank relationships Not all banking partners are are critical in the current created equal. 1 environment. 5 When drawing down on credit, it As treasury departments may may be worth moving the extra need more access to liquidity, cash to the bank that you view receiving guidance from a as your closest strategic partner. trusted partner will be essential.

Don’t make drastic moves In change lies opportunity. unless you have to. The market has reached new 2 Even if your relationship with your 6 levels of volatility, but good primary banking partner isn’t ideal, banking partners can help it’s worth completing a pro/con/ treasury departments take considerations list before moving advantage of the fluctuations. away from your incumbent.

Corporate-to-bank It’s time to evaluate back- relationships are evolving. end processes to identify any Historically, bank relationships have 3 7 inefficiencies. been based around credit. In this If you’ve been thinking about new environment, the conversations moving to electronic payments or are more strategic and consultative automating critical services, this as banks are helping corporates might be the perfect time do so. prepare for an uncertain future.

10 AFP EXECUTIVE GUIDE: Rethinking Bank Relationships in a Dynamic Environment Manage cash flow. Control risk. Increase efficiency. All remotely.

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©2020 CIT Group Inc. All rights reserved. CIT and the CIT logo are registered trademarks of CIT Group Inc. Deposit and treasury management services are offered through CIT Bank, N.A. a subsidiary of CIT Group Inc. MM#8265 ABOUT THE AUTHOR Andrew Deichler is the multimedia content manager for the Association for Financial Professionals (AFP). He produces content for a number of media outlets, including AFP Exchange, Inside Treasury, and Treasury & Finance Week. Deichler regularly reports on a variety of complex topics, including payments fraud, emerging technologies and financial regulation.

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