When pressed, Randy Shelden says the most definitive change in the correspondent banking business at Cornerstone Bank, York, Neb., occurred with the advent, nearly five years ago now, of image exchange.

“Historically, we’d developed relationships that were rooted in geography, but image took away those boundaries and made it possible to work anywhere. That was when you started to see a longer more formal process around contracts,” says Shelden, who is senior vice-president for the $680 million assets, family-owned bank with 29 banking locations in 20 communities.

Not that the practice of banks doing payments-, cash management-, or lending-related work on behalf of other banks hadn’t been a maze of operational details by tradition.

It was just that, in the case of item processing work done by Cornerstone for a slew of banks throughout the state as well as clients in neighboring Wyoming and Colorado, a handshake alone would no longer suffice.

Imaging as a technique requires extensive service level agreements (SLAs) that have to be evaluated several times before the work is handed over. Additional quality controls are required. “This business is more formal now,” Sheldon observes.

While different niches in the complicated, interconnected universe of correspondent banking have been affected by disparate drivers, the payments and operations sector, which is the historical backbone of the business, has seen significant change in the past five years.

Activity in this area alone has alerted the industry to the fact that banks doing work for other banks won’t be dying any time soon, notes Cathy Glassman, senior principal global payments solutions, Fiserv, Coral Springs, Fla. Glassman, who wrote a white paper on the subject of correspondent revival in payments a few years ago, continues to observe activity and a kind of entrepreneurial zeal in the sector.

Image has shaken up the regional nature of the business, opening up the domestic map for banks and pitting once unlikely competitors against each other in regions where neither used to operate before, typically via white-labeled services.

In other areas of correspondent work, from treasury services, to asset and liability management, to capital markets, increased automation has also tended to erase the importance of literally being the bank next door. Given that, bankers say, you often have to start discretely, from one point of entry in a niche service. This is because, on the surface, many banks increasingly have a similar story to tell. Really, the proof is in the work—and work done well over time.

Know the client
Mark Heugly, senior vice-president, Correspondent Banking Group, at $53 billion assets Zions Bank, Salt Lake City, Utah, agrees that correspondent work has both matured and reinvented itself in step with new business processes, and has expanded from payments into other valuable services on the funding side, and consequently, has taken itself more seriously. And, with the new vision and extensive service menu, comes a more formalized set-up.

However, the Zions executive also thinks that the personal relationship is still the floor that holds big contracts and allows them to prosper over time. Understanding the client’s operational profile certainly counts in his organization, where, from his perspective, hiring crack talent is also a must.

The banking executive remembers a time back in the day when big correspondent banks from back East used to show up “during ski season,” or a few times a year “for lunch or a game of golf.”

That sort of infrequent, almost ritualized, bridging of organizations in order to seal the deal also won’t suffice in a world that moves rapidly and requires the rugged connections of experts with a problem-solving bent. 

“My people are called in to offer advice and perspective,” Heugly says, citing work that spans areas such as asset and liability management and succession planning. “More often, they are called in when the downstream bank is unfamiliar with a business area and they want the correspondent to share experience,” he adds. “So there has to be expertise and trust there.”

Nicole Holzapfel, senior vice-president, correspondent banking, JPMorgan Chase, New York, agrees the more technical nature of bank operations means a more formalized sales process. In the case of JPMorgan Chase, selling correspondent services is about knowing the client. “Being able to demonstrate that you understand a client’s operation in detail counts,” says Holzapfel. 

 

While she agrees that deals, and clients, in correspondent work each have their own development curve, she does see a few commonalities: “Generally, there has to be higher coverage on a given account. The relationship with a client can’t—nor shouldn’t—be casual. You’re being a real partner, helping them run key aspects of their operations.” 

Considered part of the commercial banking division, JPMorgan Chase is investing in its correspondent business, expanding the geographic area where it delivers services, and hiring bankers.

“We see great growth opportunities outside the 17 states traditionally served and greater opportunities with existing clients to sell more products and services,” says Holzapfel.

Common truths
Representative of small, mid-sized, and large banks in this interlocking chain of outsourcing, the executives spoke about the correspondent model’s transitioning mores and operating philosophies. Although the banks interviewed differ in size and scope of operations, they agree on these points: 

1. Correspondent work is keenly competitive and only getting more so in that most banks that operate in this area of outsourcing are seeking to broaden the menu of services offered and don’t need to stay near a home base.  Banker’s Banks also constitute a competitive presence as do nonbank outsourcers, depending on the niche.

2. Bankers are great clients because the level of conversation can be advanced, and typically reflects “the understanding of colleagues.” Still, bank clients can be more demanding, generally, than the average corporate customer. For instance, an item better clear within the timeline expected and errors need to be rare events, because a bank client will “let you know about anything that goes wrong.”

3. Finally, correspondent banking is a business where the ability to do consultative service  is ever more important as the industry faces accelerated operational and competitive change.  

Clearly, payments is driving renewed interest in correspondent work, which blows hot and cold in cyclical fashion, indicates Paul Schaus, president and partner of Catalyst Consulting Group. The firm aims its national practice at the financial services industry and often consults clients on choosing outsourcers.

“I always ask if their correspondent is treating them right and if they’ve heard from the sales person lately,” Schaus says. “Strong, effective correspondents won’t take the relationship for granted.”

Schaus, who operates out of his firm’s Phoenix office, says that in this active cycle of correspondent banking, banks like U.S. Bank, which had been quiet for a while, have become aggressive. He’s seen other banks get back in, clearly eager to make gains while the payment market has traction.

“When the competition heats up, the community banks can benefit if they know what their options are and ask a lot of questions.”

Some boundaries still exist
JPMorgan operates its sprawling correspondent model squarely in a wide range of credit, treasury, and liquidity products, services, and systems. Yet, each area has specialists that, in Holzapfel’s words, “are quarterbacks guiding the relationship.”

These quarterbacks, as she describes them, are important to making inroads with the client, though the words have to be backed with deeds.

“You aren’t just going to waltz into a C-level meeting and take business without building on a track record of demonstrated success and getting to know people,” she says of the work she has built her career on. “It’s about being in a position of making observations about a client’s operations that can improve efficiency or add value.”

In payments, she says, her bank clients generally want to get a tour of operations. “Clients want to look at our vault or processing facilities.  They’ll typically ask a lot of operational questions.”

In areas such as deposit gathering—which, she notes, is generating a lot of momentum in the current market—Holzapfel’s team will partner with experts within her bank. “Banks are trying to keep their portfolios protected,” she says. Raising capital is another key area.

 

As an example, Holzapfel mentions that many community banks are looking for alternatives to trust preferred funding. “We steer them towards convertibles, common stock, and subordinated debt as alternatives,” she says.

From the beginning, she says, sales calls that are related to correspondent work in any niche will involve ample homework in advance of the meeting.

“We’re fortunate that there are the call sheets and other data sources for the banking industry,” Holzapfel says. “We offer a sense of where a client is and where they need to go in our view.”

An array of services important
Mark Heugley at Zions agrees that a show of deep and detailed banking knowledge is important. He started his career as a teller in 1968 and did every sort of job—except making loans—including a long stint as chief operating officer at another community bank.

When he started with the Utah-based regional in 1988, the correspondent division, such as it was, operated informally. Gradually, with a series of well-timed hires and development in response to opportunities around cash management and other core services, the business grew. “We came up with the idea of developing a sweep account for our banking customers,” he says.

“Basically, I put the mandate out there: lets begin to offer banks many of the same services that we offer corporate customers.”  Today, Zions is active in credit, treasury, and liquidity products.

Randy Shelden, who has seen Cornerstone Bank’s fortunes grow ever more favorably with the development of a white-labeled remote deposit capture service, says that when it comes to payment-related correspondent work, skill and effective use of technology have worked hand and glove to become a great leveler.

“We’re doing this as well as any big bank that may choose to operate in this region,” he says. “Effective customer service is how we differentiate ourselves. If there is a problem or concern, our clients know they can pick up the phone and talk to a person who can help, not someone at a call center,” he adds.

Payments itself forces change
Competition in the once staid world of correspondents certainly changed speeds after image exchange, especially when the Federal Reserve began to consolidate check processing operations, shuttering what were essentially epic check processing factories.

Cathy Glassman says that after Check 21 and image processing (particularly with the runaway popularity of remote deposit capture), there was new interest and life in correspondent banking.

“It lowered the cost of doing business significantly and changed all the rules and forced respondents to rethink their options,” Glassman notes. All the assumptions about the model shifted and you’re starting to see players of all sizes going after some of the same customers. This is much the same as has been happening among primarily state-based banker’s banks. 

Glassman says that the winners in the game will emphasize the service element, helping clients with such key notables as training. In general, an engaging onboarding process that allays any concerns about a given service, will also make a difference and let community bank clients know what their upstream counterparts have to offer. BJ

 

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