APPENDIX TO CHAPTER 5
Selecting Noncredit Banking Services
BEFORE THE GREAT RECESSION that began in 2008, companies often used a competitive bidding process to select noncredit banking and vendor services necessary for the management of working capital. This situation has changed as banks have rationed credit to corporate borrowers while expecting that noncredit service business would be included in any banking package. While it is illegal to “tie” banking credit and noncredit services, bankers can strongly “suggest” combining these activities.
At some point, the situation may revert to the earlier practice of competitive bidding. The process starts with a request for proposal (RFP) sent by the company to banks or vendors. Note that several reputable vendors provide the services previously only available from banks. In this discussion, the term bank is meant to include vendors.
THE REQUEST FOR PROPOSAL
An initial step used by many companies is to issue a request-for-information (RFI) letter to candidate service providers. The RFI is used to determine which banks are qualified and interested in providing banking services. A list of potential bank bidders can be developed from previous calling efforts; contacts at conferences and meetings; and referrals from accountants, attorneys, and business colleagues. The responses to the RFI are used to select the banks to be included in the request-for-proposal process.
Companies began using RFPs in the 1980s to formalize purchasing decisions that had become too casual. Existing bank relationships tended to be given extensions of old business and any new opportunities under consideration without a formal bidding process. See Exhibit A5.1 for a list of available banking RFPs.
| 401K plan bundled provider | Paycard (payroll through ATM cards) |
| Automated clearinghouse (ACH) | Purchasing card services |
| Controlled disbursing | Remote deposit services |
| Custody services | Retail lockbox |
| Depository services | Short-term investment management |
| Disbursement (payables) outsourcing | Treasury technology |
| E-banking and information reporting | Wholesale lockbox |
| Global treasury services | Wire transfer |
| Merchant card services |
Source: www.afponline.org/pub/res/brm/rfp/rfp.html.
EXHIBIT A5.1 RFP Templates for Banking Service
Issues Covered in RFPs
The request for proposal (RFP) is usually organized as lists of questions pertaining to general banking concerns and to specific attributes relating to each service. Specific conditions for contracting for services are included. For example, what are the logistics of the bidding process? Who is authorized to speak for the bank and the company? Will the bids be treated with confidentiality?
General issues pertain to any noncredit service being considered, and apply to the bank's financial stability and creditworthiness, approach to management of the organization for and delivery of services, quality control, and similar issues. This is the section of the RFP where references should be requested. In this regard, it is useful to require names of companies in the same industry that are of equivalent size.
Specific Service Issues
The issues pertaining to each noncredit service will vary by product. Some examples follow in Exhibit A5.2.
| Wholesale Lockbox | List the bank's schedule for post office pickups of wholesale lockbox mail for weekdays, weekends, and holidays. Does the bank have a unique five-digit zip code assigned exclusively for receipt of wholesale lockbox items? Who performs the fine sort per box number, the bank or the post office? If the bank sorts the lockbox mail, describe the mail sorting operation. Include manual and automated handling, ability to read bar codes, and peak volume capabilities. |
| Controlled Disbursement | What is the published time at which customers are notified of their daily controlled disbursement clearings? How many notifications of clearings are made each day? If more than one notification is made, what percentage of the dollars and items was included in each notification? What are the accepted procedures that are used to fund the debit from each day's clearings? |
| ACH | What procedures are used to verify accurate and secure receipt of data transmissions through a secure Internet server? Can the bank automatically redeposit items returned for insufficient or uncollected funds? When items are redeposited, are any entries posted to the customer's account? What are the hardware and software requirements for PC-based services? Does the application support use of a LAN (local area network) or cloud computing? Will assistance with software installation be provided? |
EXHIBIT A5.2 Examples of Bank RFP Questions on Noncredit Services
Review of Pricing
We defined the account analysis and reviewed the earning credit rate in Chapter 4. In this appendix, we examine how companies are charged for noncredit services. The lower portion of the account analysis will vary by bank; an illustrative configuration is shown in Exhibit A5.3. It is useful to calculate the complete cost of each noncredit service and to determine if any unusual or incorrect fees are being charged. For a directory of more than 200 bank services and their standard codes, see www.afponline.org/pub/sc/srvc.html.
Although pricing has long been the consideration in selecting a domestic cash management bank, recent experience has seen a decline in its importance and a rise in the following factors.
- Product cycle. Because many bank products are in the mature phase of the product cycle, there is minimal variation in the price charged by most banks. Furthermore, information on pricing is published in the Phoenix-Hecht Blue Book of Pricing (www.phoenixhecht.com), making pricing data fairly widely available to all interested parties.
- Unbundling. Banks have unbundled pricing for noncredit services, making line-by-line comparisons meaningless. Some banks charge for each specific service, while others include the service in the fee for the underlying product. For example, controlled disbursing may include positive pay, or it may be priced separately.
Quality. It is generally recognized that any quality or service problems relating to a specific bank product can cost many times the price per unit of the service. As a result, the savings of a few cents per item is not important when compared to the cost to resolve an error, a communication or transmission problem, or other bank issues.
| Service | Reference | Quantity | Unit Price | Price Extension |
| Account maintenance | 1 | 2 | $25.00 | $ 50 |
| Deposits—unencoded | 2A | 140 | $ 0.18 | $ 25 |
| Deposits—encoded | 2B | 600 | $ 0.12 | $ 72 |
| Returned items | 3 | 50 | $10.00 | $ 500 |
| Checks paid | 4 | 400 | $ 0.15 | $ 60 |
| ACH debits/credits | 5 | 100 | $ 0.13 | $ 13 |
| Fedwires | 6 | 4 | $20.00 | $ 80 |
| Total charges | 7 | $ 800 | ||
| Net due for services | 8 | $425* | ||
References
|
||||
*Based on the Exhibit 4.4 calculation of an ECR allowance of $375, which has been deducted from Total Charges.
EXHIBIT A5.3 Bank Account Analysis: Illustrative Noncredit Service Presentation
RFP EVALUATION
Because of the sheer number of potential questions and answers in a set of proposals, it is very difficult to simply read through and make any sense of the material. For this reason, one technique that has been helpful is to organize each set of responses into a table, listing the bank names in the columns and the important answers in the rows.
It is necessary to array the responses for each question with the intention of assigning points based on a template of average answers. For example, despite the maturity of the lockbox product, there are often significant differences in the responses. The application of points to these RFP answers allows for the objective ranking of each bank.
Weighted Scoring of Proposals
The final step in evaluating the banks' proposals is to assign weights to each response based on the perceived importance of the question. The total weight should add to 100 percent, but any individual question can have a weighting ranging from a value of 0 percent to as much as 15 or 20 percent. The weights are based on the company's perception of the importance of each question.
An illustrative weighted scoring for lockbox services is provided in Exhibit A5.4 for four banks. The responses are displayed as unweighted, that is the raw point assignments; and weighted, with the value specified for each response applied to the point assignment. The final results show Bank A with 258 points and Bank D with 252 points, both of which are significantly better than Banks B and C.
| Unweighted Scores | Weighted Scores | ||||||||
| Weight (%) | Bank A | Bank B | Bank C | Bank D | Bank A | Bank B | Bank C | Bank D | |
| Unique zip code | 8 | 2 | 0.5 | 2 | 3 | 16 | 4 | 16 | 24 |
| Number of mail pickups at post office | 12 | 2 | 1 | 2.5 | 2.5 | 24 | 12 | 30 | 30 |
| Quality assurance program | 22 | 2.5 | 2 | 1 | 3 | 55 | 44 | 22 | 66 |
| Customer service | 20 | 3 | 2 | 2 | 1.5 | 60 | 40 | 40 | 30 |
| Error rate per 10,000 transactions | 14 | 2.5 | 1.5 | 1.5 | 3 | 35 | 21 | 21 | 42 |
| Availability assignment | 8 | 3 | 2 | 2.5 | 3 | 24 | 16 | 20 | 24 |
| Volume for price discount | 8 | 3 | 1 | 0 | 2.5 | 24 | 8 | 0 | 20 |
| Period of price guarantee | 8 | 2.5 | 2 | 3 | 2 | 20 | 16 | 24 | 16 |
| Total weighted points | 100 | 258 | 161 | 173 | 252 | ||||
EXHIBIT A5.4 Evaluation Score Sheet for Lockbox Services
These scores allow the company to consider whether the expected results are consistent with the analysis, or if some adjustment in the weightings is necessary. Should the results stand, the company can visit the two finalists to ask difficult questions, meet the client team assigned by each bank, and develop a sense that the bank wants to be a long-term partner. Contact all references and probe to see if the bank has met its credit and noncredit obligations with its other clients. The scores can also be used to inform the banks that were not awarded the business why they lost, to show that the analysis was objective.
Managing Banking Relationships
Once the decision has been made, the next activity is to review the contracts the bank(s) will require as an essential part of the relationship. Each service is governed by agreements that address the various requirements of each party to protect both the bank and the company in the event of a dispute. The contracts have been drafted by the bank's attorneys, and are based on long-standing precedent as established in the federal banking statutes and the Uniform Commercial Code (UCC) adopted by all states.
Service level agreements cover terms of service for each noncredit product, and will vary depending on specific operating issues. Banks specify standard processing arrangements for the price that is quoted; any variation is considered as an exception, resulting in additional charges. Typical concerns in service agreements include acceptable and unacceptable payee names on checks for a lockbox; names of initiators and approvers for wire transfers; approved account signatories; and approved users and access restrictions for treasury information systems.
The bank requires these documents to instruct it on how to handle any transactions that are initiated, and to protect itself in the event of an error or an attempted fraud. Furthermore, the bank will require its customers to indemnify and hold it harmless from and against any liability, loss, or costs arising from each service provided.