STP for Fund Managers: More Than an Operational Issue
For organisations with high volumes of payments, such as fund managers, processing costs can mean the difference between losing and winning new business. In this Q&A, Bank of America’s William Wrest explains why an end-to-end approach to straight-through processing is important to fund managers and looks at how a pro-active approach to investment payment costs can be a market differentiator.
Q: Banks can obviously have a major influence on the Straight Through Processing (STP) rates achieved by fund manager clients, but for that influence to be truly beneficial both parties must presumably have the same understanding of the term ‘STP’? Is that actually the case in practice?
William Wrest: In most cases I think not. The typical bank interpretation is that as long as the payment moves successfully (and electronically) from Bank Account A to Bank Account B, then that is STP. That is all very well as far as the bank is concerned, since it encompasses what it sees as its primary area of responsibility – namely the payment.
However, it is only a subset of the typical fund manager’s definition, which is considerably broader. For example, a new investor might invest in a retail fund over the Internet, thus creating a new account on the fund manager’s accounting system, which becomes part of a collections file sent to the bank that in turn will generate a direct debit instruction into the appropriate clearing system. When that payment is collected, it comes via the fund manager’s bank, with the associated information being made available via its online balance reporting, before finally being reconciled into the fund manager’s accounting system. A fund manager would regard the STP process as extending from the point of the client’s original online investment to the point where the payment actually reconciled with its internal system. That sort of ‘thinking man’s STP’ is a far more extensive definition than that of most banks.
Q: What difference does this make in practice?
Wrest: It means that in most cases banks are nowhere near proactive enough to be able to support the fund manager’s interpretation of STP properly. If the bank is merely focused on shunting payments around and ignores the bigger picture, this often has a negative impact on the fund manager.
Q: How so?
Wrest: The fund manager might have a sub-optimal bank account structure that increases STP costs (or even obstructs STP) for both itself and its clients. Traditionally, funds have tended to bear the cost of redemption payments, while clients have borne the costs of investment payments. If these investment payment costs are inflated due to an inefficient bank account structure or to ignorance of local payment practice, they will act as a deterrent to investors. That is bad enough in the case of individual retail investors, but if a major intermediary or investment adviser becomes exasperated with this sort of situation, a substantial amount of business could be lost.
A bank thinking of the bigger STP picture will therefore be looking to optimise the fund manager’s bank account structure and highlight any potential problems. That in turn enables the fund manager to appear proactive in the eyes of its clients, as it is able to streamline payments in either direction for maximum efficiency and minimum cost.
Q: But how many fund managers will take actually advantage of that opportunity?
Wrest: At present, not that many. The most alert of them have a very clear picture of exactly how their clients remit to them, and will pass on advice that will facilitate STP best practice. That can prove an important differentiator, particularly in the current environment in Europe, where there are no established conventions for payment charging, and where EU regulation on cross border payment charging is only confusing matters further. In that sort of situation, any fund manager that has an optimised bank account structure and can offer clients unequivocal advice about least cost routing for payments will inevitably stand out from the crowd.
Q: Do you feel that the effects of operational deterrents, such as the excessive payment costs you allude to above, are underrated?
Wrest: There is a natural tendency to assume that issues such as brand image and investment performance dictate investor loyalty to a particular fund manager. However, I think that operational errors or inefficiencies can actually do more damage. They are also particularly pernicious in their effect because they are a ‘silent’ issue. If operations are running smoothly you don’t receive any bouquets, but often the first time you realise that something has gone awry it is too late – you have already lost the investor.
Q: You’ve explained how the most proactive managers have a dialogue with clients over payment methods and STP. Are there any other groups they can benefit from talking to?
Wrest: Absolutely – their own marketing department. Marketing is understandably focused on matters such as total assets under management, but rather less so on operational issues. In a worst-case scenario, marketing will announce they have already launched a product in a particular country and expect treasury to just sort it out. That can prove pretty disastrous, as the nuances of collecting in a new country (such as the frailties of the clearing system) can have a huge impact on profitability. We saw an excellent example of that in Austria where several fund management companies launched funds without considering these issues and subsequently found that the costs and inefficiencies they encountered in collecting payments made the launch of the fund a marginal exercise.
As a result, we actively encourage fund managers’ treasury departments to engage in ongoing dialogue with their counterparts in marketing so they are abreast of any proposed launches. We are then able to advise them in advance of the operational implications of any plans involving particular jurisdictions. Some of the best fund managers already engage in this dialogue and there is no question that it considerably smoothes the path of new product launches, as well as reducing costs
Q: Are there any other areas where you see the best fund managers showing a lead in STP?
Wrest: Intraday reconciliation is one area that springs to mind. Remittance cycles in the fund management industry are already contracting from five days to three, and for some funds already have to be same day. Some of the most advanced fund managers’ treasuries have had the ability to conduct intraday reconciliations and to monitor their cash position in near real time for some while. They are still the exception rather than the rule, but competitive pressure and industry practice will probably see more fund managers moving in this direction in the future.
However, this will impose an expectation on their banks that some will struggle to fulfill. On the one hand, the banks’ daily batch driven banking systems may simply be unable to supply the required information. On the other, the sort of proactive (and often absent) response from banks that I alluded to earlier will become an absolute necessity in order to cope with changes/expansion in the clients’ business and the shifting nature of global payment infrastructure.