Bank Selection: The Cash Management RFP

During the depth of the financial crisis in 2008, sustaining liquidity was the paramount priority for corporate treasurers. Few corporates dealt with banking request for proposals (RFPs) during that period, however, as many of them did not want to take the risk of losing one of their existing financing banks while going through an RFP process for cash management. Many banks also fell away during the crisis, of course, necessitating quick, sometimes less formal change.

Over the last years, corporates have sought to become less bank-dependent. Access to the bond market has increased (financing bank independence) and solutions like payment factories and in-house banks (IHBs) have been back at the top of the treasurer’s agenda, giving operational bank independence. Higher interest to extract and concentrate cash more quickly and effectively was a main concern, via bank liquidity solutions or internal working capital initiatives.

With these solutions in mind and more secure financing headroom post-crash, there has recently been an increase in the number of cash management RFPs being directed to the banks. This article will focus on the necessary steps a corporate should follow in order to ensure proper selection.

Major Issues Encountered During an FRP

Although an RFP process might be perceived as easy – after all it is about selecting a supplier and selection will happen anyway at the end of the process, whatever process is followed – there are cases where the RFP has not been tackled appropriately, leading to difficult, expensive and sometimes failed implementation. The main issues will typically arise during three steps of the selection process:

• The data gathering phase.
• The design phase.
• The selection phase (see Figure 1 below).

Figure 1: Major RFP Issues to Identify

Source: PwC

Data Gathering Phase: Garbage In, Garbage Out 

In a lot of cases, corporate treasuries are reluctant to go through a deep data gathering exercise and would like to move as quickly as possible to a selection phase in order to show ‘concrete’ results to higher management without bothering too much the businesses, focusing mainly on the pricing aspects of the RFP. The major inherent risks and issues of this approach are highlighted below:

• Additional banking partners and final solution more expensive: During implementation, you might realise that not all requirements are properly supported by the selected banking partners, or some will be available at very high prices only. Furthermore, additional banking partners might be needed and the final solution might turn out more expensive than initially envisaged.
• No local buy-in from local entities: As local requirements might not be supported, it will be easy for the local business units to find a good reason why the proposed solution will not work. You might end up with limited to no buy-in from the local entities to change banking partners. There have seen too many cases where only 20% of the businesses had been migrated to the new bank partners after a couple of years of implementation efforts.
• No competitive tension: The incumbent bank will be advantaged compared to competition. Indeed, they know the total wallet and will make a price effort only on the expressed requirements. This will lead to an uncompetitive bid from the competition and will not allow you to reap the full benefits of the project.

Design Phase: Get the Design Right and Tailor it if Needed

Other major risks and procedures to follow during an RFP’s early stages are:

• A standard RFP leads to standard responses: Obviously, banks will provide generic responses to generic questions. In fact, you will get the standard responses that might be applicable to all generically, but in fact to none in particular. Ask specific questions if you want specific answers.
• Difficult bank comparisons: It will be significantly more complicated to analyse the different approaches proposed if the requirements are not appropriately defined. Only visible prices will be the differentiating factors, while the final structure will not meet the requirements and could lead to a more expensive solution in the end.
• Avoid a solution that fits the bank’s requirements: In cases where the banking structure is not clearly described in the RFP with sufficient detail, the banks will propose a solution that best fits its capabilities and profit enhancement potential – not necessarily the businesses requirements.
• No proper wallet analysis: The absence of a proper wallet analysis might lead to inappropriate wallet sharing and put some banking relationships at risk.

Selection Phase

Ineffective selection might lead to partial implementation or no implementation at all. Consider the following for the selection phase:

• Longer, more painful, more expensive implementation threat: If the objectives of the RFP are not properly defined, it can be hard to land on a suitable final decision, which might be actually based on subjective feelings and leading to inappropriate bank selection. Implementation would then be longer, more painful and, finally, more expensive.
• Deterioration of banking relationships: Non-objective final decisions will not be understood by the non-selected banks and will further deteriorate your relationships with these banks.
• Stressed or inappropriate banking relationships: The absence of proper wallet sharing will lead to stressed or inappropriate banking relationships.

Data Gathering to Final Selection

Getting the critical steps for a successful RFP and selection process right after the data gathering phase will determine if you have a successful project. The approach highlighted in Figure 2 below can help achieve a proper banking selection. In this article, the focus is on the non-tax elements, although you should carefully review the tax impacts of any new banking structure under review with tax experts.

Figure 2: Critical Steps for Bank Selection

As a minimum, you should collect the necessary information for the elaboration of the RFP document to be submitted to the selected banks. Indeed, experience shows that the more information you provide to the banks, the better the pricing you receive from them. When responding to the RFP, the banks will always make their cost/benefit analysis and, in case of uncertainty, they will always consider the safe side of their estimation. Furthermore, as a corporate treasurer, you will be able to evaluate if the selected bank is able to support you, not only for your global or central needs, but also for the identified specific local requirements. This is because you should not only collect the corporate treasury centre requirements, but also the local requirements through data questionnaires, conference calls and site visits.

Finally, collect all the existing banking costs, covering not only the visible expenses resulting from transaction fees, electronic banking fees and so forth, but also the hidden costs, for example float, manual transfer process costs and risks, inappropriate payment and collection mechanisms and channels, expensive foreign exchange (FX) operations, etc. This will ensure treasurers’ get the full benefits out of any given project and will create competitive tension between the banks as they will all have visibility over the total wallet at stake.

Building a Business Case

Before moving forward with a formal RFP, you should perform a thorough data analysis to validate the needs and savings you will be able to realise. Building the business case for change will probably be a requirement from higher management. It will also allow you to estimate the cost and savings involved in the project, and will help get buy-in from all stakeholders when realising the payback period of such project.

A treasurer should elaborate the banking structure that will best fit their requirements, and not the bank’s requirements. In cases where an RFP document does not clearly describe the banking structure in sufficient detail, the banks will propose a solution that best fits their own capabilities, and profit enhancement potential. Furthermore, it will be significantly more complicated to analyse the different approaches proposed if the requirements are not properly defined.

Although credit can now generally be obtained more easily post-crash, corporates are still fearful of being caught out again. This means that an RFP for transaction banking services should go into the market requiring strong credit line support. As such, even if a bank can offer the best transaction products at good prices, credit availability might be the decisive factor in your bank relationship. You should be aware of the value of transaction banking operations for the banks and should not readily give it away without having established balanced relationships with your banking partners.

It is good practice to prepare a bank RFP document that includes all countries in scope for a certain region, instead of having individual country RFPs – please refer to the earlier gtnews article entitled ‘Regional Banking: an Attractive Model for Multinationals’ for more details on regional approaches. There are a number of reasons why this regional RFP approach makes more sense:

• It will be more difficult to achieve a priority status/good level of services in those countries where the volumes will be less important or interesting for the bank. The reason for this is that, in a lot of countries, you probably do not have the critical mass in terms of turnover to facilitate competitive tendering to banks on a per-country basis. Certain countries with lower volumes of activity will probably not obtain best services and costs from the banks if services are offered on a per-country basis, and some banks will probably not even want to respond to the RFP.
• This regional approach to tendering for services does not mean that you will ultimately select one single regional bank. However, you should expect that, in the countries where the tendering banks do not have a direct presence, you will still receive strong local services and best pricing provided by an alliance or preferred partner bank.
• This approach will ensure the tendering process takes into account all transaction flows and requirements in each country and the interactions between them, avoiding the discovery of blocking factors during the implementation phases.
• The tendering process will also allow the selection process to identify the banks most likely to provide the maximum coverage for the business. Being given the option to compete on total volumes, banks will provide a complete front-to-back solution for the countries they can cover, and propose much finer pricing based on the economies of scale by taking a larger proportion of your banking business. This will ensure best in class prices for local operations in the long run, and standardised pricing.

Conclusion

Finally, the selection process should be fair, complete and objective. This will ensure good and continuing relationships with your banks, even with the non-selected ones. To achieve this, you should have defined the objectives and the selection criteria (balanced score card) at the beginning of the project, which will facilitate final selection based on agreed objective criteria.

Although it might be tempting to skip some of the steps identified above in order not to create any waves and save a couple of weeks’ effort, corporate treasurers should not underestimate the importance of a proper RFP process. There can be multiple reasons why an implementation goes wrong. In a lot of cases, the root cause of any problem lies in a shortened/incomplete RFP process – definitely something to be considered by anyone launching an RFP process.

To read more from PwC, please visit the company’s gtnews microsite.

Comments are closed.