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:
Figure 1: Major RFP Issues to Identify
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:
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:
Ineffective selection might lead to partial implementation or no implementation at all. Consider the following for the selection phase:
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:
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.
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