Using RFPs to manage your bank relationship

Recent deregula-tion of thefinancial servic-

es industries has madeaccess to bankingservices more diffi-cult,1 and many CEOsand CFOs are findingthat credit and non-credit business mayhave to be awarded toretain the goodwill oftheir banks. Noncreditservices are the for-fee products offeredto corporate cus-tomers, including cash manage-ment, trust, shareholder servic-es, custody, trade finance,foreign exchange, and deriva-tive instruments.

BANK RELATIONSHIPMANAGEMENT

Many companies use bankrelationship management, acomprehensive approach to thefinancial institution–corporatepartnership. Traditional bankcalling often involved years ofattempts to generate an openingto corporate business. Thisworked as long as adequate rev-enues could be generated fromcorporate business, particularly

as most bankers had a poorunderstanding of profitability bycustomer or product line. Fur-thermore, commercial bankswere restricted in the use of theircapital and could not pursuemore lucrative business, such asinvestment banking or insurance.

The twenty-first-centuryenvironment allows banks andother financial service compa-nies to pursue a much broaderrange of business opportunities,reducing their reliance on creditproducts and marginally prof-itable noncredit services. Aswith other for-profit sharehold-er-owned companies, banksrequire a reasonable return onequity from each customer and

may terminate a rela-tionship if there is lit-tle prospect of accept-able returns in thelong run. The treasurershould meet withhis/her direct reportsto plan a comprehen-sive approach to bankrelationship manage-ment in consultationwith the CEO andCFO.

Given the partner-ship orientation ofbanks and companies,

there has been a growing trendtoward periodic relationshipreviews. The objectives of thereview are to:

• assure that the relationship isprofitable to the bank whileproviding added value to thecompany;

• develop a consultative atti-tude between the bank andthe company to improve cur-rent processes and increaseefficiencies;

• deliver quality customerservice and the timelyimplementation of newproducts and services; and

• understand the future require-ments of the company.

Who is in charge of your firm’s relationship with itsbank—your company or the bank? Deregulationof the financial services industries has madeaccess to banking services more difficult. Andmany companies find they have to award creditand noncredit business to retain their banks’goodwill. What is more, the finance function isoften no longer the sole gatekeeper for all bankingcontact. But companies—and finance—can getback in control by using requests for proposals(RFPs) to manage the bank relationship. This arti-cle shows how to do that. © 2006 Wiley Periodicals, Inc.

James S. Sagner

Using RFPs to Manage Your BankRelationship

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© 2006 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI 10.1002/jcaf.20258

At each step in the cycle, adjust-ments can be made by eitherparty to meet the requirementsof the “partnership.”

CONSIDERATIONS IN BANKSELECTION

Bank contact has traditionallybeen through finance, which hassuch responsibilities as the safe-guarding of the cash and near-cash assets of the company. How-ever, access has been extendedthrough other business functionsin recent years as banks havebroadened their product offerings.Too often, financial staff remainsunaware of the resulting dilutionof its responsibility.

• Purchasing and accountspayable is often the entry forelectronic data interchange(EDI), e-commerce, pur-chasing cards, and disburse-ment outsourcing (compre-hensive payables).

• The payroll department orhuman resources may invitediscussions concerning thedirect deposit of payroll andpayroll ATM cards.

• The investment or real estatedepartments may be interest-ed in such specialized ser-vices as stock loan, custody,and escrow or tax services.

• Systems or information tech-nology (IT) often initiatesdiscussions about any of the

more technology-orientedbank services.

Given the current credit environ-ment, it is essential that financebe the gatekeeper for all bankingcontact. This may require CEOinvolvement in the process, par-ticularly as certain functions list-ed above (or others that usebanking-type services) do notreport to the treasurer or even tothe CFO.

CREDIT FACILITIES

Credit facilities normally arerequested of the financial institu-tion based on past and projectedfinancial statements, a business

22 The Journal of Corporate Accounting & Finance / November/December 2006

DOI 10.1002/jcaf © 2006 Wiley Periodicals, Inc.

Conditions for Contracting for Services

Logistics of Proposal 1. Provide your best and final bid.2. Submit the bid no later than a specified date and time.3. Provide “x” copies of the bid in print and/or electronic format.

Bidder Authorization 1. An authorized bank officer must sign proposals.2. The signed bid constitutes a binding commitment should the bank be awarded the

business.Date of Award 1. The company expects to award the business by September 1, 200X.

2. The company retains the right to reject all bids.Nondiscrimination Clause 1. The bank agrees not to discriminate against any employee or applicant for

employment with respect to race, sex, religion, ancestry, age, physical appearance,or handicap.

2. Any violation of this covenant may be regarded as a material breach of the contract.Confidentiality 1. The bank agrees to hold in confidence any data provided by the company in this

RFP or in relation to this RFP that are not otherwise publicly available.2. The bank will not use any confidential material for any purpose unrelated to this

RFP without written approval from the company.Other Possible Conditions 1. Contract duration and cancellation

2. Modification of the bid during final negotiations3. Standard company contracts and purchasing authorization(s)4. Costs incurred by banks in preparing bids5. Use of subcontractors by the bank6. Party to respond to bidder questions about the RFP

Exhibit 1

plan, booked and anticipatedsales, and other relevant data.Specific terms offered bylenders include the following:

• amount of the loan;• maturity or duration of the

loan;• interest rate, usually the prime

rate or London InterbankOffered Rate (LIBOR) plusor minus 1 or more percent;

• payment schedule, usuallymonthly;

• collateral pledged to securethe loan, usually involving aperfected first security inter-est in:•• leasehold improvements,

•• accounts receivable,•• inventory, and•• equipment, furniture,

and fixtures;• periodic financial statements

(usually quarterly) that pre-sent the company’s financialposition and support theloan;

• financial covenants that thecompany must meet, usuallyspecified as the attainmentof the minimum balancesheet account and ratioresults; for example:•• a typical balance sheet

account minimum is networth above $500,000 orsome other amount, and

•• a typical ratio minimumis net worth-to-total lia-bilities greater than 2:1;and

• material adverse changeclause, which terminates theloan should the company’sfinancial condition signifi-cantly change.

THE RFP

Companies began usingrequests-for-proposals (RFPs) inthe early 1990s to formalize apurchasing decision that hadbecome too casual. Existing bankrelationships tended to be givenextensions of credit and noncredit

The Journal of Corporate Accounting & Finance / November/December 2006 23

© 2006 Wiley Periodicals, Inc. DOI 10.1002/jcaf

Bank RFP Questions: General Issues

Financial Stability and 1. Identify key measures of the bank's financial strength (e.g., capital ratios, market Creditworthiness capitalization, total assets).

2. Provide ratings for the bank and/or bank holding company from two of the major credit rating agencies.

3. Provide audited financial statements.Organization 1. List names, titles, phone and fax numbers, and e-mail addresses and provide brief

biographies of bank contact personnel.2. Will one primary contact be assigned to our account? If so, from which area of the

organization? How many employees does the bank have in key areas providing theservice?

Commitment to the Service 1. What differentiates your service from other banks?2. How do you plan to keep this product current and competitive? What approach is

the bank taking in the development of new services?Disaster Recovery 1. Describe your disaster recovery facilities and plans. If these facilities are maintained

by a third party, explain how you expect to recover processing capability in the event of a disaster.

2. Has your bank experienced a disaster? How was the situation handled?Quality Assurance 1. Do you maintain quality standards including minimal and target performance goals?

2. Do you periodically publish a quality chart book and/or allow customer access toquality review meetings?

References 1. Provide three references in our industry or with similar processing requirements.2. Provide the names of two companies that have ceased doing cash management

business with your bank in the last year.

Exhibit 2

services under review without aformal bidding process. TheAssociation of Financial Profes-sionals (AFP) supported the RFPprocess by publishing three vol-umes of Standardized RFPsbeginning in 1996.2 Each servicerepresented in these booksincludes both a printed version ofthe RFP and an electronic ver-sion.

The RFP is usually organizedas lists of questions pertaining togeneral banking concerns and tospecific attributes relating toeach service being bid. Specificconditions for contracting forservices are included in the RFP;for examples, see Exhibit 1.

General issues pertain to anyservice being considered andapply to the bank’s financial sta-bility and creditworthiness,approach to management of the

organization for and delivery ofservices, and similar issues. Typ-ical questions are provided inExhibit 2. The issues pertainingto each noncredit service willvary by product.

PRICING

Although pricing has longbeen the consideration in select-ing a bank, recent experiencehas seen a decline in its impor-tance. There are several reasonsfor this:

• Maturity of the productcycle. Because many bank-ing services are in themature phase of the productcycle, there is minimal vari-ation in the price chargedby most banks. Further-more, information on pric-

ing is published in thePhoenix-Hecht Blue Book ofPricing (www.phoenix-hecht.com/treasuryre-sources/Products/Blue_Book.html), making pricingdata fairly widely availableto all interested parties.

• Unbundling. Banks haveunbundled pricing for manynoncredit services, makingline-by-line comparisonsmeaningless. Some bankscharge for each specificactivity, while othersinclude the service in thefee for the underlying prod-uct. For example, controlleddisbursing may include pos-itive pay,3 or it may bepriced separately.

• Quality. It is generally recog-nized that any quality prob-lems relating to a specific



Lockbox Account Analysis Detail

Component Cost Quantity Per-Item Charge Total Charge

Wholesale maintenance 5 $100.00 $500.00Lockbox deposit preparation 100 $1.25 $125.00 Deposit ticket 100 $0.80 $80.00 Wholesale item, photo 5,200 $0.43 $2,236.00 Nondeposited items 1,000 $0.25 $250.00 Data transmission—Box 1 1 $100.00 $100.00 Data transmission—Boxes 2–5 4 $40.00 $160.00 Keystrokes 23,000 $0.01 $230.00 Per image scanned 12,000 $0.03 $360.00 Image output per CD-ROM 8 $15.00 $120.00 Image services per item 12,000 $0.27 $3,240.00 Deposited items—On-us 400 $0.01 $4.00 Deposited items—In-district cities 1,600 $0.05 $80.00 Deposited items—Other in-district 1,600 $0.06 $96.00 Deposited items—Out of district 1,600 $0.08 $128.00

Total monthly charge $7,709.00

Exhibit 3

noncredit service can costmany times the price per unitof the service. As a result,the savings of a few centsper item is not importantwhen compared to the cost toresolve an error, a communi-cation or transmission prob-lem, or other bank mistakes.

ACCOUNT ANALYSES

The account analysis is themonthly invoice treasury receivesfor banking services. There arethree purposes in requesting apro forma (or projected) accountanalysis in the RFP.

1. Product pricing. It is usefulto calculate the completecost of each service and todetermine if any unusual feesare being charged. Exhibit 3illustrates one bank’s bid forwholesale lockbox4 as an ele-ment of a comprehensiverelationship plan; we’ll con-tinue the lockbox example inthe next two exhibits. Theaccount analysis pricingshows a per-item charge 43cents, but the total cost peritem is $1.48 (calculated as$7,709 total monthly charges÷ 5,200 items)! The compi-lation of such data permits

the determination of allancillary costs for each non-credit service.

2. Format. Another considera-tion in developing a proforma account analysis isthat the format and peculiar-ities of each bank’s pricingcan be identified. Remem-ber: if the account analysiscannot be easily understood,you will either fail to deter-mine that all charges arevalid or will spend consider-able time trying to analyzethe fees charged each month.

3. Balance information. Theaccount analysis presents all



Selected Responses to Lockbox RFP Questions

Bank A Bank B Bank C Bank D

Unique zip code Wholesale and No unique zip Unique for Wholesale and retail retail share unique codes wholesale share unique; retail

sorted by bar code

Number of mail pickups 10 daily; 3 daily; 19 daily; 7 daily; at post office 5 weekend 1 weekend 7 weekend 4 weekend

Quality assurance program Monthly customer Monthly Tracking only for Full program: customer tracking for 30 consolidated holdover, tracking, chart books,types of errors tracking for 12 investigations, open customer

types of errors productivity meetings

Customer service Primary Specialist and Team (specialist Pool; no specific representative and pool support for each service) assignmentspool support

Error rate per 10,000 1.2 1.8 < 10 (vague 0.6transactions answer)

Availability assignment By item Float factor used By item with Option of float factor for retail lockbox fractional availability or by item

Volume for price discount At 20,000/month At 50,000/month No stated discounts At 25,000/month

Period of price guarantee 1 year standard; 1 year with inflation 2 years 1 year; no guarantees 2nd year available increases for 2nd thereafter

year

Exhibit 4

relevant balance informa-tion, including ledger (book)balances, collected andavailable balances, and earn-ings credit rate (ECR)allowances.5 Despite thetrend toward standardization,there may be variations inthese calculations due tobank-specific practices.

EVALUATION OF THEPROPOSALS

Because of the sheer numberof potential questions andanswers in a set of proposals, itis very difficult to simply readthrough and make any sense ofthe material. For this reason, onetechnique that has been helpfulis to organize each set ofresponses into a table, listing thebank names in the columns and

the important answers in therows.

Exhibit 4 presents an excerptfrom such a table; a completeanalysis involving most of theresponses could be several pageslong. Note the variation in theresponses to the RFP questions.

The final step in evaluatingthe banks’ proposals is to assignweights to each response basedon the perceived importance ofthe question. The total weightadds to 100 percent, but anyindividual question can have aweighting ranging from a valueof 0 percent to as much as 15 or20 percent. The weights arebased on the company’s percep-tion of the importance of eachquestion.

An illustrative weightedscoring for lockbox is providedin Exhibit 5 for the four banks

from Exhibit 4. The responsesare displayed as the raw pointassignments, and weighted, withthe value specified for eachresponse applied to the pointassignment. The final resultsshow Bank “A” with 247 pointsand Bank “D” with 242 points,significantly better than Banks“B” and “C.”

These scores allow the com-pany to consider whether theexpected results are consistentwith the analysis, or if someadjustment in the weightings isnecessary. Should the resultsstand, the company should visitthe two finalists to ask difficultquestions, meet the client teamassigned by each bank, anddevelop a sense that the bankwants to be a long-term “part-ner.” References should be con-tacted to inquire whether the



Evaluation Score Sheet for Lockbox

Points Assigned Weighted ScoresWeight (%) Bank A Bank B Bank C Bank D Bank A Bank B Bank C Bank D

Unique zip code 12 2 0 2 3 24 0 24 36

Number of mail pickups at post office 12 2 1 3 2.5 24 12 36 30

Quality assurance program 22 2.5 2 1 3 55 44 22 66

Customer service 16 3 2 2 1 48 32 32 16

Error rate per 10,000 transactions 14 2 1.5 0 3 28 21 0 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 1 20 16 24 8

Total weighted points 100 247 149 158 242

Exhibit 5

bank has met its service obliga-tions with its other clients.

FINAL STEPS

Each credit or noncreditservice is governed by agree-ments that address the variousobligations and requirements ofeach party, to protect both thebank and the company in theevent of a dispute. The contractshave been drafted by the bank’sattorneys and are based on long-standing precedent as establishedin the federal banking statutesand the Uniform CommercialCode adopted by all states.

A team should be assignedto determine the necessary bankand company actions to com-plete the implementation. Con-

siderations may include notifica-tions to your customers aboutchanges in procedures, anyrequired information technologyinitiatives, and possible changesto existing workflow procedures.See Exhibit 6 for a handy check-list for managing the RFPprocess.

NOTES

1. The Riegle-Neal Act of 1994 allowedfull interstate banking by 1997. TheGramm-Leach-Bliley Act of 1999 endedGlass-Steagall Act prohibitions on theseparation of commercial and invest-ment banking, as well as insurance.

2. For additional information, seehttp://www.afponline.org/pub/store/pubs. Selected RFPs are available forindividual purchase by online down-load. The price per RFP is $79 for AFPmembers and $99 for nonmembers.

However, it should be noted that cer-tain RFPs published by the AFP arenow several years old, and in need ofupdating.

3. Controlled disbursing uses an accountthat is funded once in the morning tocover daily check presentments (deb-its), eliminating the need for compa-nies to leave balances to cover late-clearing items. Positive pay is a fraudprevention feature of controlling dis-bursing. Each day’s check run is trans-mitted to the bank in a file, and clear-ing checks must match as to checknumber and amount to be honored bythe bank. The company is notified ofany mismatches and has several hoursto decide whether or not each itemshould be paid or rejected by the bank.

4. Wholesale lockbox is used to handlelow-volume, high-dollar checks.Remittances are directed to a postoffice box, are picked up andprocessed by a bank, and are depositedsame-day to the company’s bankaccount.

5. Ledger balances are the amounts



Checklist for Managing the RFP Process

3 Catalog all of your current banking relationships. Ask within your company how satisfied each user is with thevarious services provided.

3 Calculate your likely needs for credit facilities and discuss them with several banks. Then ask if the bankers arealso interested in bidding on your noncredit service business.

3 Make sure that all affected business units are involved in the RFP process. Use an ad hoc committee to reviewall decisions and to assure that all parties “buy in” to decisions made.

3 Quality, experience, and concern for the relationship should be more important than price. Remember, banksmay be willing to negotiate certain charges, such as implementation fees.

3 Edit the Standardized RFP modules so that only the important questions are included. Be certain to includeappropriate company data on volumes, processing requirements, and other concerns.

3 Only send RFPs to banks that have clearly demonstrated they can provide the required services. It is a waste ofeveryone’s time to include banks on the bid list merely because they have called on your company.

3 Reexamine your weightings once the first set of scores are calculated to determine if you have assigned theappropriate value to each question.

3 Do field visits to meet your contacts and tour the processing facility. Ask a few hard questions to see how yourbankers handle issues requiring investigation . . . or if they ever get back to you with an answer!

3 Develop an implementation team to consider and plan for any initiatives necessary to complete the transition tothe new banking service.

Exhibit 6

entered onto the company’s bank state-ment and do not reflect the timing ofaccess to those funds. Collected (avail-

able) funds are usable for transactionsor other activities. The earnings creditrate is an interest allowance against

collected balances in a checkingaccount, usually determined by the 91-day U.S. Treasury Bill rate.



James S. Sagner, PhD, CCM, CMC, is a principal of Sagner/Marks, a firm of treasury consultants createdfrom the First National Bank of Chicago’s consulting division. He has managed 250 studies for organiza-tions worldwide and has authored five finance books. Dr. Sagner speaks at the University of North Caroli-na’s Advanced Topics in Cash Management and contributes to industry publications. In addition, he is onthe faculty of the School of Business of Metropolitan College of New York. This article is updated andrevised from material originally in Chapter 9 of Essentials of Managing Corporate Cash by Michele Allman-Ward and the author (Wiley, 2003).

Documents

Using RFPs to manage your bank relationship