Feature Articles and Resources

• Managing Banking Relationships
  
• Banking Services RFP: Design, Criteria, and Value
  
• Eleven Essential Items to Include in a Review of Your Existing Banking Relationship
  
• Recommended Practice on Procuring Banking Services
  
• Useful Resources on Procuring Banking Services and Preparing an RFP
  

• Panel of Economists: Is the Yield Curve Signaling a Recession?
  
• Interest Rate Outlook
  
• Snapshot of Economy and Interest Rates

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Key Rates: Cash Markets
  • Relative Value Yield Chart

Managing Banking Relationships

Effectively managing banking relationships can save a government time, money, and unwanted surprises, but it requires an investment of time and effort on the front-end and ongoing oversight. Envision banking relationships as two-way streets, whereby the bank client needs to be an active participant along with the bank to ensure that everything is running smoothly. Sometimes banking relationships go awry because the government never conveyed to the bank that it was dissatisfied with something, and the situation just snowballed. Consider the following concepts while reviewing your banking arrangements:

Banking Requests for Proposals (RFPs). If your government has had a long-standing banking relationship in place and has not gone out to bid for numerous years, then it may be time to consider doing so. Typically, governments will put their banking out to bid every five years. A common scenario involves a three-year contract with two one-year renewals, totaling five years. An RFP process creates a very competitive environment among the banks, resulting in the most favorable pricing and terms and conditions for the government.

Banking Relationship Review. If your government would prefer not to undertake an RFP process, which can be arduous, then it could consider performing a formal banking relationship review. All of the key banking relationship components, such as pricing, product utilization, customer service, and contracts, can be reviewed and renegotiated with the existing bank. The bank will know that if the process does not satisfy the government that the banking relationship could still go out to bid, so it is in the bank’s best interests to negotiate a favorable package for the client.

Bank Selection Criteria. When selecting a bank or monitoring existing banking relationships, governments should consider and rank the following criteria:

1. Protection of public funds (collateralization of deposits)
2. Financial strength of bank (capitalization, bank ratings, profitability)
3. Ability to provide required services (basic cash management services)
4. Ability to provide enhanced services (new services, emerging technology)
5. Experience with public sector clients (Government Services Group)
6. Quality of references (other like agencies with similar service utilization)
7. Cost to the government (pricing, cost of conversion, staff time)

Note that protection of public funds should be a top priority. If there is any risk of loss through lack of proper collateralization or poor financial performance on the part of the bank, then the government needs to look at another bank. Also, cost is not always the key decision making criterion, because if the bank does not score well with the other criteria, then cost becomes a mute point.

Monitoring Banking Relationships. Once a banking relationship is established, a government will want to ensure that everything is on the up and up throughout the duration of the contract. For example, pricing can be monitored through on-line account analysis data downloaded to a spreadsheet program that compares contract pricing with actual pricing. Bank financial information can be obtained through a government’s broker/dealer, bank annual reports, or online investment services such as Bloomberg. Collateralization information can be obtained by requesting copies of the public funds reports that the bank files with the state. The other areas can be discussed and tracked through regular meetings with the bank relationship manager. Typically, a government should expect quarterly in-person meetings with its bank, and most likely there is daily bank contact by agency staff with Customer Service and other bank departments for research items, questions, and problem resolution.

Be the Squeaky Wheel. Surprises typically occur when the bank client has not communicated directly with the bank’s relationship management team about any ongoing concerns. If the bank does not know there is a problem, then they will not endeavor to find a solution. Lack of communication with the bank can result in overpayment of bank fees, maintaining balances well in excess of what is needed, high pricing in non-negotiated product areas such as merchant bankcard or uncollected funds, and loss of goodwill among the bank and agency staff.

In a Nutshell. In summary, governments should check to make sure that the following banking relationship characteristics are in effect:

• An underlying banking services RFP, banking services proposal, and bank contract.
• Regular RFP or banking review schedule in place (e.g., every five years).
• Bank monitoring system in place for pricing, financial condition, and collateralization.
• Regular in-person meetings with the bank’s relationship manager (e.g., quarterly).
• Ongoing dissemination of new product information from bank.
• Fast turnaround from bank staff for day-to-day questions, requests, and research items.
• Familiarity of agency with banking services used and new services available.

A well-managed banking relationship benefits everyone involved—the government, the bank, and most importantly, the taxpayers and constituents.

Banking Services RFP: Design, Criteria, and Value

Summary. About every three years, finance officers face the task of producing a RFP for Banking Services. Few, if any, look forward to the experience or expect the result will significantly improve day-to-day operations and results. However, in today’s rapidly changing banking environment, a carefully structured RFP can reduce the pain of changing banks while producing immediate benefits to the state or local government. Evaluating value versus price is an area of growing interest as new technology supplants the replication of existing services.

When to Issue. Local laws and regulations may determine the answer, or it may be based on the expiration of an existing contract. In a few cases, it may even reflect changing circumstances in the government or in the existing bank relationship.

Most banking contracts are set for a three-year period with two one-year extensions possible. This timing will work for most governments in most circumstances. The exceptions will generally lead to earlier issuance rather than longer contracts.

Who to Invite. There is often a question about who should be invited to bid and who should be excluded. In the past, the criteria often relied upon those banks with physical presences within the boundaries of the governmental unit. In today’s marketplace, that may unnecessarily limit the options, reduce the value, and add significant cost. Increasingly banks are specializing (or creating specialist units) to address the unique requirements of various economic sectors. In this case, these specialists may be able to provide access to lower cost funding, pre-tested automated links to popular software, and investments designed exclusively to meet the requirements of public funds. The value of these specialists must be weighed against the convenience of a local bank. The range of who you invite will often determine the scope and value of the responses you get. You may wish to consider inviting one or more national players to get an indication of what is available.

What to Include. This can be narrowly defined or broad based. In the best case, banking services will include the entire scope of services from checking accounts, purchasing cards, short-term liquidity, access to capital markets, and investments. Each portion can be evaluated independently, but the entire picture is seen by all.

For the government, an all-inclusive RFP is a massive undertaking, but the value can be enormous. Many banks will value the relationship based on the potential value over the term of the contract. For a bank, even a small portion of the relationship may still incur a similar start-up cost as would the complete relationship. If many providers are selected, the government will end up covering start-up costs for multiple vendors. (Banks do require a profit, so getting a chance at the whole relationship will produce a better result for the government).

Top Business Driven Reasons for Issuing a Banking Services RFP

Existing bank is acquired or exits the business of Public Fund Banking Government unit experiences consolidation or rapid growth and existing bank can no longer meet the needs Government changes base accounting software package and existing bank cannot support new system Technology becomes available at competing banks and is not available at existing bank, significant and quantifiable advantages available if technology implemented Service level agreements are not met by existing bank

Are you Looking for a Partnership or a Prisoner? The wording may be harsh, but you probably want a banking partner who values the relationship with you and vice versa. In that spirit, consider the following when drafting the RFP.

• Have a vendor conference. Ask for questions in writing and in advance, but also take questions from the floor during the conference. While there is always the chance that a bank may take the opportunity to showboat, this is often the only time the non-incumbent banks have to understand what issues are affecting the government.
• Use a reasonable timeframe for formulating responses. This is a three-year partnership that will impact your life on a daily basis. Allow sufficient time for all banks to respond in a thoughtful manner consistent with the importance of the RFP. A short turnaround time favors the incumbent bank, not the government.
• Use evaluation criteria that look at line item costs, but also values the benefits of new technology. A low quality RFP will give item counts and services used. The bank is asked to respond by providing their price for replicating what is being done today and does not allow for different procedures or services to be introduced into the process. This provides an easy method of comparison, but does a disservice to the public. With recent technological advances (think also of the new methods of fraud), your requirements may be significantly different than those of three years ago. Take full advantage of the “consultative” aspect of your bankers and let them propose alternatives to your existing methods of operation.
• Require service level agreements. A bank may be the lowest cost provider, but that is small consolation if the service provided costs additional staff time, added errors, or has hidden fees. This is an area that may be included, but often is not valued in the analysis. It should be.
• Require a banking transition schedule. A detailed transition schedule is a good indication that the transition will go smoothly and on schedule. The schedule should include dates, personnel involved, progress reports, and critical item identification.
• Clearly define the selection process before the bids are opened. The incumbent should not be given a second chance to meet the best bid (A not uncommon practice that guarantees the government will not get the best effort of non-incumbent banks) The process should be clear before the responses are opened. While the criteria need to be understood by the public, it must also understand that this is a technical service that may not easily be reduced to a black and white decision.
• Give everyone a reasonable opt-out. The opt-out provisions can go from very liberal (30 days for any reason, initiated by any party) to very onerous (never for the bank, 30 days for any reason for the government). The fact is if a bank wants out, it will find a way to make you let it out. It is better to have a provision written in that allows a bank to withdraw on notice, but still guarantees the per- item cost for certain line items; checks cleared as one example. This protects the government, but also allows a bank that wants to exit the relationship an open door.
• Require ongoing and periodic relationship reviews. The Review should be a maximum interval of one year and should be a very formal process.

Conclusion. The RFP process should bring benefits to the government entity, especially if designed with that goal in mind. Whether it be decreased operating costs (not just bank fees), improved earning potential, increased data security, ease of use, or a better business partner, the selection of a banking provider is a critical success factor. While often dreaded, the RFP process is an opportunity to make quantifiable improvements in your operations and your life.

Recommended Practice on Procuring Banking Services

State and local governments use a wide variety of banking services for the deposits, disbursement, and safekeeping of public monies. Prudent procurement practices necessitate the reevaluation of banking services on a periodic basis. In addition, continual changes in technology, cash management practices, and banking industry structure offer public cash managers opportunities to reevaluate banking services and costs.

The GFOA recommended practice on procuring banking services recommends that state and local governments should undertake the following practices to receive effective banking services at reasonable costs:

1. Periodically initiate competitive-bidding and negotiation processes, in accordance with the state and local laws and regulations, for major banking services. The processes should include requests for proposals and should cover services, fees, earnings credit rates, and availability schedules for deposited funds.
2. Have contracts for banking services that specify services, fees, and other components of compensation.
3. Establish a relationship manager who will best understand the needs of the entity and be able to provide service improvement recommendations as well as cohesive communications.
4. Evaluate the relative benefits and costs of paying for services through direct fees, compensating balances, or a combination of the two. Factors to consider in this evaluation are the earnings credit rate, reserve requirements and insurance fees on deposits.
5. Evaluate their needs against the costs and benefits of specific banking services, including but not limited to:
   
   Electronic
   • Balance and transaction-reporting services
   • Stop payments
   • Payment capabilities
   • Transmitted analysis and statements
   • Digitized storage of paid checks and statements
   • Stale date check management
   • Access to safekeeping/custodial information
   • Access to investment performance reporting
     
     Accounts
   • Controlled disbursement
   • Zero-balance
   • Interest-bearing
   • Investment sweep account
     
     Security features
   • Positive pay services
   • Reconciliation services
   • ACH blocking/filtering capabilities
   • Check to ACH conversion
   • NSF/ACH conversion for representment of NSF check
   • Collateral requirements
     
     Cash management services
   • Lock-box services
   • Credit card receipt merchant services
   • Safekeeping custody arrangements
   • Procurement cards
   • Payroll/value cards
   • Web links for Internet payment for services
   
   
6. A cash management review and comprehensive evaluation should be performed prior to the issuance of a RFP to ensure that the cash manager asked for all required and optional banking services. This preliminary work is necessary periodically to take advantage of changes in banking services and technology as new services become available.