Treasury Today Country Profiles in association with Citi

Selecting a cash management bank

This month’s question

“We are in the process of selecting a cash management bank and I would like to know which particular criteria one should focus upon most and the reasons why? I have the following criteria:

  • Financial strength.

  • Long-term relationship.

  • Provision of credit facilities.

  • Geographic presence.

  • Breadth of treasury management capabilities.

  • Quality of technology/internet services.

  • Credit ratings.

  • eBAM capabilities?”

Portrait of David Felton
David Felton, Treasurer, Stemcor Trade Finance Ltd, responded:

The criteria that you have listed are all very valid but the priority that you should attribute to each really depends on the drivers and targets that you set for your project. Those targets can also be a mix of immediate, medium and longer term. For example a cash management bank needs to have the technical capabilities to enable you to manage cash efficiently but consider what is required to manage cash; reporting (electronic capabilities/reliability/interconnectivity with your systems), perhaps full membership of local clearing systems, physical bricks and mortar presence in a single bank name or ‘club’ membership etc.

Having ranked your criteria, decide on how you will rate prospective providers and what weighting will be given to aspects of each of those criteria. Give the providers feedback after the results are calculated so that they have the opportunity to supply additional information.

One criterion missing from your list that your Board will be most interested in is ‘cost’ – initial outlay and ongoing expenditure but also the benefit of selecting one provider over another. The Board is interested in the bottom line, as you are, but you are also interested in efficiency and information flows. The Board will be interested in those ‘softer’ factors if things go wrong!

Portrait of Adrian Rodgers
Adrian Rodgers, Director, ARC Solutions, responded:

Bank selection criteria can vary materially depending on services required. Assuming your challenge includes both treasury (financial) and business unit (commercial) transactions, this first priority must always be to meet the genuine operating needs of the business, as established by in-depth discussion with business unit finance management. In this context, ‘genuine operating needs’ include support for the payment and collection instruments required by the business, its vendors and its customers. These will be supported by liquidity services geared to an appropriate level for the geographies in which the business operates. This in turn will lead to a view of what services are required by geography. A health warning here; do not confuse bank presence (which may be limited to a representative office) in a specific location with capability – the ability to actually deliver service and support in that location.

Credit is now, most usually, a critical factor for borrowers and potential borrowers. Lending banks need to balance the books, and the award of cash management business is a way to ensure that they get some (profitable) reward to balance their (marginal or loss-making) lending portfolio. Credit, however, cannot truly compensate for a failure to meet underlying business needs. Many corporations now establish a selection ‘longlist’ by reference to their lending relationship group (ie only credit banks initially qualify).

However, if it appears that lending banks do not support the range of products or geographies required by the customer, non-lenders may be selectively included. The same logic applies to long-term relationships, even for non-borrowers. Long-term relationships can be important, often offering intangible benefits like access to senior bank executives, willingness to tailor services etc. But long-term relationships all have to start somewhere, and if a new bank appears to offer the services you need (together with a positive attitude towards longer term relationships) do not be afraid to include them.

Financial strength (as expressed via external credit ratings) is generally desirable, but not in my view essential. It is a potential tie-breaker in well-banked regions like western Europe; however in other areas of the world, there may not be a choice of banks with good credit ratings who can offer the services you require. The real sensitivities around financial strength though are protection of surplus funds, and business continuity in the case of total failure. Some multinationals address the former by dividing their local banks into transactional and liquidity banks; excess funds being transferred from the former to the latter as often as is necessary to reduce risk to an acceptable level. Business continuity risk is being addressed by having a backup operational bank in major locations.

The definition of ‘operating needs’ in the 21st century now generally includes the provision of an appropriate level of electronic/internet banking systems. Depending on the customer’s degree of IT sophistication, the selection criteria may include a high degree of connectivity or integration between customer and bank systems, with marked and increasing trend to SWIFT. Support for eBAM is, generally speaking, in very early stages. Few customers are currently making this a critical criterion, but if it is a very high priority for your organisation it should certainly be included in your RFP document.

Portrait of Frank Hamer
Frank Hamer, Global Head of Transaction Banking, National Bank of Abu Dhabi, responded:

The relative importance of each criterion below depends on a detailed analysis of a corporation’s management agenda and the requirements pertaining to its cash and liquidity flows. To be more specific:

  1. Financial strength.

    In today’s marketplace the financial strength of a financial institution becomes more and more important. A sound balance sheet and a related stable and sustainable corporate strategy enables the customer to work with the bank within a long-term relationship. The corporate customer can expect solid, recurring and first class service. Money placements are secure and the customer can establish a decent sized counterparty limit. This particularly benefits large scale customers with substantial excess cash flows.

  2. Long-term relationship.

    Important, but we do see that many banks have changed their business model over time and therefore can become more or less relevant and reliable for a corporate client. More important than the long-term relationship is the bank’s strategic sustainability to ensure being a reliable partner for future years to come.

  3. Provision of credit facilities.

    This can be an important criterion for corporations with heavy capital equipment investment and/or negative working capital cycles. It would be almost irrelevant for corporations that do not require funding because of a positive working capital cycle, for instance.

  4. Geographic presence.

    Very important for clients that span with their subsidiaries across a region (or globally). Likely selection will be regionally and the strongest banks in their respective regional arena will be chosen.

  5. Breadth of treasury management capabilities.

    Significantly important for very sophisticated clients that need cross-border sweeping or pooling structures or would like to have both trade service, structured trade, cash and liquidity and FX management all under one electronic roof.

  6. Quality of technology/internet services.

    Important particularly for the integration with in-house ERP systems, automated upload functions and internal remittance or pooling structure approval processes within a corporation.

  7. Credit rating.

    This ties in with point one above, financial strength.

  8. eBAM capabilities:

    We see increasing efforts to work within a paperless environment. With less manual and paper based processes there will be time and cost savings that can be reinvested into strategic initiatives.

The next question

“What is the value for corporates to connect to SWIFT?”

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