Chapter 7: Relationship Management and Financial Service Provider Selection

What three tasks should a treasury department complete before designing and administering the RFP? 1. Define the objective, determine the business requirements, and develop the project plan 2. Define the objective, submit a request for information, and submit a request for quotation 3. Define the objective, negotiate with the selected vendor, and implement 4. Develop a long list, determine the business requirements, and develop the project plan

1. Define the objective, determine the business requirements, and develop the project plan Before designing and administering the RFP, the treasury department should: Define the objective. This involves developing and articulating a clear understanding of the factors driving the required products or services. Such factors may be strategic or operational. Clearly defining the objective and identifying the key drivers will allow for an improved selection process. Determine the business requirements. Business requirements spell out what the firm hopes to accomplish, including the needs of the various stakeholders. Business requirements are sometimes prioritized as must have, nice to have, and neutral. These requirements should then be collected into a formal requirements definition that should form the basis of the selection project. Develop the project plan. Project plans identify the tasks that comprise the project and define completion dates, assigned resources, and task dependencies. Exhibit 7.6 provides an outline of the major steps and approximate timing for a complex global RFP. The project plan should also include a list of people participating at each stage of the process and identify who will make the key decisions.

A vendor is selected through a request for proposal (RFP) process for a global banking system that needs to be implemented in multiple countries for the organization. What is a best practice for the implementation phase? 1. Implement in one country first and fix the problems there before proceeding 2. Implement in one country first and send out RFPs for the other countries while this is being done to encourage competitive pricing 3. Ensure this phase of the RFP process takes less time than the prior phases 4. Implement in all countries in parallel and get each step done before starting the next

1. Implement in one country first and fix the problems there before proceeding In terms of time and effort, implementation is often the largest component of the project. As with selection, the implementation of the project needs to be planned carefully and then appropriately resourced. Depending upon the size of the project, it may be advisable to break the implementation into sections. This allows the opportunity to test new practices and procedures in one area before they are rolled out company wide.

What are examples of tools available to help companies monitor the financial health of banks? 1. SOC 1 Report, published financial statements, and credit analysis 2. Published financial statements, credit analysis, and regulator's assessments 3. Published financial statements, credit analysis, and Uniform Bank Performance Report (UBPR) 4. SOC 1 report, ISAE 3402 report, and published financial statements

2. Published financial statements, credit analysis, and regulator's assessments There are a number of tools available to help companies monitor the financial health of banks. These include: Published financial statements. Published financial statements provide a measure of the reporting entity's financial health on the statement date, and can be compared with statements prepared for different time periods. Notably, both US accounting standards and International Financial Reporting Standards (through ASC Topic 326: Financial Instruments−Credit Losses9 and IFRS 9: Financial Instruments, respectively) require financial institutions to calculate the expected credit loss over the life of a loan, in effect requiring the institution to recognize its probable future losses on its balance sheet. This is a change from previous accounting treatment, which only required financial institutions to record a credit loss when it had occurred. Credit analysis. Published credit ratings from a recognized credit rating agency, and counterparty risk analysis from third-party specialists, can provide an initial indication of a financial institution's strength. Market data, including credit default swap spreads, provide a more immediate assessment of a financial institution's creditworthiness, particularly whether it is perceived to be improving or weakening. Regulator's assessments. Banking sector regulators perform regular reviews of the financial strength of the banks under their supervision and publish results of stress tests applied to the most systemically important banks.

A Certificate of Deposit (CD) represents the bank's obligation to pay ________________. A rate of interest regulated by the US Federal Reserve 1. A fixed or variable interest rate until the deposit 2. is withdrawn, which could be without notice 3. A rate of interest that is fully negotiable for any deposit amount 4. A fixed or variable interest rate over a specified period of time

A fixed or variable interest rate over a specified period of time. A certificate of deposit (CD) is an example of a Time Deposit Account (TDA). Given a deposited amount, a CD holder earns a fixed or variable interest rate over a specified period of time. Historically, a CD was backed by a physical certificate, which could be negotiated in the money markets.

Which of the following statements is true regarding the use of account analysis statements from banks? Banks use standard terminology in describing services They are used for reporting purposes only, not for billing Standard formats can resolve errors in volume and pricing The ASC X12 822 transaction set is incompatible with the AFP standard account analysis format

C. Standard formats can resolve errors in volume and pricing Account analysis statement provides information on the services provided, balances maintained, transaction/item volumes processed, charges assessed, and earnings credit allowances. It is important to note that banks may not use the same terminology when describing products/services. Some services and fees may be combined into a single line item or flat fee, and these combinations may vary from bank to bank. The ASC X12 822 transaction set accommodates the AFP standard account analysis format and AFP Service Codes.

A company opening a new bank account wants to determine if the 6.0% earnings credit rate (ECR) offered will be sufficient to offset the bank's monthly service charges. In addition to the service charges, there is a 10% Federal Reserve requirement. In October (31 days long), the bank charged $900 in fees. The company had an average of $300,000 on ledger balance and an average of $50,000 in deposit float. What is the total excess earnings credit (Total earnings credit less the bank's monthly service charges)? (Rounded to the nearest whole dollar) A. $1,147 B. $1,376 C. $476 D. $247

D. $247 To calculate the earnings credit, first calculate the collected balances and determine the earnings credit, and then subtract the bank fees to determine the total excess earnings credit. Average Collected Balance (CB) = Average Ledger Balance − Average Deposit Float Average Collected Balance (CB) = $300,000 − $50,000 = $250,000 Reserve Requirement (RR) = 10% Earnings Credit Rate (ECR) = 6.0% Number of Days in Month (D) = 31 Earnings Credit = CB × (1 − RR) × ECR (D ÷ 365 Days) Earnings Credit = $250,000 × (1 − 0.10) × 0.06 (31 ÷ 365) Earnings Credit = $1,147

All of the following are important considerations in determining the number of banks a company should have in its banking network EXCEPT ___________. a. Cost to maintain each bank relationship b. Existence of multi-country operations c. Importance of diversification of funds d. Risk of having a "single point of failure"

Importance of diversification of funds The treasurer generally determines the appropriate number of banking relationships that are required given the firm's unique operating and financial characteristics. Specific determinants include the organization's credit needs, the organization's geographic footprint, the need to balance the costs of maintaining multiple relationships against concentration risk (i.e., the risk of having a single point of failure), and the relative strengths and capabilities of each bank.

A company would use which of the following to measure the qualitative and quantitative performance provided by its banks? a. Scorecard b. Informal annual relationship review c. Account analysis and billing statements d. Number of visits by bank service representatives

a. Scorecard A scorecard is a management tool used to qualitatively and quantitatively measure the FSP's performance. The primary purpose of a scorecard is to provide feedback on the service provided and the benefit received. The scorecard also allows the provider to better understand how the customer perceives the combination of the quality and cost of the services provided.

ABC Company has incurred costs due to its bank repeatedly missing the controlled disbursement reporting deadline. To which of the following would the company's cash manager refer? a. Service level agreement b. UCC-4A c. Account resolution d. Regulation CC

a. Service level agreement The SLA is primarily concerned with the definition of the specific services provided (including the terms and conditions under which they are provided) and the operating metrics used to measure the level of service provided. SLAs also typically include a description of any penalties for failure to comply with the requirements of the agreement. The elements of an SLA often include: Operational policies and procedures (including the detailed processing requirements for each service; a list of required information and related reports; a list of individuals authorized to make changes; and a description of the issue escalation and resolution process) Performance standards and calculations that define agreed-upon levels of service performance and quality

A company wants to determine the required collected balance needed to offset the bank's service charges of $7,700 per month. Their earnings credit rate (ECR) is 6.00% and the reserve requirement is set at zero. For the month of November (30 days), what are the collected balances required? (Round to the nearest whole dollar) a. $1,734,877 b. $1,561,389 c. $1,678,913 d. $1,490,323

b. $1,561,389 To calculate the collected balances required, the following information is required for this scenario: Service Charges (SC) = $7,700 Earnings Credit Rate (ECR) = 6.00% Reserve Requirement (RR) = 0% Number of Days in Month (D) = 30 The formula for collected balances required is as follows: Collected Balances Required (CB) = SC ÷ [ECR × (D ÷ 365 Days) × (1 − RR)] Collected Balances Required (CB) = $7,700 ÷ [0.06 × (30 ÷ 365) × (1 − 0)] Collected Balances Required (CB) = $1,561,389

n conjunction with company policy, bank fees and short-term interest rates, what factor can be used to determine whether it is better to hold excess balances and reduce bank service charges or to maintain lower balances and increase short-term investments? a. Reserve requirement b. Earnings credit rate c. Account maintenance fee d. Availability delay

b. ECR US banks typically provide their corporate customers with imputed interest on DDA balances using earnings credit analysis (ECA) systems. The rate used to calculate this imputed interest is called the earnings credit rate (ECR) and is typically negotiable as part of the initial bank selection process. ECR is typically tiered based on balances, with different ECRs applying as balances move above or below pre-agreed thresholds. The earnings credit allowance is the total dollar value of credit that can be used to offset the service charges incurred during the analysis period.

During a formal relationship review of a company's bank, the company should discuss all of the following EXCEPT ___________. a. Future strategies and needs b.Negotiation of more favorable interest rates c.Qualitative assessments of service levels d. Fees and error rates

b. Negotiation of more favorable interest rates A relationship review is procedure firms use to assess service levels and responsiveness, both quantitatively and qualitatively. Formal reviews typically involve a quarterly, semiannual, or annual meeting of the senior management representatives from both parties. FSPs (Financial Service Provider) also often initiate relationship reviews by preparing summaries of services, fees, error rates, and other relationship information, as well as an introduction to new products and services. Relationship reviews enable discussion of future needs and strategies in a true two-way dialogue.

The Uniform Bank Performance Report (UBPR) presents all of the following types of data EXCEPT? A. Data for the specific bank B. Data for a peer group of banks similar in size and economic environment C. Credit analysis D. Percentile rankings

c. Credit analysis By analyzing the data contained in the UBPR, the user can obtain an overall picture of the bank's financial health and discover conditions that might require further analysis and investigation. The UBPR presents three types of data for use in the financial analysis of a bank: Data for the specific bank Data for a peer group of banks similar in size and economic environment Percentile rankings A thorough understanding of these data groups and their interrelationships and limitations is essential in order to use the UBPR effectively. As a general rule, any analysis should compare the bank to its peer group, consider the bank's trends over time, and recognize trends and changes in peer group averages.

Which of the following is a reason that banks may favor fee compensation over balance compensation? a.Balance compensation is not as visible as fees for budgeting purposes b. Earning credits used to determine the value of collected balances are taxable c. Deposit balances increase liabilities on the balance sheet d. The strategy involves attracting deposits to fund their loans

c. Deposit balances increase liabilities on the balance sheet Some banks prefer fee compensation because deposit balances increase the liabilities on their balance sheet. This may lead to a need for additional capital to meet regulatory requirements. A second reason why banks often prefer fee compensation is that fees from deposit services are viewed as a low-risk source of earnings. The other answers either are arguments for balances over fees or they are from the company's perspective.

Financial institutions have the ability to offer earnings credit or interest on which of the following accounts in the U.S.? a. Money market deposit accounts b. Commercial bank passbook savings accounts c. Certificates of deposit (CDs) d. Demand deposit accounts (DDAs)

d. Demand deposit accounts (DDAs) DDAs are interest-bearing in many countries, depending on local practice and applicable regulation. For example, in the United States, Federal Reserve Regulation Q (Reg Q) had historically prohibited FIs operating in the United States from paying interest on DDAs held by for-profit companies. In lieu of interest, corporate account holders received earnings credits, which were used to offset bank service charges. The passage of the Dodd-Frank Act in 2010 has since repealed Reg Q, so banks are now permitted to pay interest. Even so, most US-based firms continue to be compensated for funds held in DDAs with earnings credits.