A same-day money payment costs a bank around 25p to make. They’re charging your company £20. If corporations got tough with the banks and adopted formal rules, they could add an astonishing 15% - 20% to their bottom line. But it could be higher.

You’re a large corporate wanting to pay a supplier in the Middle East. Neither you nor your bank has an office there. So you choose a bank that does. And then it happens. You start incurring significant costs.

Where business crosses international borders, corporations have historically struggled to monitor and collate the variety of costs associated with payments made through third-party banks and local payment systems.

Sliding scale
Banks charge these costs back in a variety of ways that may not be easily understood by the corporate. Charges can be levied on a fixed-cost basis or, at worst, on a sliding scale proportional to the value of the payment. Often, there’s a minimum fee that could be as high as USD 100.

Worse, companies might have multiple business entities, each with its own suite of accounts  in some cases at more than one bank. They might even have multiple banking arrangements in one country, all with different terms and conditions  or in some cases no formal terms and conditions at all. Certainly, few banks’ terms and conditions are negotiated by a single unit and cover every banking service that a corporate uses.

Service reviews
But corporations have only themselves to blame. When appointing a bank, corporates should conduct a full review of the types of services they require and ensure that the all-in costs are quoted for payments and receipts in each currency, including their base currency. Charges for services that are not documented should be disputed and not paid. The corporate should request a tariff review on completion of any merger with its payment bank  it’s reasonable to assume that their bank will have leveraged their new buying power to reduce its own unit costs.

Steve Faulkner is the MD of Agnos Consulting, a company that provides a complete set of services to manage the costs and services of cross-border payments and cash management using third-party banks (nostros).

Lower unit price
“During the 1990s,” he says, “car manufacturers insisted that their suppliers become more efficient and that each year they should reduce the cost of their components by 5%, or lose their contracts. The same should surely apply to banks used by corporate customers? At the very least, corporates could negotiate the tariff structure so that an increased volume of payments and receipts in their most frequently used currencies could trigger a lower unit price.”

So, what charges are we talking about?

Open season
Commercial payments  payments where the beneficiary is not a financial institution  have always been regarded as ‘open season’ for banks. In some centres, e.g. the eurozone, any bank in the chain can claim the right to take a non-STP (Straight Through Processing) repair fee under the Interbank Convention on Payments  not formally agreed with either party, and with the exact nature of the repair sometimes unclear.

Further still, in some cases, the payments could have been processed on an STP basis, but the bank can and does make a charge. To avoid this regime, where charges are fluid and, in many cases, undefined, a corporate should challenge his payments bank to find a solution. For example, banks can agree with each other bi-lateral standards under which payments can be made, helping the corporate ensure that ad-hoc charges are avoided.

Lifting
Alternatively, a fixed charge can apply  a charge that can change from time to time and is removed from the payment principal  a process known as ‘lifting’. Or it can be applied by value, so that the larger the payment, the greater the fee deducted. Again, the payments bank can be asked by the corporate for ways to eliminate or, at worst, mitigate these charges.

In Japan, for instance, this can be up to 20 basis points. A basis point is 1/100th of 1 per cent. For example, on a payment in yen equating to £100 million, this fee would be £5480. But the actual cost of making this payment is less than 50 pence. Banks can even levy fees on book transfers where the remitter and the beneficiary are on the books of the same bank!

Then there is ‘bene-deduct’  where banks advise that the cost of a payment is to be borne by the beneficiary. This may be artificially high, but is of no concern to the remitter. His bank makes the payment to the receiving bank, and the paying and receiving banks divide the fees. This has historically been a huge money-earner for banks for little or no risk. This way, a big payments bank with a lot of commercial-payments traffic can ensure it maximises payment revenues at extremely low cost and low risk.

Significant revenue
In some extreme cases, these payments can be delayed, so that one- or two-day value can be withheld by the paying bank, so it effectively arrives at the beneficiary bank late. This can cause problems if the payment is particularly large. “Banks simply rely on the fact that it has always been done this way,” says Steve. “Alone, the amounts are not huge. Multiply them thousands of times, however, and they become a significant revenue stream.”

Just as payments are charged for, so now are receipts. This seems odd, given the developments in straight-through processing (formatting standard message types in a commonly agreed way). Here, the receiving bank levies a charge, despite the fact that many payments are not contingent on the receipts that cover them.

Some banks charge a liquidity fee of several basis points if there are no available funds in the account apart from money due to be received that day. Corporates should determine what intra-day credit facilities are to be made available to them and whether increased intra-day limits can be applied if the corporate advises of incoming credits, and from which banks they are due to be received. This also applies to timed payments (payments that must arrive by a certain time, like margin payments to Eurex) and this can be around 10 to 20 basis points, often with a hefty minimum charge.

Many banks also charge a repair fee, saying that they have had to ‘repair’ a transaction by manually adding information, such as the IBAN code. However, this information usually exists in the body of the message. Banks also have a different set of criteria in different countries  so the chances of a bank having a payments engine that can anticipate all the various protocols in each country are extremely rare. Some simply pay the repair fee knowing that, if they don’t, they won’t receive their repair fees in return.

Debit and credit interest rates, too, are not above suspicion. The agent might set interest rates, which may not be easily verifiable. However, EONIA is the Euro Overnight Interest Average  an easily verifiable rate published every day in the newspapers, and the benchmark rate used by the wholesale market. Even with interest rates being traditionally low over the last 10 years, the spreads that apply should still be monitored, as this is another source of leakage.

Protecting revenue
Corporates can also pay liquidity fees  fees levied for anticipated funds that have not yet arrived  and value-dating of payments. The point here is that paper clearing, like foreign currency cheques, can take at least 30 days for US dollar items. These cheques can be cleared using same-day London USD clearing, while the bank may not advance the value date it gets on the cheque to the customer. However, whatever value date is advanced to the customer, finality of payment can never be guaranteed. Cheques, by their very nature, can be mislaid and are often sent between banks using ordinary postal services or uninsured couriers.

Leakage
All of this, of course, implies leakage. But leakage falls into several categories. As explained, these include undefined transaction fees that chip away at the value of payments, and lifting fees, especially those that are proportionate to the size of the payment.

The lack of Service Level Agreements is only adding to the leakage problem. “Without SLAs, it’s like a bucket with several holes – over time, the amount of water that escapes can be considerable. If companies reviewed and implemented more formal arrangements, backed up by Service Level Agreements tailored to the corporate’s individual needs, they could add 15% or 20% or even more to their bottom line. They could also add enhanced levels of service that are important to the corporate e.g. intra-day reporting and the quality of reference data reported,” says Steve.

Formal agreements
With periodic formal service reviews, the corporate gets to know where costs savings can be made, enhance core services that are important to them, and control costs. All these factors can be brought into one document  the Service Level Agreement, which does not have to be legally binding. It is more of a commitment between the corporate and his payments bank in one or more currencies setting out what each party will do in the spirit of co-operation and partnership. Companies could also negotiate better service quality and end-to-end customer experience, through formal Service Level Agreements drawn up with their payments banks.

So, in short, the actual cost to the bank of making an international payment or similar transaction is a few pence  but the charges that they levy are out of all proportion to this. A CHAPS payment, for example, costs around 25p, but customers can be charged in the region of £20.

So what can the corporates do, in practical terms?

Detailed review
They need a detailed review of which bank does what in each centre and to calculate what the total annual spend is over the last two full years. They can then calculate the unit cost per transaction and use this figure to see how it compares with current known market rates and volumes.

The corporate is then able to renegotiate with an individual agent, or review their process to get close to those rates. They will also agree that, if the service is not mentioned in the SLA, then it does not get charged. All other aspects of the services will be set out in the SLA, together with the way to format payment message types so that they do not need repair, points of contact, bank holidays, payment cut-off times and other criteria that the corporate has defined as being important.

Insightful
Companies with like-minded individuals might also seek to get together to form a ‘guild’ to ‘compare notes’ or share thoughts on issues that affect them jointly. These could include low-value payments initiated outside Japan for disbursement domestically that require conversion to katakana characters.

This can be very insightful and rewarding, but only works if all parties are prepared to share information. Beware attendees who do not contribute. Some may choose to exchange business cards and carry on discussions offline. It should not be a forum at which salesmen peddle their wares, unless of course invited to do so.

Powerful tool
“It’s a way of making the SLA a powerful tool to benchmark the services and associated costs that will be delivered by the agent,” says Steve Faulkner. “It can also set out what the corporate will do as a customer of the agent bank. For example, it will not send all its payments two minutes before cut-off time, and provide properly formatted instructions. The SLA will then be reviewed periodically and candidly by the stakeholders and action taken to address any of the services which are not meeting the standards set out in the SLA.

That is, of course, in a perfect world. And, as we’ve seen, the world of corporate banking is far from perfect.

You can read more about Agnos Consulting at www.agnos.co.uk.