Teaming up on banking services: how combining business volumes can drive down costs.

• Author: James, Perry E.

While the economy is now showing signs of recovery, most government revenue sources have yet to turn the corner. As a result, many governments still find themselves struggling to meet increased demand for services with constrained resources. In this environment, governments must take advantage of cost saving opportunities wherever possible. Many governments have banded together to achieve savings, adopting such strategies as merging city and county services, sharing facilities, and combining buying power in joint purchasing bids.

There is nothing particularly unique about the cooperative procurement of products such as oil, gas, asphalt, salt, furniture, office supplies, and vehicles. For years, governments have known that they could obtain better pricing and service from vendors by aggregating volumes. However, this model has rarely been applied to the procurement of banking services. Many governments assume that the sheer number of providers, the disparate needs of public entities, and the nuances of paying for banking services make such a procurement infeasible. While these factors certainly add a layer of complexity, they are not insurmountable. This article describes how three North Carolina governments overcame these obstacles and successfully lowered their banking services costs by jointly procuring banking cards.

THE EVOLUTION OF AN IDEA

Sharing many of the same core issues and challenges, as well as the common goal of efficient government, the City of Raleigh, the Town of Cary, and Wake County have long enjoyed a good working relationship. The governments readily share information with one another, and finance personnel regularly discuss ways to collaborate on fiscal matters. Several years ago, we noticed that these discussions increasingly turned to the subject of banking services.

As it turned out, all three governments used the same bank, Wachovia Bank. While there were differences in the types of banking services required by each government, many of our needs were the same or very similar. These included the processing of transactions through central checking and payroll accounts, the use of lockbox and purchasing card services, ACH transactions, and the safekeeping of assets. As we delved into the matter in greater detail, we discovered that our respective jurisdictions shared two overriding needs: (1) to moderate ongoing fee increases that were not always consistent with the experiences of the other units and (2) to obtain state-of-the-art technological solutions for their rapidly evolving business needs.

As these discussions evolved, the idea of collaboratively procuring banking services became more and more appealing. All three governments were looking for ways to contain the costs of banking services, and the proliferation of e-commerce and e-government were creating new opportunities and challenges in this area. If ever there were a time to alter the nature of municipal banking relationships, this seemed to be it. Still, two fundamental questions remained about the viability of a collaborative banking services agreement. First, would combining service needs and business volume result in better services at lower costs for each unit of government? And if so, how would we go about soliciting proposals on a joint basis?

Raleigh, Cary, and Wake County appointed a project team consisting of finance personnel from each unit to study the viability of a collaborative banking services contract. This team soon identified a number of other important issues that would need to be resolved before the three governments could begin developing a request for proposals.

* What effect--either positive or negative--would the different financial characteristics of each government have on a combined contract? For example, county revenue streams are primarily large-dollar, seasonal tax receipts, whereas cities receive a lot of small-dollar, regular payments for utilities and other services.

* Would it be beneficial to combine under one request for proposals the core banking services of each unit, as well as the newer services that can be priced at a premium? There was a concern that banks might adjust the core services fees upward to make newer services more appealing.

* Should the contract combine all of the banking services under one financial institution or would it make sense to have separate contracts with multiple banks for different services?

* Would each of the three participating units be bound by the results of the joint procurement, even if some services were priced higher than the same services under existing agreements?

* Given the differences in service levels among the participating governments, would it be possible to obtain an "apples to apples" pricing comparison?

* Would it be advantageous to share contract savings with other governments in the county?

As with any new initiative, answering these kinds of questions requires much discussion, analysis, and inquiry. We benefited tremendously from the expertise of the University of North Carolina's Institute of Government, which facilitated a series of meetings designed to achieve a common understanding of the issues among the...