01 Feb3 thoughts on checking what you pay your bank or custodian for

The prompt for this week’s post is a story about fees charged by State Street, the major custodian: “State Street overbilled customers $200m over 18 years”.

Institutions pay many fees to their banks and their custodians. Fees are not an easy thing to reconcile. There is nothing as simple as a SWIFT MT950 cash reconciliation: debits, credit, balance. Standards vary hugely on both sides of the table; what is charged and how well that is reviewed.

In the State Street case, the error was apparently a particular fee category: “out-of-pocket” costs. In the scheme of things, these fees represent a very small amount of State Street’s revenue. Coming on the back of a previous transgression with FX pricing in 2014, my expectation is that the effect will be large in comparison to the relatively small size of those fees.

I have been on both sides of the billing process: charging clients as part of a transaction services business and checking fees as the user of a service. A few tales of real situations will illustrate where this can and does go wrong.

STP vs. Repair: the holy grail is to have all trades or payments settle STP, without a need for manual intervention. As a rule, STP prices are a regular focus and buyers always seek to push these down, often at the cost of agreeing to higher repair fees. In a transaction business I worked with, we worked on introducing a new service with detailed reports of what was STP vs. what was repaired.

We were a little surprised to find some major differences between the results of using SWIFT standards vs. our “house rules”. The latter were used to drive the bill. Over time, lots of people had fiddled with that code and simply put, it was out of step with reality. In order to add a new reporting product, we had to complicate our project and add a new billing process.

Ticket price vs. extras: one FI that I worked with was forced to negotiate a new price for settlement service. At first the provider wanted to increase from USD 2.50 to USD 10.00. After some heated debate, a new price of USD 5.00 was agreed. The FI was happy and those involved gave themselves a pat on the back. Sadly, their Network Management either did not read or did not understand the fine print. The supplier slipped in a clause charging USD 0.50 for every status update sent. Five of those were charged as standard for every trade. USD 2.50 in extras for every USD 5.00 ticket. Two notes of shame in this case; not one of those status messages was ever used and nobody noticed the extras until I was asked to verify some charges 18 months later. Those costs were passed straight back to the business. The Network Management team, which had negotiated the fees, did not review the actuals. At least USD 10 million wasted.

Lessons Learned:  

In the State Street case, the affected clients have to take some of the blame. They will have had a bill and a chance to check it. Now, while the amounts involved may well have been small, my own sense is that any amount in the category “out-of-pocket” costs has to be unexpected and in need of a challenge.

I would offer some guidance for how to deal with billing.

Rule #1 – Monthly Cycle

Ask for all fees to be monthly. Even if there is an annual service fee, ask for it to be charged 1/12th per month.

Rule #2 – Pre-advice

Ask for the bill to be prepared and sent to Network Management for review at least 5 business days in advance of month-end. For the most part, the fees will be direct debited to your account.

As a rule debit & credit interest are provided for on a separate schedule. You should expect to see a balance per value date and a charge or credit per day. Any withholding should only happen if there is a net credit across the whole month.

Rule #3 – Sanity Check

Reconciling exactly is most likely impractical. The main cause of this is that there are as yet no standard billing formats and you would have to source data from your own systems in the same format.

A decent enough control is to eyeball the bill and go through the following checklist.

  1. Is the total cost substantially different from last month? 10% or more deserves questioning.
  2. What is breakdown between STP tickets and non-STP? You need to know what normal is, but certainly any number over 5% is questionable, unless there are only a handful of trades.
  3. Are there any extra costs, such as status messages, that are more than 5% of the total bill? Do they make sense?

On the interest schedule: are there days when the balance was outside +/- a nominal amount? Nominal would be +/- $5mm equivalent in USD, EUR and GBP and +/- $2mm in any other currency. It is unlikely the Nostro or the Custodian is at fault, and you will have to pay the bill. However this is a sign that cash management is not as precise as it ought to be. Small overdraft charges, as well as small credit interest credits are a factor of being in the business. They should just be considered part of the ticket cost. Only if there is a very large single cost that can clearly be allocated to a particular error, should the costs be split up into “normal” and “special”

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