By the end of the calendar year (and for many of us, fiscal year-end), we have a growing mountain of tasks to complete – close the books, conduct our annual budgeting exercise, get ready for the audit, and review upcoming changes to regulations that may affect our cash.

Somewhere in this shuffle, we leave money on the table and important strategic decisions are left unmade. By adding these actionable year-end items to your 2020 checklist, your treasury team can reduce cash management costs and gain operational advantages by making the right decisions. When companies don’t plan for the new year with their banking partners, they can over pay for services, improperly prepare for price increases, and not leverage shifts in the interest rate environment.

1. Pricing changes

Unless your company is under a contract for bank fees, you should expect annual price increases with at least some of your services in January. How does your treasury team plan for this change? At the very least clients should be having annual formal reviews with all banking partners to help codify these changes and discuss any increases, and pushback when necessary. At the very heart of this relationship is one of provider/client, albeit with banks playing a key partnership role in your treasury team’s success. We do not want to use this opportunity to play ‘beat up the banker.’ Rather, we want to socialize our concerns and be prepared to ask hard questions, backed by internally reviewed data.

2. Service mix

“Who ordered the black and white fax service and how is this a line item?” How often has the analyst come across such line items and scratched their head? Another line item is 99-9999 (AFP code for miscellaneous services); simply put, if the bank is unsure of the service item and how to code it, the service will be assigned this code. Going through line-by-line, at least annually, will help verify that you have the right service mix with your banks and that new unintentional services were not implemented by the bank during the year. Aligning purchased services with operational and treasury needs is critical – what may have been needed a year or two ago, may no longer be necessary.

3. Interest rate changes

Since the interest rate environment has changed over the last several years, corporate treasury must be positioned to ask, first internally, and then with their banking partners, a series of questions around interest earned.

With corporate demand deposit accounts (DDAs) now being able to earn hard interest on the accounts – are you? With interest rates having declined over the last 12 months, how has your earnings credit rate (ECR) moved during this period? We often hear the statement, “ECR covers a good portion of our fees.” Does it still, and to what amount? Have you negotiated a hybrid arrangement, or even hard interest? Where should you keep your balances – in the accounts themselves to earn ECR (in a compressed interest rate environment), or swept out into another account or vehicle for overnight investment? One important distinction to remember, which has tax implications, is that ECR is a soft interest applied against charged services, it is not transferred from period to period, and it will not be for an amount greater than your services, while interest earned is considered income.

All of these factors must be accounted for when walking through the different scenarios and should be considered before approaching the bank to hold discussions around the interest rate structure on your cash management accounts.

Summary

Success with bank fee analysis lies within the quality of questions you ask, actionable visibility into your fees, and awareness of your firm’s needs in relation to the services charged by the bank. Even getting to the stage of being able to ask these questions can be a daunting task, especially when your treasury team maybe managing multiple banks, across the globe with different currencies, and relationships that contain hundreds or even thousands of accounts. Add to these inherent challenging tasks; banks do not apply the same logic when assigning AFP codes to what looks to be the same service.

If your firm is stuck on any of the above items, or needs a sounding board for best practices, please reach out to us and we can discuss in more detail how Redbridge can assist your treasury team.

Originally published December 4, 2018, updated December 6, 2019

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