At a recent conference dedicated to cash management in the US, Sarah Gundle, project manager at Redbridge, presented the three differences that always surprise European treasurers conducting their first operations across the Atlantic – Interview.

What is the first thing that usually surprises a European treasurer starting a US operation?

Sarah Gundle: There are three fundamental differences between cash management in the US and in Europe. The first is certainly the bank fees statement, which is easily accessible but more difficult to decipher across the Atlantic. The second is the concept of the earning credit rate or ECR that must be mastered to reduce the cash management costs. Finally, the check collection chain, a means of payment that is still very present, involves different players than in Europe, which can be puzzling.

What is so different with the US bank fee statements?

– In the US, cash management banks tend to break their billing statements into a lot more service fees than in Europe. If it is common to see around 50 items charged in Europe, this number easily reaches 250 in the US. So, while it’s generally easier to get bank billing statements – it’s even mandatory for a US bank to send a recap for all the services charged, it is difficult to wade through all the information.

Didn’t the Association for Financial Professionals work intensively twenty years ago to standardize bank fee statements?

– They did and they continue to work on that standardization. There are new revisions every five years to the AFP Service Codes Set (to find out more on the last code set update, please read our article), but its use is not mandatory.

Even when larger banks and regional banks tend to structure their billing statements according to the AFP service code set, they still break things down in different ways. One might have a service that’s only one line item, when another might split that out into several line items. Regular mapping is necessary to understand which service each item relates to since service names can change, as well. Depending on the number of accounts, it can take an entire week every month to a treasury analyst to harmonize the statements before being able to analyze them!

How do European banks that have local subsidiaries in the US behave?

– European banks operating in the US tend to structure their bank billing statements in a simpler way. This is partly because they are just not as set up to handle the complexities and with all of the different services that US companies are looking for.

Do you feel that complexity of banking statements in the US is justified?

– It could be simpler. The complexity of bank billing statements in the US has gotten to a point where it often serves more to confuse and make it more difficult for clients to challenge them.

Why are checks still play an important role in the US?

– Americans love their checks and there’s are a couple major reasons that this mean of payment will not go away any time soon. The country has major sections that are rural, with no necessarily good internet, nor good access to banks. In the meantime, the US Postal Service is required to deliver and pick up mail from every address every day provides an easy and convenient way for people to pay at home. Also, paying online implies a steep learning curve for older people used to checks.

Can you briefly explain how the checks are processed?

– It depends on the number of checks you get each month. A company getting only a hundred checks or so a month can process them easily either with a bank deposit or a remote scanner. For companies accepting a large volume of checks every month, the easiest way to collect them is through the lockboxes. A lockbox is kind of an outsourced AR resource. Your bank or your lockbox provider will give you a special address – a post office box – with a specific reference number which will be used by your clients to mail in their checks along with the coupons and the remittance.

The lockbox facility has people to open your mail, scan and cash in the checks. If there are any errors, they’ll follow a decision process designed with you. At the end of the day, the company receives a batch with all the accounts that have collected money, any errors, any special considerations… That way, the treasury team isn’t spending too much time on checks and can run a leaner team. Lockboxes are a huge value for insurance companies, utility companies, any company that’s going to have large recurring volumes and also has that requirement to accept any form of payment.

Do all lockboxes look the same?

– No, there are definitely superstar providers. Some lockbox providers can’t handle all of the volume and tend to specialize on B2B businesses, leaving retail and wholetail clients to larger providers. Some banks also have gotten out of the game, but since this service is required by their clients, they’re white labeling another company’s product.

Why is the earnings credit rate a key concept when dealing with cash management in the US?

-The earning credit rate started as another way to attract customers after Regulation Q prohibited banks from offering interest in an effort to curb speculation. It’s almost like an interest rate because you’re paid a certain amount to keep your balance at the bank. But instead of giving you that money, it’s like an allowance that you can use on your bank fees.

Is there a formula which sets the earning credit rate and does it vary with the Fed Fund rate?

– The ECR results from a negotiation with the bank and will be related to where the Fed Funds rate is at the time of negotiation. Most banks offer flat fees, which means that regardless of what the fed funds rate is, the company will be earning the same amount. I’m not a big fan of that because when the Fed Fund rate goes up, the bank is not compelled to increase the ECR. Generally, a couple months can go by before the banks increase the ECR, but there’s no requirement to do so.

It is important to set up some rules regarding the ECR when crafting a contract with its bank. For instance, we advise clients to institute an ECR floor and say it will never drop below a certain point and to calculate your net rate whenever possible. When the company is also paying insurance recovery fees, its net rate could be negative, which means it pays the bank to hold the balance. That’s why we always try to ask about that to protect our clients.

How can cash management fees and services in the US be improved?

– A full bank fee statement monitoring, if done manually, might not be possible every month. We would love to see our clients doing this, see them with software that can help make it happen. But if the treasury department does it manually, we advise to stick to the 80/20 rule to review the bulk of the fees, and then to perform a quarterly review of all fees just to check since the company typically only has 90 days to report errors to the bank.

On top of statement monitoring, treasurers should have an annual review with each banker. The discussion should encompass the relationship as a whole, not just cash management, but also any lines of credit and anything they have coming that may benefit to the treasury department. They’re going to come prepared to that review with all kinds of recommendations. The treasurer must also come prepared to the discussion, with a detail review of contracts and statements, and a list of questions to make sure that the bank share the same vision for your company moving forward.

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