Sarah Gundle, project manager at Redbridge, sheds light on three surprising distinctions that European treasurers encounter when conducting operations across the Atlantic. From managing large volumes of checks to decoding intricate US account analysis statements and understanding the nuances of Earnings Credit Rates, Gundle provides valuable insights and practical solution to navigate in the U.S. banking landscape.
There are a few key things that European treasurers find surprising when they consider their US operations.
Up to thousands of checks per month
The first is that checks are still highly utilized in the US, where Europe makes much better use of electronic methods of payment. This is caused by many factors, from the large rural population without consistent access to the internet to older populations preferring to maintain payment systems they are comfortable with, but it means that, depending on the industry, companies have to find solutions to deposit up to thousands of checks per month.
If check volumes are low, bank counter deposits or remote deposits, done by a desktop scanner on location, can be an easy solution. For larger volumes, especially for utility and insurance companies, clients typically use lockboxes to process their incoming check payments. This is a kind of outsourced Accounts Receivable (AR) resource, where clients send checks directly to a post office box and the lockbox operator (either a bank or a third-party operator) will scan the checks and remittance information and transmit a payment file to the corporation. Treasury or AR teams will then receive the consolidated file and be able to update their ERP directly.
Decoding bank statements is a true undertaking
The second is that US account analysis statements tend to be much longer and more detailed than statements in Europe. These statements are sent to clients monthly, but the breakdown of services means each account can use as many as 200 services (or more!).
As most of our clients have multiple banking partners in the US, they’ll also find that how these services are broken down and named varies widely from bank to bank. Because of this the Association for Financial Professionals (AFP) regularly releases code updates to help corporates understand and categorize their services. But these codes are not mandatory, and different banks can apply them to different services, so this is more of a guideline than a set of rules. And if a company does not have electronic reporting, it can take days or even a full week to upload and harmonize all of their bank statements before they can begin to analyze them.
Understand the intricacies of Earning Credit Rates
The third key point for European treasurers to keep in mind in the US is the Earnings Credit Rate. This is similar to an interest rate, as it’s earned based on the balances held at a bank and can be indexed to the Federal Funds Rate. However, instead of earning money that is then deposited into the account, it is a credit applied to the account to lower bank fees. Treasury teams can also opt to earn interest, but banks do not always offer the same rate for ECR as they do for interest, so it is important to review the bank’s offerings and determine what makes the most sense for your team.
It’s important to address how your rate is calculated, because banks will generally offer one of three types of rate: flat, managed, or index.
- A flat rate generally remains the same, as long as the Federal Funds Rate does not drop significantly below it. Some banks will maintain this rate even if the Fed Funds Rate drops, but it’s rare.
- A managed rate will move slightly with the market, but you may not benefit from increases in the Fed Funds Rate as quickly or as completely as you would with an indexed rate. Rate changes will be communicated to you by your banker, but are not automatically applied and rates may not change with each increase to the Fed Funds Rate.
- An indexed rate is indexed directly to the Fed Funds Rate and will move as it moves. This means that increases and decreases will be applied in close to real time and you’ll benefit from any increase in rates as soon as possible.
It’s especially important to address rates quickly as they are predicted to drop in 2024 and by ensuring you have an optimized rate structure now you will be in the best position possible as rates begin to decline.
In order to make sure your rates are optimized and the fees you are being charged are consistent with your fee schedule, we encourage our clients and all treasurers to have regular meetings with their bankers and to ensure they’re reviewing the bulk of their fees at least quarterly, if not monthly. We also recommend having a dedicated software to help monitor fees in order to free up the treasury team’s time to do deep analysis.