With the fast-spreading threat of the coronavirus paralyzing the U.S. and global economy for months to come, the Federal Reserve made the drastic decision on March 15, 2020, to slash interest rates to zero.

This will almost certainly impact the earnings credit rate (ECR) you receive on balances you hold with your banks. We will likely see earnings credits near zero, or even negative, starting with our next account analysis statements.

Stay calm and consider the following:

1. Anticipate higher but more transparent bank fees

Unless your company is among the happy few that operate on a true zero balance basis or has mastered the art of cash forecasting, chances are your organization has been keeping a certain amount of operating balances. As the fed funds rate steadily increased over the last decade, your bank fees started steadily disappearing, thanks to the magical concept of earnings credit. But Sunday, March 15, 2020, was a wake-up call: with the fed funds rate now nearing zero, the spotlight is back on your bank fees. No more gross fees versus net fees. No more offset. You are now facing the truth of exactly how much you are paying in bank fees. Depending on how much balances you maintain historically and how competitive your ECR was before the rate cut, you might see millions in bank fees resurfacing overnight.

2. Get your house in order and hold your banks accountable

More than ever, it is time to be smart about your bank fees. Start with the simple and the obvious: look out for the next ECR cut, try to anticipate and negotiate ahead of time with your banks, and keep them accountable for notifying you of any major changes. But it is also a good time to pay close attention to your account analysis statements. Look for the unjustified reserve requirement fees that some regional banks are still slipping under the rug. Watch your float and ledger balance to keep your insurance recovery fees at bay. And, if you have the time, resources, and stomach for it, dig deeper into your service line items and challenge your entire suite of services.

3. Refocus on your core bank relationships

We are now most likely facing the next big recession, so it is time to refocus on the bank relationships that matter the most to your organization: the ones that will provide the support, credit and liquidity that you might need in the coming months. Bank fees are often considered a side product, but we like to think of them as a reward product. So, it is time to carefully rethink and reallocate some of your business to your key partners in a structured and strategic way, taking into consideration the aspirations of both parties.

4. Seek long-term commitment

In this uncertain environment, securing long-term commitment will eventually benefit banks and corporations. Banks will secure long-term revenue and recurring business, while corporations will secure locked-in pricing. But you shouldn’t blindly enter into any long-term commitment. Take time to assess your options, compare services and cost across banks, consider share of wallet, assess the overall relationship, and then make an educated decision.

5. Protect your company’s bottom line

At the end of the tunnel, the vast majority of companies will still face long-term impacts on their revenues and profitability. Every department will be required and asked to reduce costs even more. So think about how treasury can participate in the collective effort and where your main sources of savings are located. We think bank fees are a good place to start.

If you have any questions, please contact your Redbridge advisor. As always, we are here to help.

cash management considerations

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