In our daily lives, we experience the simplicity of receiving a bill for services rendered – a straightforward and transparent process. While consumers receive clear and concise bills for most services, organizations of all sizes grapple with the complexity of account analysis statements banks provide for treasury management services. These statements can come in a variety of formats (PDF, CSV, Excel, and EDI 822) with a multitude of line items.
In our latest blog in the Treasury Foundations series, we’ll discuss the role the treasury team plays in bank relationship management. We’ll explore how organizations can better understand their account analysis statements, the significance of earnings credit rates (ECR), and ways to enhance their banking relationships.
Bank Fee Analysis: The Account Analysis Statement
One of the primary tools for understanding banking fees incurred by municipalities is the account analysis statement. The account analysis statement outlines the fees applied to your account and delineates how your cash balances have been used to offset these charges.
Elements in Account Analysis Statements
While each financial institution (FI) will format its account analysis statement, there will be some common elements:
Transaction Fees
Municipalities engage in a variety of financial transactions, from wires and checks to ACH transfers. Banks charge transaction fees based on the type and volume of these transactions.
Maintenance Fees
Banks will charge maintenance fees for account upkeep, banking portals, and other related services. These fees can vary and municipalities need to assess whether they are getting value for the services provided.
Other Cash Management Services
Municipalities frequently leverage cash management services offered by banks. Fees associated with services such as lockbox processing, positive pay, prior and intraday reporting, and other value-add services, are outlined in the account analysis statement.
What are Earnings Credit Rates (ECR)?
Banks offer earnings credit rates (ECR), which allow municipalities to hold balances in an account to offset some of the fees incurred. ECR is a crucial component in the relationship between municipalities and banks and while being different from a real interest rate, ECR acts in a similar manner. This rate is usually negotiable and actively managed by banks, moving similarly to the Effective Fed Funds Rate.
Here's how it works:
Earnings on Deposits
ECR represents the interest earned on the average collected balance traditionally maintained in a municipality's master concentration account and is used to offset or reduce service fees. This interest is a soft-dollar adjustment of bank fees vs. hard-dollar interest paid to an account and, at maximum, is credited to fully offset fees.
Calculating Earnings Credit
Banks calculate the earnings credit based on the prevailing ECR and the average collected balance. The resulting credit is then applied to offset service fees, providing municipalities with a cost-saving mechanism.
Optimizing Earnings Credit
By maintaining higher balances, municipalities can usually negotiate an enhanced ECR and, consequently, reduce the net banking fees paid. In a high-interest rate environment, it's crucial for municipalities to actively manage their account balances because any excess earnings credit, once fees are fully offset, is forfeited.
Strategies to Optimize Banking Relationships
Account analysis statements serve as the foundation for comprehensively understanding the range of services you engage with at your bank and are used to optimize banking relationships.
Here are some strategies for optimizing banking relationships:
Transaction Review
A good strategy to start out with is to regularly review transaction types and volumes to identify opportunities for cost savings and efficiency improvements. Understanding this breakdown is crucial for municipalities to optimize their banking activities and identify accounts that may be exposed to fraud, idle, seeing an unusual change in activity, or even help prepare for a Request for Proposal (RFP).
Negotiate Fees
If you want to secure favorable fee structures or be well prepared for pricing negotiations in an RFP, engage in proactive negotiations with your banks. Establishing transparent communications is key to strong bank relationship management. This includes creating formal pricing contracts that will lock in pricing for years at a time, allowing Treasury teams to have a better idea of monthly bank fees as part of long-term forecasting.
Benchmarking Fees
If you’re an organization with multiple banking partners, actively reviewing fees can help compare fees across FIs to ensure rates are similar. Technology can assist with this as statements do not line up across different FIs and each statement can be a dozen or more pages.
Balance Optimization
When you actively manage your account balances you can maximize ECR and minimize net banking fees. This could mean moving funds into an account to ensure fees are fully offset or moving fees held beyond the level necessary to fully offset into higher yield investments.
Conclusion
Navigating the landscape of banking fees for municipalities involves a nuanced understanding of account analysis statements and the role of earnings credit rates. By adopting proactive bank fee analysis, municipalities can not only control costs but also strengthen their financial position for the benefit of the communities they serve.
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Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.
