Here’s how Earnings Credit Rate works:
- Average Collected Balance: Banks calculate the average collected balance maintained in a client's deposit account during the statement period.
- Applying ECR: The bank applies the Earnings Credit Rate (usually quoted as an annual percentage rate) to the average collected balance to determine the earnings credit.
- Offsetting Service Fees: The calculated earnings credit is used to offset banking fees, including monthly maintenance fees, wire transfer fees, ACH transaction fees, and other service charges.
- Net Charges or Excess Credits: If earnings credits exceed the incurred fees, typically no cash is paid back to the organization, though excess credits may be carried forward depending on bank policies. If fees exceed credits, the organization must pay the net difference.
Regularly reviewing and negotiating your ECR can significantly impact your organization's banking costs, making it a critical component of effective treasury management.
What’s important here?
The ERC allows organizations to earn credits from maintaining balances in deposit accounts, which offset banking service fees. Understanding and optimizing ECR can result in meaningful savings in banking expenses.
