When it comes to comparing the cost of banking services, the need to dig below the surface is necessary.
Most public entities will conduct banking Request For Proposals (RFP) to compare pricing on bank services and products. In these RFPs, the level proposed for an earnings credit rate (ECR) plays an important role in determining best pricing. But that may not always be the case.
Externally, banker(s) will view each client as a whole relationship. But internally to the bank, each service or type of deposit account is viewed separately. Here’s the most important thing to remember: the cost for individual banking services and the level of rates offered on bank deposits have their own separate profit centers. They must stand alone and be compared separately.
An ECR is used to determine the interest earnings a bank calculates internally for the level of deposits necessary to cover banking fees. This level can vary from .50% to over 1.25%. However, that’s only half of the real calculations in how the bank covers its cost.
It is important to note that bank fees for products have built-in profit margins to cover the cost of services and overhead. For large national banks, the pass-through costs for their organic overhead are greater than those of local community banks. Bear in mind that local community banks need to cover the costs for outside, third-party support and services; these might be higher due to a smaller number of clients vs. national banks.
As a former Market President of a major bank, here are some tips you should consider when determining the best bank pricing:
1.) Internally, banks price treasury services separately from deposit rates. So should you! Keep in mind that banks internally price their treasury services independently of treasury management of deposits. Since they are priced separately inside the bank, you should also view them separately when comparing pricing. Even though the industry makes you think they are intertwined, you’ll get the best pricing on your banking services and the highest yield on your cash if you consider them independently.
2.) Request a proposed ECR rate, and one that will readjust as the Federal Reserve increases the Fed fund rate. Ideally, the sharing arrangement between you and the bank should be a 50/50 split. As rates increase, so should the narrowing of the spread.
3.) Be sure to have the bank disclose any FDIC charges related to deposits being held by the bank. You may have a higher ECR but if FDIC charges creep in, the less competitive your ECR may be. There needs to be a balance on both sides of the relationship.
4.) A wholesome relationship and strong communications between you and your banker(s) are imperative. There is a direct link between better pricing and strong ties with your bank.
At three+one, we believe in strong relationships with your financial institutions. As interest rates change, so does the value of your deposits and how they relate to the overall value of your banking services and fees. As an independent liquidity analysis and data firm, we provide a pure, unbiased perspective around both sides of any banking relationship.
There is a real cost to doing business. To make a true comparison—and be fair to all involved, including those your entity serves—it is important to know what your real costs are.
We’re here to help you sort it all out.
The trends continue: short-term interest rates are still on the rise, the economy is growing, technology is advancing, and banks want your business. That is good for you and your banks.
Let me breakdown each of these trends:
First, short-term interest continues to rise and I expect this trend to continue throughout 2019. The Federal Reserve wants to bring short-term rates back up to what it views as normal levels: 3% to 4%.. This means you will make a greater interest earnings on your cash and banks will make more net-interest margin on deposits, making it appealing to both sides of the relationship.
Second, the U.S. economy is improving and above most expectations. A better economy means higher tax receipts for public entities, a strong job market for college graduates, and a more stable lending base for banks. All that is good for everyone as well.
Third, advancing technology brings new levels of productivity both personally and professionally in today’s marketplace. The ability to do banking transactions faster, virtually, and at your fingertips, allows greater access, control, and opportunity whenmanaging your cash. It also gives banks greater ease in monitoring and managingdeposits and transactions. These tech advances are both great for you and helpful to your banks.
Finally, as rates rise so does the spread that banks make on deposits. As a result, banks are more willing to raise deposit rates—if asked. The need to communicate with your banks as rates go up is imperative if you are to make the most of this rising-rate environment. This is good news and for both you and the banks, as you will both experience more interest earnings.
Rising rates, a stronger economy, advancing technology, and a desire for banks to gain and keep your business. They all have all the makings of a great 2019.
The link to ensuring success is the support and services of threeplusone. This is a fact. Our proprietary liquidity analysis and data will enable your entity to be proactive in managing all its cash in a rising-rate environment, while adopting new technologies and enhancing itsbanking relationship. And that is good news for both your entity and your bank.
A personal relationship with your banker is everything. Being a good customer1 has its rewards but also comes with responsibilities.
Last week, I had a meeting with a local banker. She told me how much she enjoys personal interactions with her clients. She shared a story about a customer who had stopped by her office to just say hello and drop off a cup of coffee. A few weeks later that client called for help on an unexpected matter, and she responded immediately. His request required critical information and needed higher management approval. However, based on her knowledge of and relationship with the client, she was able to address all his questions while he was still on the line.
So many times we expect bankers to react to our requests at a moment’s notice. However, given higher demands and the need to service many clients, the ability to respond swiftly is often directly linked to the strength of the bond between client and banker.
So what does this mean?
1.) Given Dodd-Frank regulations—yes, they’re still in place—and the need to “Know Your Client,” strong communications between banks and entities are a must. No matter who initiates the call, please respond as soon as possible. Both sides need to get in the habit of responding quickly; that’s especially important when an unexpected need or emergency occurs.
2.) It’s healthy to meet with—or call—your banker at least once a quarter. This can be a challenge if you have multiple bank relationships. Make your primary bank and/or lending institution your top priority; secondary banks require only an annual meeting and review.
3.) Call, email, or stop by every once in awhile to just say hello. Let me assure you, as a former banker, such a greeting, with no requests attached, goes a long way. Those friendly touches will be remembered if and when you have to make special request later on.
4.) When there are significant changes at your office, notify your bankers. Provide any essential information as well as any forms the bank may need to keep on file. Don’t surprise your bankers well after the fact. This can cause mistrust and lead to delays when time is tight or the need is great.
5.) The right fit and comfort level are important elements to a healthy bank relationship. If you make an effort and you get little response back from your banker, then it might be time to consider a new banker.
Given our business, public service, higher Ed, and government banking experience, we believe in the strength of an engaging banking rapport. The value of a strong customer relationship with your banker(s) is everything, which will lead to better pricing, proactive deposit rate increases, and a quicker ability to respond to simple or complicated requests. And that will enable you do more for those you serve—your customers2.
Definition of customer (noun)-
1. Informal: A person one has to deal with or through.
2. A person who purchases goods or services from another; buyer; patron.
Origin 1400-50 late Middle English
Target’s CEO, Brian Cornell, stated late last month that the consumer environment in the United States has never been better, indicating that retail sales are strong and will only get stronger.
These comments are in line with those of economist James Glassman at J.P. Morgan. During a recent New York State County Treasurers Conference, Glassman was very positive on the state of the U.S. economy and the upward trend in sales tax revenue from gas and retail sales. He expects the economic growth in the U.S. will continue to be positive into 2019 and 2020.
As a result of this sustained growth in the nation’s economy, a parallel growth in public operating funds is very likely. We expect the vast majority of public entities across the country will have more cash on hand this year than they did in 2017. This is the same trend that entities experienced in 2016 and 2017 compared to previous years—but at a higher percentage level.
With more cash on hand, the greater is the need to manage that cash proactively—especially as higher short-term rates lead to even higher operating reserves going forward.
This is very exciting news.
Taking full advantage of this growth trend is paramount, especially when preparing for ongoing sustainability.
At threeplusone, we view all cash as a revenue-generating asset. We use proprietary algorithms to produce liquidity analyses that capture the time value of all cash and sync it to its marketplace value. With such data in hand, public entities have the knowledge base they need to better deal with financial providers and advisors.
The likelihood of having more cash on hand this year and next is in store for public entities across the country. It will be up to you to put that extra cash to work on behalf of those you serve.
What kind of banking relationship would like to have: good, better, or best?
The decision is yours to make.
In today’s banking environment, the way you bank and with whom is changing. The idea of a bank on every corner is fading, but having a bank icon on your computer is more the norm.
As technology advances and access to banking becomes more and more an online approach, banking will continually offer options well beyond town, city, or county lines. Having a bank that’s tailored to your needs and one with greater touch points will determine what level of banking you are truly receiving.
Here are a few tips in achieving the best level in your banking relationships:
Do not limit your banking options to those that are solely within your community. If you do, you may find that one day you’ll have only one bank left to respond to your needs or banking RFPs. That can lead to higher fees and much lower bank deposit rates.
By having a greater number of banks compete for your business, the better are your chances to lower banking fees and earn higher bank deposit rates.
You should still expect in-person meetings with your banker. The more personal your communications, the better your banking relationship.
Mandate that any bank you agree to work with will offer online banking services, 12-month banking and analysis statements, and a strong fraud-protection policy.
Develop and have in place an electronic banking policy. Today’s banking is conducted more “online” than “in branch.”
A good or better banking relationship means you are getting what you expect.
At three+one, we can help you drive the best possible banking options with policies in place that will lead to the best banking relationship.
That is what you deserve.
Strong lines of communication are an effective strategy for an entity in securing a strong banking relationship.
In a world full of so many ways to communicate, one would think communicating between one another would be easy, efficient, and effective. Well, you may ask, how is that working for you?
With the daily deluge of emails, texts, pop-up ads, robocalls, and junk mail, it’s no wonder you’re overwhelmed with communications. Because so much of it is unwanted, you may miss out on genuine opportunities to enhance your banking relationships.
As a public official, higher Ed trustee, community leader, former government banker, and business owner, I try to ensure that my messages, like this blog, are timely, useful, and effective. The same should be true for your communications with your bankers.
A healthy level of communication with your bank will pay off in both less stress in the role you serve as well as more income to your entity’s bottom line.
Here are five tips that lead to effective communications between you and your bankers:
The more your bankers know about you, the better they can serve you. “Know Your Client” (KYC) plays an important role in both meeting federal banking regulations and bringing to surface all aspects of the relationship an entity has with its banks.
Regular in-person meetings with your bankers will lead to a stronger rapport and likely more and better banking services.
Starting a new relationship with a bank or banker? That’s the time to clearly state your expectations. Remember, you are the client. The bank will know how to take care of itself. Your primary interest is those you serve.
Be candid with your bankers by telling them what’s on your mind, what’s working, and what’s not.
Be proactive and ask, assume nothing. When your bankers call you, be sure to call back; the same goes for the bankers when you call first. When you dread a call from your bankers or have no desire to talk with them, it may be time to re-evaluate the relationship.
A direct line of communication leads to a healthy and productive banking relationship, ultimately leading to more services, higher deposit rates, and a lot less stress.