TMAC, 2004

1
TMAC, 2004
How To Reduce Analysis (Banking Service) Fees
Stephen J. Weiland The Weiland Financial Group,
Inc.
http//www.weiland-wfg.com sjw_at_weiland-wfg.com
2
Introduction

• A Quick Review of Analysis Elements
• The Baseline Statement
• Minimize Service Fees
• Maximize Balances
• The 822 Electronic Statement
• Understand the Game
• Current Market Trends
• The Most Important Points

3
What Is Account Analysis?

• A Weighing Process
• A Record of Balances Services
• A Bill for Services Rendered
• A Flat Out Mystery

4
Analysis Simplified
A Weighing Process
Stmt
5
Analysis Simplified
A Weighing Process
Balances, 10,000 EC
Profit to Bank
Stmt
6
Analysis Simplified
A Weighing Process
Balances, 7,000 EC
You Pay 3,000
Stmt
7
Analysis Simplified
A Weighing Process
Balances, 8,000 EC
Break Even
Stmt
8
The Baseline Statement
Average Daily Ledger Balance 60,000.00 Less
Float 10,000.00 Average Daily
Collected Balance 50,000.00 Less Reserve
Requirement (10) 5,000.00 Balance to Support
Services 45,000.00
ACCOUNT POSITION....... ..FEES
..BALANCES Earnings at 1.0 38.11
45,000 Less Compensable Charges 30.00
39,354 Earnings Excess 8.11 5,646
Fee-based Charges 20.33 Total Due
20.33
SERVICES RENDERED.... VOLUME PRICE CHARGE
BALANCE Total Charges Before Credit
50.33 39,354 Compensable
Subtotal 30.00 39,354 Fee-based
Subtotal (F) 20.33
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Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable

10
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable

Baseline
11
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable

(Changed Fee-based to Compensable)
12
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable

ACCOUNT POSITION....... ..FEES
.BALANCES Earnings at 1.0 38.11
45,000 Less Compensable Charges 30.00
39,354 Earnings Excess 8.11
5,646 Fee-based Charges 20.33 Total Due
20.33
Baseline
13
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable

ACCOUNT POSITION....... ..FEES
.BALANCES Earnings at 1.0 38.11
45,000 Less Compensable Charges 50.33
66,023 Compensable Charges Due -12.22
-21,023 Total Due 12.22
Baseline was 20.33
14
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable
• Volume Discounts, Threshold Pricing

15
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable
• Volume Discounts, Threshold Pricing

Baseline
16
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable
• Volume Discounts, Threshold Pricing

(Baseline was 50.33)
17
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable
• Volume Discounts, Threshold Pricing

( Baseline was 12.22 )
18
Discounting Trends
Percent
Source Phoenix-Hecht Blue Book of Bank Prices
19
Frequently Discounted Services
Source Phoenix-Hecht Blue Book of Bank Prices
20
Deeply Discounted Services
Source Phoenix-Hecht Blue Book of Bank Prices
21
Minimize Service Fees

• Fee-based (Hard Charged) vs. Compensable
• Volume Discounts, Threshold Pricing
• Percent-of-Volume Tier Pricing (first x of
  volume at y cents, etc.)
• Volume Tier with 1st Tier Flat Charge
• Balance-Based Tier Pricing (discounts based on
  collected balance tiers)
• Base Charge plus Volume (20 plus volume charge)
• Min / Max Charge Limits (never less than never
  more than)
• Basket Pricing (chargeable volume is sum of other
  volumes)
• ODIC on Book, Collected, Compensating Balance ODs
• Waivers Based on Balance Levels
• Percentage Discount on Charge Total
• Closed / Wrong price / Not my service

22
Maximize Balances

• OD Interest on Negative or Net ?

Example Assumptions 30 day month Ending OD
balance on day one (90,000) Ending balance on
each of the other 29 days 13,448.28
Aggregate Balance Results Positive 29
13,448.28 390,000 Negative 1 (90,000)
(90,000) Net
300,000
Average Balance Results Positive 390,000 / 30
13,000 Negative (90,000) / 30 (3,000) Net
300,000 / 30 10,000
Charge
No charge
23
Maximize Balances

• Right of Offset Daily or Monthly ?

Example Assumptions Two accounts in the
relationship, 111 and 222, and a three day
month
111 222 Parent
With Daily Offset there is No Parent OD at days
end.
Day 1 Balance (9) 9 0
Day 2 Balance 15 9 24
Day 3 Balance 15 9 24
-----
Avg Pos 16
With Daily Offset there is No OD charge at Parent.
Avg Neg 0
Avg Net 16
---- ----
Avg Pos 10 9 19
Add detail account balances at EOM. There is an
OD charge!
Avg Neg 3 0 3
Avg Net 7 9 16
24
Maximize Balances

• The Hidden Overdraft Charge

(Remember, there is an 8,000 collected OD along
with a specific charge!)
Baseline
25
Maximize Balances

• The Hidden Overdraft Charge

( Baseline balance was 45,000.00 )
(Remember, there is an 8,000 collected OD along
with a specific charge!)
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Maximize Balances

• The Hidden Overdraft Charge

Baseline
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Maximize Balances

• The Hidden Overdraft Charge

( Baseline was 10.22 )
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Maximize Balances

• Tiered Earnings Rates

Baseline, NO Earnings Tiers
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Maximize Balances

• Tiered Earnings Rates

(Baseline Total Due was 4.62)
1.5 on Balances over 50,000
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Maximize Balances

• Extended Compensation Cycle

MONTH CREDITS CHARGES EXCESS/DEFICIT Apr
50.00 40.00 10.00 Goodbye! May 59.46
48.83 10.63 Goodbye! Jun 40.00 48.00
(8.00) Pay bank ------ ------
------- 149.46 136.83 12.63
Yes!
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Maximize Balances

• OD Interest on Negative or Net ?
• Right of Offset Daily or None ?
• The Hidden Overdraft Charge
• Tiered Earnings Rates
• Extended Compensation Cycles
• Pay with Balances or Fees

32
Maximize Balances

• Pay with Balances or Fees?

Assumptions Monthly Compensable Charges
1,000, Bank Net-of-Reserves Earnings Rate
1.5, Requirement Factor 1/(1.5 (30/360))
800, CD Per Annum Rate 2.0
Balance Approach Monthly Balance Required
1,000 800 800,000
Plus 10 balance cushion 80,000
Total Monthly Average Balance Used 880,000

Fee Approach Income Expense
Monthly Fees 0
1,000 Monthly CD Interest 1,467
0 ( 880,000 2.0 30/360
) Transfer Fees 0
50 Net Monthly IBT 1,467
- 1,050 417.00
Less 20 Tax on Net 83.40

Net Gain 333.60

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The 822 Electronic Analysis Statement

• What is it?
• Why is it?
• Whos Doing It?

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The 822 What is it?
ABC Company Statement
ABC Company Statement
ABC Company
An Alternative EDI Delivery Mechanism
Statement Statement Statement
The 822
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The 822 What is it?

• Customer Account Analysis Transaction Set 822
• Used to transmit detailed balance, service charge
  and adjustment data
• From a bank to its customers
• Defined within ANSI ASC X12 EDI
• A national standard
• An EDI tool
• A Tool for Cash Managers
• Do what you do now - but faster
• Do what you do now - but completely
• TMA Guide to Account Analysis Statement
  Standards and Transaction Set 822 Implementation
  Guide

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A Raw 822
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The 822 Why is it?

• Electronic handling is much more enabling because
  you can
• check all bank calculations (find errors)
• check expected balances, volumes, prices
• allocate bank charges automatically
• perform modeling and what if
• compare divisions, departments, regions, etc...
• import/export data to GL and budget systems
• perform bank-to-bank comparisons
• examine each and every line item charge
• archive statements electronically

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The 822 Why is it?

• An Opportunity Because
• Bank charges run well over 6 billion per year
• Service unbundling leads to more line items
• Low earning rates focus attention on services
• Compensation shifting from balances to fees
• Electronic handling enables thorough inspection
  verification

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The 822 Consider This
One service line item buried within thousands of
lines across hundreds of statements. What can
this line tell me? What questions can I ask
about this service?
AFP DESCRIPTION PRICE VOLUME
CHARGE ------ ----------------- ----- ------
--------
050100 Lockbox Processing .1200 12,000
1,440.00
I dont recognize this service!
Is that the special price I negotiated?
Hold it, theres been a price change.
I think that volume is unreasonably high.
Is this the exact volume I expected?
Is this close to the average charge over the last
three months?
How does this price compare to other banks?
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The 822 Whos Doing It? (partial)

• ABN AMRO Commerce
  Bank, MO
• LaSalle National Bank, IL
  Deposit Guaranty, MS
• Michigan National Bank, MI
  Eastern Bank, MA
• Standard Federal Bank
  Fifth Third, OH
• Allfirst
  First Fidelity, PA
• AmSouth
  First Interstate Bank of Calif., All
  locations
• Associated Banc Corp, WI First
  Maryland, MD
• Bank of America, NT SA First Merit,
  OH
• Bank of Oklahoma, OK First Union
  National Bank of Florida, FL
• Bank of New York, NY First Security
  Bank
• Bank of the West, CA Firstar, WI
• Bank One, All Locations Mercantile
  Bank, MO, IL, KS, AR
• BancWest Corp., HI
  FleetBoston Financial Corp. CT
• Bankers Trust, NY
  First National Bank-N. Platte, NE
• Branch Banking Trust Co., NC First
  New Hampshire Bank, NH
• Chevy Chase Bank, FSB, MD First
  Tennessee Bank, TN
• Citibank, NY Harris
  Trust Savings Bank, IL
• Citizens Bank, CT, MA, NH, RI
  Huntington National Bank, OH
• Comerica, MI

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The 822 Whos Doing It? (partial)

• HSBC, CA, NY
  Royal Bank of Canada
• Illinois National Bank, IL
  Signet Bank, VA
• International Bank of Chicago, IL
  Society National Bank, OH
• Intrust, KS
  SouthTrust Bank
• JP Morgan
  Sovereign Bank, MA, PA
• Key Bank
  State Street Bank and Trust Co., MA
• Marine Midland
  SunTrust Services Corp., FL, GA
• Maryland National, MD Summit
  Bank
• Mellon Bank, PA
  Trust Company Bank, GA
• MI First American National Bank, WI UMB Bank,
  MO
• Midlantic, NJ
  Union Planters, TN
• Morgan Guaranty, NY U.S.
  Bancorp, WA
• National Bank of Commerce, NC,TN
  Wachovia, NC
• National City Bank, OH Wausau
  Bank
• Northern Trust Company, IL
  Wells Fargo, All Locations
• Oakbrook Bank, IL
  Whitney National Bank, LA, FL, MS, TX
• PNC, PA, OH, KY, DE
  Wilmington Trust, DE
• Provident Bank, OH

42
Understand the Game

• ECR Net of Reserves or Not

43
Understand the Game

• ECR Net of Reserves or Not

Average Daily Ledger Balance 60,000.00 Less
Float 10,000.00 Average Daily
Collected Balance 50,000.00 Less Reserve
Requirement (10) 5,000.00 Balance to Support
Services 45,000.00
Factor Balance by Reserve Rate
Not Net 1.0 45,000 450
Factor Credit Rate by Reserve Rate
Average Daily Ledger Balance 60,000.00 Less
Float 10,000.00 Average Daily
Collected Balance 50,000.00 Net of
Reserves 0.9 50,000 450
44
Understand the Game

• ECR Net of Reserves or Not
• How Many Days in the Month / Year?

45
Understand the Game

• ECR Net of Reserves or Not
• How Many Days in the Month / Year?

DP/DY 30/360 .083333333 100,000 1
(DP/DY) 83.33 DP/DY 31/366
.084699453 100,000 1 (DP/DY) 84.70
46
Understand the Game

• ECR Net of Reserves or Not
• How Many Days in the Month / Year?
• Invoice vs. Direct Debit
• Multi Year Contracts With Caps

47
Current Market Trends

• Balance Methodology
• POSITIVE NEGATIVE Book Collected Balances
• Other Analysis Related Balances
• Treatment of Reserves
• Non-Balance Compensable Services
• What you see is what you pay
• OD fees, FDIC charges, pass through charges
• Non-Monthly Settlement
• IBC International Bank Compensation

48
Current Market Trends (Contd)

• Shrinking Earnings Credit Rates

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The Amazing Shrinking Earnings Credit Rate
Its September, 1999, and the ECR is 5
ACCOUNT POSITION....... ..FEES
..BALANCES Earnings at 5.0 410.95
100,000 Less Compensable Charges 400.00
97,333 Earnings Excess 10.95
2,667
Now its May, 2004, and the ECR is 1
ACCOUNT POSITION....... ..FEES
..BALANCES Earnings at 1.0 84.70
100,000 Less Compensable Charges 450.00
590,322 Total Charges Due -365.30
-490,322
50
Current Market Trends (Contd)

• Shrinking Earnings Credit Rates
• Pricing Options
• Unbundling
• All over the map
• 6 decimal positions for by-the-byte charging
• Statement Presentation
• Web Page delivery eliminate the paper statement
• Payment authorization via the Internet
• Increasing 822 acceptance, eliminate the paper

51
The Most Important Points!

• Ask your friendly banker, and you may receive.
• Dont ask and you may not receive.
• Thank You, and Goodbye.