Researching the Financial Services Industry Since 1983. Impact of Recent Regulatory Changes on Bank...

Researching the Financial Services Industry Since 1983.

Impact of Recent Regulatory Changes on Bank Pricing, Services,

and Trends

2Knowledge is profit

Agenda• Introduction

• Summary of regulatory changes• Product Impact and Industry Trends

• Products and Services Analysis• Rate Environment• Fee Environment

• Final Thoughts• Recommendations for 2012• Projections for 2013 and beyond

• Contact Information


Summary of Regulatory Changes & Product Impact and Industry

Trends


Regulatory & Technological Changes• Regulatory Changes

• Repeal of Regulation Q• Durbin Amendment• FDIC Changes

• Technological Changes• Web Portals• Security Devices• Mobile Banking


Earnings Credit Rates


5 Year ECR Historical

Data compiled from institutions with an asset size of $100 Billion+ as of April 2012.


5 Year T-Bill & Fed Funds Historical


5 Year Historical TrendFed Fund 5.25%T-Bill Rate 4.76%

Fed Fund 3.00%T-Bill Rate 2.25%

Fed Fund 1.00%T-Bill Rate 0.355%

Fed Fund 0.00% - 0.25%T-Bill Rate 0.025%


Hybrid Commercial Checking Accounts


OVERALL

<$1 Billion

$10 Billion - $1 Billion




$100+ Billion 0%

20%

40%

60%

80%

100%

120%

79%

60%68%

83% 86%

100%

90%

21%

40%32%

17% 14%

0%

10%

YESNO

Source: Informa Research Services 2011 Impact of Regulation Q Study

Do you offer or plan to offer a hybrid option that both offsets fees and pays interest on excess balances?

Many institutions have not changed their perspective on offering the hybrid product from 2010 to 2011.

2011 Regulation Q Study (overall)• 79% will offer the hybrid product• 21% will not offer the hybrid product

2010 Regulation Q Study (overall)• 76% are planning to offer the hybrid product• 24% are not planning to offer the hybrid product


42%

8%17%

33%

PRODUCT STRATEGY

SYSTEM LIMITATIONS

LACK OF INTEREST FROM CLIENTS

OTHER


Which of the following reasons prevented your financial institution from introducing a hybrid product?

Reasons for not offering the hybrid product:

• 42% is product strategy• 17% indicated there was a lack of

interest from clients• 8% indicated that there were

system limitations• 33% of those who responded had

a different reason for not offering the hybrid product:• Core vendor cannot support

the product • Other priorities limit focus at

this time• Clients wish to leverage

100% FDIC coverage


87%

2% 11%THE PRODUCT HAS AN ECR RATE TO OFFSET THE FEES AND AN INTEREST RATE EARNED ON THE EXCESS BALANCES

THE PRODUCT DOES NOT HAVE AN ECR, BUT THE INTEREST EARNED IS USED TO OFFSET THE FEES AND IF THERE IS EXCESS INTEREST THE CUSTOMER IS PAID IN-TEREST

WILL OFFER BOTH OPTIONS LISTED ABOVE

Which of the following methodologies would define how your Hybrid product will work?

Traditional Hybrid Option:• Overall 87% indicated that the

hybrid product offered will have an ECR rate to offset the fees and an interest rate earned on the excess balances

Non Traditional Hybrid Option:• Overall 2% indicating they will

offer a product that does not have an ECR, but the interest earned is first used to offset the fees and if there is excess interest earned, the customer is paid interest.

Traditional and Non-Traditional:• Overall 11% of those that

responded indicate they will offer both hybrid options.


Commercial Interest Checking Accounts


OVERALL

<$1 Billion

$10 Billion ...

$20 Billion ...

$50 Billion ...

$100 Billion...

$100+ Bill...

0%10%20%30%40%50%60%70%80%90%

100%

70%

60% 64%

83% 86%

71% 70%

30%

40% 36%

17% 14%

29% 30%

YES NO

Do you currently offer a commercial interest checking account?

There was a slight downward trend in the percentages on offering a commercial interest checking product from 2010 to 2011.

2011 Regulation Q Study (overall)• 70% will offer a commercial interest checking product • 30% will not offer a commercial interest checking product

2010 Regulation Q Study (overall)• 85% are planning to offer a commercial interest checking product • 15% are not planning to offer a commercial interest checking product



FDIC Fees


32%

84%

35%

75%

SMALL BUSINESS ACCOUNTS

MIDDLE MARKET/LARGE CORPORATE ACCOUNTS

SMALL BUSINESS PUBLIC FUND ACCOUNTS

MIDDLE MARKET/LARGE CORPORATE PUBLIC FUND AC-COUNTS

On which of the following segments will your financial institution be passing a standard FDIC fee on to a Non-interest DDA?

2011 Regulation Q Study (overall)

Overall, the majority of respondents indicated that an FDIC fee would be passed onto a non-interest DDA.

• 84% indicated they would pass an FDIC to the middle market/large corporate segment .

• 32% will pass on an FDIC fee to the small business segment.

2010 Regulation Q Study (overall)

• 62% of respondents stated that they are not planning to pass on the FDIC charge to their non-analyzed account holders .

• 21% of respondents are planning to pass on the FDIC fee to the small business customer segment


65%

51%70%

26%19%

11%

INTEREST-BEARING CHECK-ING FOR COMMERCIAL AND CORPORATE CLIENTS

INTEREST-BEARING CHECK-ING FOR PUBLIC FUND CLIENTS

HYBRID CHECKING FOR COMMERCIAL AND COR-PORATE CLIENTS

COMMERCIAL AND COR-PORATE MONEY MARKET DEPOSIT ACCOUNTS

PUBLIC FUND MONEY MARKET DEPOSIT AC-COUNTS

DO NOT OFFER ANY OF THE ABOVE PRODUCTS

Do you currently charge or anticipate charging an FDIC fee on the following products?

Products assessed an FDIC Fee:

65% - will pass FDIC fee on commercial checking70 % - will pass FDIC fee on a hybrid checking11% - do not offer any of those products


ECR, Hybrid and Commercial Interest Checking Strategies


ECR and Hybrid Rates Comparison

Data compiled from institutions with an asset size of $100 Billion+ as of April 2012.

Analyzed ECR Only

Analyzed ECR With Interest

(Hybrid)

Institution Tier Earnings Credit Rate Earnings Credit Rate

Bank A $100,000 0.45 0.20

Bank B $100,000 0.20 0.20

Bank C $100,000 0.30 0.20

Bank D $100,000 0.35 0.20

Bank E $100,000 0.25 0.20

Bank F $100,000 0.15 0.25

Average $100,000 0.28 0.21


Commercial Interest Rates

Data compiled from the top 25 Banks and Thrifts with the Most Deposits in the American Banker as of April 2012


Checking Accounts Statistical Data• 60% - 15 out of the top 25 institutions currently offer a Commercial

Hybrid Checking product

• 60% of the top 25 institutions currently offer both an Analyzed ECR product & Commercial Hybrid Checking product.

• 68% - 17 out of the top 25 institutions offer a Commercial Interest Checking Product

• 56% - 14 out of the top 25 institutions are currently offering both a Commercial Hybrid and a Commercial Interest Checking Product.

• 56% - 14 out of the top 25 institutions are currently offering an Analyzed ECR, Commercial Hybrid, and a Commercial Interest Checking Product



FDIC Insured Sweeps


Do you anticipate making any rate changes to the commercial money market/savings or sweep product options you offer as

a result of the repeal of Regulation Q?

15%5%

5%

75%

YES, RATE CHANGES TO BOTH COMMERCIAL MONEY MARKET/SAVINGS AND SWEEP PRODUCTS

YES, RATE CHANGES TO MONEY MARKET/SAVINGS ONLY

YES, RATE CHANGES TO SWEEPS ONLY

NO CHANGES



After the Repeal of Regulation Q, did you create or are Did you create, or are you planning to create a

commercial DDA product that includes an investment sweep into a bank Money Market Deposit Account?

OVERALL

<$1 Billion





$100+ Billion

0%

20%

40%

60%

80%

100%

120%

23%

0%

32%

0%

43%

29%

10%

77%

100%

68%

100%

57%

71%

90%

YESNO



FDIC Insured Sweep Examples


Investment Sweeps Fees



Credit & Dual Sweeps Fees



Commercial Checking Account Fees


OVERALL

<$1 Billion





$100+ Billion

0%

20%

40%

60%

80%

100%

120%

73%

33%

64%

100%

67%

100%

71%

28%

67%

36%

0%

33%

0%

29%IDENTICALDIFFERENT

If you anticipate offering an interest-bearing checking product for commercial customers, will your Cash Management fee structure be identical to or different from commercial

checking accounts with earnings credit?



Commercial Account Fees

Monthly Maintenance Deposit Ticket Deposited Item Paid Item

Analyzed ECR Only

Analyzed ECR &

InterestAnalyzed ECR Only

Analyzed ECR &


Analyzed ECR &


Analyzed ECR &

Interest

Bank A $20.00 $20.00 $0.75 $0.75 $0.15 $0.15 $0.20 $0.20

Bank B $18.00 $40.00 $1.00 $1.00 $0.15 $0.15 $0.22 $0.22

Bank C $15.00 $30.00 $1.40 $1.40 $0.11 $0.11 $0.15 $0.15

Bank D $15.00 $15.00 $0.80 $0.80 $0.20 $0.20 $0.20 $0.20

Bank E $20.00 $30.00 $0.80 $0.80 $0.12 $0.12 $0.17 $0.17

Bank F $30.00 $30.00 $1.00 $1.00 $0.17 $0.17 $0.20 $0.20

Data compiled from institutions with asset size of $100 Billion+ as of April 2012


Commercial Checking Fees



Deposited Item Fees



Virtual Banking


Information Reporting Fees



ACH Monthly Fee



ACH Transaction Fees



Domestic Outgoing Wires - Web



International Outgoing Wire - Web



• Remote deposit capture (RDC) has become a convenient service for business customers and now even retail clients.

• RDC has grown 13% over the past two years, mainly due to the expansion to the consumer market.

• The benefits of RDC greatly outweigh the cost of processing paper checks.

• Smart phones will increase the number of users.

Remote Deposit Highlights


Lockbox Monthly Fee



Remote Deposit Monthly Fee



Key Trends• Commercial Business Segment:

• Overall lower service fees in 2011 compared to 2010 - 2009 averages.

• Monthly fees can be based on number of accounts, locations, or check scanner equipment.

• 62% of financial institutions only offer one RDC solution for all business clients regardless of business size.

• Small Business Segment: • Growing market with specific remote deposit capture and

mobile banking solutions. • Lower monthly fees for remote deposit packages available

for analyzed and non-analyzed clients. • The further development of small business mobile remote

deposit will help make RDC more affordable. • Two most common services thought after by new clients –

remote deposit capture and mobile banking

www.wellsfargo.com


Key Trends

• Retail Segment: • Remote deposit capture has

expanded to the personal account level where checks can be scanned and deposited via web connection by taking a picture with a mobile phone or using a check scanner.

• The remote deposit service and mobile banking are generally free with certain deposit limitations, such as total daily and monthly deposit limits, to reduce incidence of check fraud and liability.

www.chase.com


Card & Cash Transaction Processing


Credit and Prepaid Card Trends• Shift from Debit to Credit

• Regulations• Durbin Amendment• Overdraft Protection

• Reversed Trend• Credit Card vs. Debit Card Rewards

• Payroll Cards• Cost • Convenience


Payroll Card Fees



Merchant Card Processing

• Interchange Rate• Alternative Providers• Rise of the quasi-merchant


Virtual Cash Processing• Security• Convenience• Daily Credit• Information Reporting

Source: www.brinks.com


Final Thoughts• Conclusions

• Where are we now?• What is going to happen?

• Product Recommendations• Industry Focus• Sophistication & Simplicity

• Projections for 2013 and beyond• Rate Environment• Fee Environment

• Questions

There are so many men who can figure costs, and so few who

can measure values.


Contact Information

Randy Rosen, CTP

Manager Deposit ResearchInforma Research Services, [email protected]

Zoya Lieberman, CTPProduct Manager Commercial ServicesInforma Research Services, [email protected]

Trends in Bank Pricing

What Corporate Treasurers Need To Know

2012The extreme volatility of banking regulations, rates, fees,

lending, international exchange, and relentless bank revenue-generation tactics mandate now more than ever that

companies perform constant analysis and tuning of their bank relationships.

The Current Environment

Common Problem, Few Solutions

Low Interest rates + new regulations + constant demand for new technology and latest products


FEESNew. Increased. Bundled.


Liquidity Performance

Bank

Cus-tomer

The primary objective of a bank is to earn as much yieldas possible on the liquidity of its depositors.

Liquidity Gross Potential Yield

Liquidity Performance

Bank

Cus-tomer

The primary objective of a corporation is to earn as much yield as possible on their own liquidity.

Liquidity Gross Potential Yield

Through persistent analysis, comparison, structuring, and negotiation.

BALANCE

Trends in Bank Pricing – Our Focus

Regulation Evaluation

Negotiate Rates

Fees = Help, Please!

Unlimited InsuranceThrough Dec 2012

Regulation Evaluation

Hard InterestTaxable

Alternate InvestmentCorps with dividend income can use hard interest in lieu of

MMAs

Decreased InterchangeDurbin caps debit card interchange fees at .12/c

Regulations = Corporate Re-evaluation

Do the MathECR vs Hard Interest vs Hybrid

How much is the FDIC actually costing you?

What are ways to push cheaper payment alternatives and is it worth it?

Earnings Credit Rates have been traditionally tied to LIBOR or T-Bill. The current environment gives banks more flexibility to set rates based on other factors, and therefore rates vary greatly

across institutions.

Negotiate Rates

Account Analysis Audit Period April, 2012

Bank ECR Rate Negotiated/ Exception ECR Rate

Industry Best Competitive Rate

Bank A 30 bps 55 bps 135bps

Bank B 20 bps 90 bps 135bps

Rates

Negotiate Rates

Earnings Allowance = Fees = Balanced?

Rate Trends

.13 bpsAverage ECR

(after FDIC insurance recovery)

“ECR rates of 0.35% and 0.50% were more prevalent if total service charges were above rather than below the median level.” (Phoenix Hecht Executive Summary)

Earnings credit rates are tiering backwards based on balances. Higher the balance, the lower the rate.

Negotiate Rates

35bps ECR rate difference across

accounts for a companyunder a single Bank relationship

3rd Place

Negotiate Rates

-0.12 %Actual ECR rate for a company

with $20M+ ADB at Bank(based upon a 1 bps rate and

13 bps FDIC insurance recovery)

$20 mill x .0001/12 = $167 less $20 mill x .0013 FDIC/12 = $2167-$2000.00

2nd Place

FDIC Rates – Grand Prize Winner

The FDIC has no official position on if or how a bank chooses to pass along its insurance premiums.

I think the greatest resource at the moment is to convince customers that these fees imposed by their banks are negotiable and should be a point of discussion with their depository institution.

Anonymous, FDIC

Fees = Help, Please!

Treasurers Banks

profits

regulationbranchoverhead

capital ratiosrelationship ambivalence

risk management

fee overload

volatilitynear or less than zero

interest rates

no timelack of transparency and no

means for comparison

automation

Fees – Help, Please!

2,566AFP Domestic Service Codes

for Bank Fees

850AFP Global Service Codes

for Bank Fees

$378Average Monthly Bank Fees

Per Account

Fees – Help, Please!

72%Companies That Do Not Perform a Detailed Account Analysis Review

4%Actively Challenge Banks on Their Account Analysis Review Findings

21%Average Number of Unnecessary

or Duplicate Services

Benefits of a Detailed Review of Fees

DDA Statement Mailed: Four accounts are set up with this service, at a rate of $25 per account ($100 per month). Bank should ensure that all 13 accounts in the group are set up with “DDA Statement -Internet," which provides the statements online with a $0 charge; currently 10 accounts are set up with this.

Acct Maint Services: The math on the analysis is wrong. Comp X is being charged $15 with a volume of 2 - the total charge should be $30. The analysis reflects a $40 charge. This extra $10 needs to be credited, and the go-forward rate should remain at $15.

Wire Transfer Advice- Mail: This service should be eliminated unless there is a need for some % of wires to have paper confirmations mailed.

Returns - Alternative Address Services: This is a new service; we need Bank to define what this is.

General Checks Paid - Not Truncated: One account has been setup to "not truncate" checks that are paid – (acct ending in XXX). This is the only account set up this way. It should be modified to truncate all paid checks, similar to all other accounts in the group.

New Fees

Incoming Wire Fees Rising

Averaging fees - Individual lockbox prices are higher/lower but the average stays the same

Bundled Pricing/ Changing Line Item

Wires with Additional Remittance Data - Enabling STP

Going Green

Additional Online Banking fees - Tokens, Users, Value-Added

When a bank changes a price or adds a new charge, they are required to notify you in two different ways.

Cash Letter Charges

Online banking wire approvals – Mobile Maintenance and Per User fees.

Pos Pay Reject Notification (without image) - Customers pay more if they want an image of the rejected item.

Advices!

UPIC (Universal Payment Identifier Code)- shadow code that enables posting of credit payments to a bank account without having to give the vendor your bank instructions (routing, account#, etc) as a means of fraud prevention.

New Fees- Continued

Fees – 3rd Place Winner!

$25 Monthly fee now charged to clients

who request an invoice detailing fees.

3rd Place

Fees – 2nd Place Winner!

$25NEW “PAPER DEPOSIT MAILED” LINE ITEM MAY

DISPLAY ON YOUR ACCOUNT ANALYSIS STATEMENT BEGINNING IN JANARY 2012, IF YOU

SUBSCRIBE TO ONLINE DEPOSIT STATEMENT ACCESS AND ALSO RECEIVE PAPER

STATEMENTS THROUGH POSTAL MAIL. THIS SERVICE WILL BE PRICED AT $25.00 PER

STATEMENT GENERATED.

Runner Up

Fees – Grand Prize Winner!

Image Clearing - IRD Creation

When Bank receives images from you via Image Cash Letter or Remote Deposit, they can many times send those images directly to the receiving bank for settlement of funds. Some

banks, however, cannot receive images to settle funds and your bank has to create an

Image Replacement Document, and (in essence) send them paper to facilitate the

settlement of that deposit.

Instead of charging the bank who cannot accommodate Images – YOU are charged.

Grand Prize

There is a disconnect within companies between people generating reports, people performing different functions through an online banking platform, and the people in charge of billing.

97 wire notifications

37 people generating wires

Why?

Ways to Reduce Fees Within Company Walls

RFP RIPOccasional pricing does little to counter

daily banking volatility.

How is Liquidity Performance Optimized?

There are numerous ways to achieve optimal liquidity performance:

• Negotiate and Reduce Fees• Improve ECR• Eliminate Redundant & Unnecessary Services• Implement New Services• Resolve Price Inconsistencies• Leverage Regulatory Allowances• Optimize Internal Processes• Integrate Technology Platforms• Utilize Third Party Services – Co-Source• Float Compress

Questions & Answers

About the Presenter:

Bridget Meyer [email protected]

Product Manager, BRM Services for The Montauk Group

Product Manager, AFP Accredited Service Code Provider Program

Project Manager/Author of the AFP Global Service Codes

Researching the Financial Services Industry Since 1983. Impact of Recent Regulatory Changes on Bank...

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