essential learning for ctp candidates texpo conference

Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02

Copyright © 2018 – The Treasury Academy, Inc.All Rights Reserved 1

TEXPO Conference 2019:Essential Learning for CTP CandidatesSession SU2 (Sunday. 3:45 – 5:00 pm)

ETM5-Chapter 3:Banks and Financial Institutions

ETM5-Chapter 4:Payment Systems

ETM5-Chapter 7: Relationship Management and Vendor Selection

© 2018 - The Treasury Academy, Inc. - All Rights Reserved 1

Essentials of Treasury Management, 5th Ed. (ETM5) is published by the AFP which holds the copyright and all rights to the related materials.

As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.

Overview of Chapter 3 Topics

Introduction

Financial Institutions: Functions and Services

Global (Non-U.S.) Financial Institutions

U.S. Commercial Banks

Investment Banking and Brokerage Firms

Other Financial Institutions

2© 2018 - The Treasury Academy, Inc. - All Rights Reserved

Financial Institutions: Functions and ServicesGlobal (Non-US) Financial InstitutionsU.S. Commercial BanksInvestment Banking and Brokerage

FirmsCredit Union and Special Purpose

Financial Institutions


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Services Offered by Global Financial InstitutionsDepository accts & transaction svcsShort-term lending & investmentsForeign exchange (FX)Information reportingInvestment bankingOther Services Trade services Agent & fiduciary servicesRisk managementConsulting


Regulation of Global FIs Outside the U.S.

Country Guidelines“Know Your Customer”

Rule Level of RegulationsFI/Customer

Relationships Legal Lending Limits

Nationwide BranchingMulticurrency Accounts


U.S. Commercial Banks

Commercial bank is an FI possessing a federal or state charter that accepts deposits and makes commercial loansFull range of sizesBank holding

companiesRegulatory

environment


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Group Exercise

Working in your groups, answer the following questions:What are the services typically offered

by a large commercial bank?Where do you think the bank makes

most of its revenues and/or profits?


Services Offered byCommercial BanksDeposit AccountsCredit ServicesInvestment Banking ServicesTransaction ProcessingTrade ServicesForeign Exchange(FX) ServicesRisk Management ServicesFiduciary ServicesConsulting ServicesOther Financial Services


Deposit AccountsDemand Deposit (DDA)

or current account Time Deposit (TDA) or

noncurrent account Certificate of Deposit (CD)

Nonresident AccountsAccount IdentificationRTN vs. IBAN

Deposit Insurance (FDIC)


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More on Deposit Accounts

A DDA is both a store of value and a vehicle through which an account holder uses a bank to transfer funds to, and, receive deposit from, a third partyDDAs may be interest-bearing

or non-interest bearingUse of overdraft accounts (US

vs. most other countries)


Credit ServicesWide range of business loans that vary

by type of borrower, use of proceeds and maturities

Medium- to long-term secured loans for the purchase of PP&E

Long-term loans for capital equipmentLeasingShort-term working

capital loansTerm loansRevolving line

of credit (revolver)


More Bank ServicesTrade Services

Foreign Exchange (FX) Role of large global banks

Risk Management FX, Interest Rates, Commodity Prices

Fiduciary Trust dept, registrar,

agency, custody

Consulting

Other Services Broker/dealer,

securities, insurance© 2018 - The Treasury Academy, Inc. - All Rights Reserved 12

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Other Banking Services

Investment Banking Services

Transaction Processing (Payment and Collection Services)


Group Exercise

Working in your groups, answer the following questions:How are investment banks different

from commercial banks?What was the primary legislation that

that originally separated their functions?What’s happening today?


Investment Banking and Brokerage FirmsInvestment Banks Underwriting Facilitating M&A Acting as Broker or Financial Advisor

Investment Banking Process Origination, Underwriting, Distribution Buy side vs. Sell side and Insider Trading

Institutional and Retail Brokerage Firms Sales of securities Discount vs. full-service Investment advisory/mgmt


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Credit Unions

Not-for-Profit financialcorporations in the U.S.

Chartered by either federal or state agencies

Originally only member/consumer oriented, but now expanded to include businesses

Provide services similar to othertypes of FIs

Generally offer higher investmentrates and lower borrowing rates


Special Purpose Financial Institutions

Industrial Banks

Captive Finance

Companies

Factors

Insurance Companies



IntroductionPayment System OverviewCash PaymentsCheck-Based PaymentsLarge-Value Electronic

Funds Transfer(EFT)/Wire Transfer Systems

Small-Value Transfer or Automated Clearinghouse(ACH) Systems

Card-Based Payment Systems


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Payment Systems Overview

A way to transfer value, usually involving a financial institution – cash, checks, cards, electronic payment systems.

The combination of a payment instrument, a clearing channel and a settlement mechanism constitutes a payment system.


A. Basic PaymentsPayment instrument, clearing channel and

settlement mechanism that transfers monetary value from one party to another.

The two parties are generally: Payor: Makes the payment

Payee or Beneficiary: Receives the payment

Most payment systemsare defined by theprimary instrumentused in the system


ETM5: Chapter 4


Essentials of Treasury Management, 5thEd. (ETM5) is published by the AFP, which holds the copyright and all rights to the related materials.

As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.

ETM5-Chapter 4:Payment Systems

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The Payment Process Payment instructions Information contained in an

electronic transfer or a check

Payment generation Where the instructions are entered into the

payment system itself

Clearing Process where FIs use the payment information

to transfer money between themselves

Settlement Final step in the process when the

beneficiary’s bank account is creditedand the payor’s bank account is charged


Key Participants in the Payment Clearing Process

Paying Bank

Depository (Receiving) Bank

Correspondent Bank

Central Bank or

Monetary/Banking Authority

Bank Clearinghouse

Third-Party Clearing Entity


The Settlement ProcessThe most common

methods include: Bilateral exchange

of value Correspondent

bank accounts Reserve accounts

at a central monetaryor banking authority

Key factor to consider is the timing of the clearing versus the settlement for payment


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Settlement VS. Finality

Settlement versus finalitySettlement is only final

when a payment is unconditional and irrevocable Often significant

delays in paper-based systems


Types of Payments Cash Payments Currency and coin

Paper System Checks/drafts (debit-based)

Presentment & value dating

RTGS or Large-Value Electronic RTGS = Real Time Gross Settlement

ACH or Small-Value Electronic ACH = Automated Clearing House

Card-based Payments Debit, Credit, Stored-value, ATM,

EBT, Payroll Cards, etc.

Emerging Payments Mobile wallets, mobile payments,

P2P payments & Virtual Currencies


What if cash is normal method of payment? Concerns include: payment security/integrity, fraud,

cost of managing payments

Global paper-based payment systems involve the clearing and settlement of checks or drafts within and between countries Cross-border check clearing is often a slow,

complicated and expensive process

Checks and drafts are typically collection items settled through correspondent banks


Cash & Paper Payments

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Check Clearing Process

ClearingSystem

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Payor Payee

Drawee Bank

Bank ofFirst

Deposit

© 2018 - The Treasury Academy, Inc. - All Rights Reserved

Sample Business Check


• MICR line at bottom of check enables automated check clearing• Auxiliary Field distinguishes a business check

– typically used for check #• RTN or ABA number uniquely identifies the paying bank• Bank of first deposit encodes the amount of the check• Today, the check is typically scanned into an IRD• Clearing of checks and IRDs is governed by Reg CC

Source: ETM5 - © AFP

Check ClearingRole of cash letters Impact of Check21Key event is presentmentOn-Us Check ClearingTransit Check Clearing Clearinghouse Correspondent bank Direct send or direct exchange Federal Reserve System (Fed)

Foreign Checks Image-Based Clearing Many checks now clear same day, with remainder

settling in one day Finality may be delayed due to returned items


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Other Paper-Based InstrumentsPayable Through Draft (PTD)Remotely Created Check (RCC)Money OrderTraveler’s CheckSight Draft/Time DraftCashier’s Check/Certified CheckGovernment Warrant


Large Value Electronic Funds Transfer(EFT)/Wire Transfer Systems

Real-Time Gross Settlement(RTGS) System

Clearing House Interbank Payments System(CHIPS)

TARGET2 and the Single Euro Payments Area (SEPA)

Continuous Linked Settlement(CLS)

Society for Worldwide Interbank Financial Telecommunication(SWIFT)


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Sender/Payor Beneficiary/Payee

Sender’s/Payor’sBank

Beneficiary’s/Payee’s Bank


Large Value Electronic Funds Transfer(EFT)/Wire Transfer Systems

Central Bank

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Clearing & Settlement of a Wire Transfer


Society for Worldwide Interbank Financial Telecommunication

The global provider of secure financial messaging services

Enables banks/members to send authenticated electronic messages in standard formats

An information system, NOT a settlement system

Corporations may join either directly or through one of their banks


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Originator (Payor) Receiver (Payee)

Payor’s FI(ODFI)


Credit Transaction in an ACH System

ACH Network

Payee’s FI(RDFI)

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Uses of ACH Credits

Payroll Direct DepositGovernment Transfer PaymentsDividend PaymentsCorporate-to-Corporate Payments


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Receiver (Payor) Originator (Payee)

Payor’s FI(RDFI)


Debit Transaction in an ACH System

ACH Network

Payee’s FI(ODFI)

ACH DebitRequest

ACH DebitRequest

Uses of ACH Debits

Cash ConcentrationConsumer PaymentsDistributor PaymentsUtility PaymentsTax PaymentsCorporate-to-Corporate

PaymentsCheck Conversions


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Card-Based Payment SystemsCredit Cards Credit card transaction

participants Lifecycle of a credit card

transaction Pmt card industry data

security standards (PCI DSS) Merchant card fees Open Loop (Bank Issued) Closed Loop (Gas, Retailer) EMV Chip cards


Credit Card Transaction Process

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1B/D. Authorization request

3/2A. Charges sent for clearing

1B/D. Authorization granted

Merchant Merchant Bank

Credit CardNetwork

ConsumerAccount

1. Credit card presented tomerchant for purchase

2C. Hold convertedto charge

2B/3. Funds remitted

1C. Hold placed on credit limit

Authorization = Clearing = Settlement =

Issuing Bank

© 2018 - The Treasury Academy, Inc. - All Rights ReservedSource: ETM5 - © AFP


Introduction

Relationship Management

Vendor Selection

Bank Compensation

Practice

Assessing Service

Provider Risk


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Relationship Management

Number of Bank RelationshipsDocumentationPerformance Measurement and

Evaluation


Bank Relationship Management

There are some unique considerations due to the type of documentation required, the method of monitoring risk, and the methods of compensation

Treasury is the focal point for bank relationship mgmt.


FSP Relationship ManagementFactors that increase the mutual benefit

and profitability of the relationship are: Open and frequent two-way communication Regular and timely feedback Documentation of expectations of both parties

in agreements and legal contracts Fairly priced, efficient and effective financial

services and products Complete, candid and timely disclosure of

information by both parties Compliance with a current legal contract Use of service level agreements


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More Issues in Bank Relationship Management

Number of Bank Relationships Many companies have multiple

bank relationships, with one or two lead institutions

Costs related to relationship Optimize both internal and external

costs and number of banks Banks often have sophisticated

relationship management systems See lists of pricing factors in text


Documentation in Bank Relationship ManagementDocumentation Service agreement or contract

Service level agreement (SLA)

Account resolution

Signature cards and account terms

Performance Measurement and

Evaluation Bank scorecard

Relationship review


Soliciting Info from FSPs

Request for Information (RFI) Used to narrow the field and solicit ideas

Request for Proposal (RFP) Formal document used to obtain bids Should address all the relevant selection criteria Technical RFP will focus more on level and

quality of services rather than pricing Request for Quote (RFQ) Similar to RFP, but is best suited to products

and services that are essentially standardized and/or commoditized

The Selection Decision Weighted scores on all relevant factors should

be used in the selection decision Qualitative factors are sometimes more

important than quantitative Outside consultants may help in the process


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Other Issues in Bank Relationship Management

Bank Compensation Practices Use of account analysis

Fees Versus Balances Compensation

Comparing Costs Among Service Providers

Billing for Bank Services


Account Analysis in the U.S. Commercial Banking System

A record of the services provided to a customer by the bank, along with detailed information on balances and credits earned for those balances, information typically includes: Services provided

Balances maintained

Volumes processed

Charges assessed

Earnings credit allowances


Example of Account Analysis

Statement


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Account Analysis Terminology

Average Ledger Balance

Average Deposit Float

Average Collected Balance

Reserve Requirement

Available or Investable Balance

Service Charges

Earnings Credit Rate (ECR)

Earnings Credit Allowance


Earnings Credit

Where:EC = Earnings creditCB = Average collected balancesAB = Average available balancesRR = Reserve requirementECR = Earnings credit rateD = Number of days in the month

DEC = CB × (1 RR) × ECR365

D= AB × ECR365



Earnings CreditAssume the following scenario:

Average ledger balance $250,000Deposit float $ 30,000Reserve requirement 10%Earnings credit rate 1%Service charges for the month $ 1,000Days in month 30

Average Balance Calculations:Average ledger balance $250,000Less: Deposit float ($30,000)Equals: Average collected balance $220,000Less: Reserve Requirement ($22,000)Equals: Average available balance $198,000

DEC = CB × (1 RR) × ECR 365

30= $220,000 × (1 0.10) × 0.01365

= $162.76

DEC = AB × ECR 365

30= $198,000 × 0.01365

= $162.76



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Collected/Available Balances Required

Where:CB = Average collected balances required to pay service chargesAB = Average available balances required to pay service chargesSC = Service chargesECR= Earnings credit rateRR = Reserve requirementD = Number of days in the month

SCCB =DECR × × (1 RR)

365SCAB =

DECR × 365



Collected/Available Balances RequiredAssume the following scenario:

Monthly service charges $1,000Earnings credit rate 1%Reserve requirement 10%Days in month 30

SCCB =DECR × × (1 RR)

365

$1,000=

300.01 × × (1 0.10)365

=$1,000

= $1,351,716.68(0.0007398)



Fee vs. Balance Compensation Why Compensate by Fees?

Short-term investments may offer a higher yield than the ECR

Ability to use excess balances to reduce short-term debt

Easier to budget & compare fees relative to other treasury costs

Why Compensate by Balances?

Allows the firm to take advantage of excess collected balances

May get more favorable pricing on loans and other services

Earnings credits are not taxable, while interest on S/T investments is

ECRs may exceed available S/T investment rates

Issues with Balances

ECRs are not always known until after applicable billing period

Excess earnings are unstable & not carried over period to period

Balances over FDIC insurance may be at risk in event of bank failure

Some Banks like Fees, Others like Balances


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Assessing Operational Risk of FSPs

Assessing Operational Risk

SSAE 16 Audit Reports

Assessing Financial Risk of Global Banks

Basel Accords

Assessing Financial Risk of US Banks

Uniform Bank Performance Report (UBPR)

Counterparty Risk

Sovereign & Political Risk

Confidential Info & Conflicts of Interest

Legal and Ethical Issues (FCPA)


What did we learn from this lecture?

What topics do we want to learn more about?

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Session Wrap-upSession SU2: Banks, Payment Systems & Relationship Management

TEXPO Conference 2019Essential Learning for CTP Candidates

End of This Session

We will reconvene at 9:45 am Monday.

The topic will be:

More Key ConceptsWorking Capital Management


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