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Essential Learning for CTP CandidatesNew York Cash Exchange: 2016 – Session #02

Copyright © 2016 – The Treasury Academy, Inc.All Rights Reserved – www.treasuryacademy.org 1

New York Cash Exchange: 2016Essential Learning for CTP CandidatesSession #2: Wednesday Morning (6/01)

ETM4-Chapter 3:Banks and Financial Institutions

ETM4-Chapter 4:Payment Systems

ETM4-Chapter 7: Relationship Management and Vendor Selection

© 2016 - The Treasury Academy, Inc. - All Rights Reserved 1

Essentials of Treasury Management, 4th Ed. (ETM4) 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 TopicsIntroduction

Financial Institutions Global FIs

Commercial Banks

Investment Banks and Brokerage Firms

Credit Unions

Special Purpose Financial Institutions

Summary

2© 2016 - 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




Regulation of Global FIs Outside the U.S.

Country Guidelines“Know Your Customer”

Rule Level of RegulationsFI/Customer RelationshipsNationwide 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


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)


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 equipment

Leasing

Short-term workingcapital loans

Term loans

Revolving lineof credit (revolver)




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


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


Overview of Chapter 4 Topics

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


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


Group Exercise

Working in your groups, answer the following questions:What is the difference between a

payment instrument, a clearing system and a settlement system?Discuss the above in the context of a

business-to-business check payment.


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

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


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 PaymentsCash 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 Low-Value Electronic ACH = Automated Clearing House

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

EBT, Payroll Cards, etc.


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

Check Clearing Process

ClearingSystem

1

7

65 4

8

3

2

7

24

Payor Payee

Drawee Bank

Bank ofFirst

Deposit

© 2016 - 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: ETM3 - © 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 99% of FED-processed checks are images Only Cleveland Fed still takes paper checks


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)




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


Group ExerciseWorking in your groups,

answer the following questions:In the ACH system, we use the terms

originator and receiver. Who are these entities – what happened to the payor and the payee?Can a company be both an ACH

originator and receiver? If so, provide an example




Uses of ACH Credits

Payroll Direct DepositGovernment Transfer PaymentsDividend PaymentsCorporate-to-Corporate Payments


Uses of ACH Debits

Cash ConcentrationConsumer PaymentsDistributor PaymentsUtility PaymentsTax PaymentsCorporate-to-Corporate

PaymentsCheck Conversions


Card-Based Payment Systems

Credit CardsCredit card transaction

participants

Lifecycle of a credit card transaction

Pmt card industry data security standards (PCI DSS)

Merchant card fees




Credit Card Transaction Process

34

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

© 2016 - The Treasury Academy, Inc. - All Rights ReservedSource: ETM3 - © AFP

Overview of Chapter 7 Topics

Introduction

Relationship Management

Vendor Selection

Bank Compensation

Practice

Assessing Service

Provider Risk


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.


Group ExerciseWorking in your groups,

answer the following questions:What do you think makes for a good

bank/customer relationship?If you are a banker, what do you look

for in a customer?If you are a treasury practitioner, what

do you look for in a bank?


Bank Relationship Management Factors 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




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


Financial Service Provider (FSP) Selection Process

Consolidation and specialization in the financial services industry have made FSP selection a very important decision

Selection process initiated because: Need for new product or service

Part of a re-engineering program

Part of a regular product/service review

To reduce costs

To update existing technologies

To reflect a change in the banking group

To comply with statutory or regulatory requirements


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




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


Group Exercise

Working in your groups,answer the following questions:What is the best way to compensate a

bank for the services they provide –fees or balances?What is the level of business required

for a customer to go on account analysis?




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 CreditAssume the following scenario:

Average ledger balance $250,000Deposit float $ 30,000Reserve requirement 10%Earnings credit rate 5%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) × 0.05365

= $814

DEC = AB × ECR 365

30= $198,000 × 0.05365

= $814



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





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 5%Reserve requirement 10%Days in month 30

SCCB =DECR × × (1 RR)

365

$1,000=

300.05 × × (1 0.10)365

= $270,373

SCAB =DECR ×

365

$1,000=

300.05 × 365

= $243,333



Assessing Service Provider Risk

Assessing Operational Risk SSAE 16 Audit Reports

Assessing Financial ServicesProvider Risk Basel Accords

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?

52

© 2016 - The Treasury Academy, Inc. - All Rights Reserved

Session Wrap-upSession #2: Banks, Payment Systems & Relationship Management

New York Cash Exchange: 2016Essential Learning for CTP Candidates

End of This Session

We will reconvene after lunch.

The topic will be:

More Key ConceptsWorking Capital Management


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