Essential Learning for CTP Candidates · 2020. 4. 7. · May get more favorable pricing on loans and other services Earnings credits are not taxable, while interest on S/T investments

TEXPO Conference 2020:

Essential Learning for CTP CandidatesSession #4 (Wed., 9/02, 1:30 – 2:30 pm)

❖ ETM6-Chapter 3:

Banks and Financial

Institutions

❖ ETM6-Chapter 4:

Payment Systems

❖ ETM6-Chapter 7:

Relationship Management

and Vendor Selection

© 2020 - The Treasury Academy, Inc. - All Rights Reserved 1

Essentials of Treasury Management, 6th Ed. (ETM6) 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.

ETM6: Chapter 3

2© 2020 – The Treasury Academy - All Rights Reserved





❖ ETM6-Chapter 3:Banks and Financial Institutions

Overview of Chapter 3 Topics

❖Introduction

❖Financial Institutions:

Functions and Services

❖Banks

❖Nonbank Financial

Institutions

3© 2020 - The Treasury Academy, Inc. - All Rights Reserved

Financial Institutions: Functions

and Services

❖Commercial Banks

❖Investment Banks

❖Universal Banks

❖Industrial Banks

❖Other Banks

❖Nonbank Financial

Institutions


Commercial Banks

❖Commercial bank is an FI

possessing a federal or state

charter that accepts deposits

and makes commercial loans

❖Full range of sizes

❖Bank holding companies

❖Regulatory environment


Commercial Bank Services

❖Deposit Accounts

❖Credit Services

❖Transaction Processing

❖Information Reporting

❖Trade Services

❖Foreign Exchange (FX) Services

❖Financial Risk Management Services


Depository Account Services

❖Many different types with specific

functionality, terms, and conditions:

▪ Foreign Currency Accounts

▪ Deposit balances may be held in a currency

other than that of the country of location

❖Multicurrency Accounts

▪ Where the customer can use one account to

make and receive payments in several

currencies

❖Nonresident Accounts

▪ May be owned by people or institutions from

outside the country in which the FI is chartered


Credit Services❖Wide 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 working

capital loans❖Term loans❖Revolving line

of credit (revolver)


Investment Banks

❖Investment Banks

▪ Securities underwriting

▪ Facilitating M&A, divestitures, and other

corporate reorganizations

▪ Broker/financial advisor for institutional

clients


Universal Banks

❖Definition: An FI that offers both commercial

and investment banking services;

investment banking services are offered

through the investment banking arm of a

commercial bank’s holding company


Other Banks

❖Industrial Banks▪ FI with limited scope of services

❖Central Banks▪ Provides banking services to a country’s

government and banking sector


❖Export Credit Banks▪ Provides financing and

insurance products to support exporting of goods

Nonbank FIs (Shadow

Banking)

❖Broker-dealers

❖Fiduciaries

❖Captive Finance Companies

❖Factors and Invoice Discounters

❖Asset-Based Lenders

❖Insurance Companies

❖Asset Managers

❖Credit Unions


ETM6: Chapter 4


Essentials of Treasury Management, 6thEd. (ETM6) is published by the AFP,




❖ ETM6-Chapter 4:Payment Instruments and Systems

Overview of Chapter Topics

❖Introduction

❖Payment Overview

❖Payment Instruments

❖Payment Systems

❖Summary

14

© 2020 - The Treasury Academy, Inc. - All Rights Reserved

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.


Basic Payments❖Payment instrument, clearing channel and

settlement mechanism that transfers monetary

value from one party to another.

❖The two primary parties are generally:

▪ Payor: Makes the payment

▪ Payee or Beneficiary: Receives the payment

❖The other two key parties are the

payor’s and payee’s banks

❖Most payment systems

are defined by the primary

instrument used in the system

16


Four-Corner Payment System Model


Network

Payee’s Financial

Institution

Payee/Beneficiary (Vendor)Payor (Customer)

Payor’s Financial

Institution

Settlement VS. Finality

❖Settlement versus

finality

▪Settlement is only final

when a payment is

unconditional and

irrevocable

▪Often significant

delays in paper-based

systems


The Settlement Process

❖The most common

methods include:▪ Bilateral exchange

of value

▪ Correspondent

bank accounts

▪ Reserve accounts

at a central monetary

or banking authority

❖Key factor to consider is

the timing of the clearing

versus the settlement for

payment


Correspondent Bank Settlement

Process


Most international (cross-border) settlements are done

through a series of correspondent bank relationships.

In this example Co. A (US) receives an invoice for EUR20,000

from Co. B (Germany). In order to get value from Bank A to Bank

B, two correspondent banks (C & D) must be used

Payment Methods❖ Cash Payments

▪ Currency and coin

❖ Paper System

▪ Checks/drafts (debit-based)

▪ Presentment & value dating

❖ Electronic Fund Transfers (EFTs)

▪ Wire transfers (or RTGS), High-value Electronic

▪ ACH Low-value Electronic

• ACH = Automated Clearing House

❖ Card-based Payments

▪ Debit, Credit, Stored-value, ATM,

EBT, Payroll Cards, etc.

❖ Emerging Payments

▪ Digital (or mobile) wallets, mobile payments,

P2P payments & Virtual Currencies


Payment Characteristics

❖Urgency and time sensitivity of payment

▪ This can vary significantly depending on the method of payment

❖Dollar value of payment

▪ Some payment methods have limits on the amount of value per transaction

❖Push vs. Pull Payments

▪ Push: Checks, ACH Credits,most Wire Payments

▪ Pull: Direct Debits andsome Card Payments


Payment System Trends

❖A move from paper toelectronic instruments▪Due to processing costs and risk

❖A shortening of retail payment settlement cycles▪Closer to real-time or near real-time

❖The increased use of mobile and internet payment instruments▪ In some countries mobile and internet

payment systems have overtaken more traditional methods


❖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-Based Payments

❖Oldest non-cash payment instrument in US

❖Primary regulation is UCC

❖Check Clearing Process

▪ Begins with the deposit of a check drawn on a

U.S. bank in USD into a payee’s account

▪ The payee’s bank is called the bank of first

deposit (or depository bank)

▪ This bank must encode the check amount and

start the check clearing process

▪ The deposited check is usually scanned at the

depository bank and clearing is primarily image-

based


Check Clearing Process

Clearing

System

1

7

6

54

8

3

2

7

26

Payor Payee

Drawee Bank

Bank of

First

Deposit


Other Paper-Based Instruments

❖Cashier’s Check/Certified Check❖Government Warrants❖Money Order❖Payable Through Draft (PTD)❖Pre-Authorized Drafts▪Remotely Created Check (RCC)

❖Sight Draft/Time Draft


Electronic Funds Transfer (EFT)

▪ Key Concepts

▪ Finality of Payment

▪ Gross (RTGS) vs. Net Settlements

▪ Systemically Important EFT Systems

(RTGS)

▪ Fedwire & CHIPS (US)

▪ CHAPS (UK)

▪ LVTS (Canada)

▪ TARGET2 (Eurozone)

▪ CNAPS (China)

▪ Other EFT Systems (Non-Urgent)

▪ ACH (US), Bacs (UK) , SEPA (euro)


29

Sender/Payor Beneficiary/Payee

Sender’s/Payor’s

Bank

Beneficiary’s/

Payee’s Bank


Large Value Electronic Funds

Transfer(EFT)/Wire Transfer Systems

Central Bank

Clearing & Settlement of a Wire

Transfer


31

Originator (Payor) Receiver (Payee)

Payor’s FI

(ODFI)


Credit Transaction in an ACH

System

ACH

Network

Payee’s FI

(RDFI)

Uses of ACH Credits

❖Payroll Direct Deposit❖Government Transfer Payments❖Dividend Payments❖Corporate-to-Corporate Payments


ACH – Direct Deposit

© 2020 - The Treasury Academy, Inc. - All Rights Reserved 33Source: ETM3 - © AFP

34

Receiver (Payor) Originator (Payee)

Payor’s FI

(RDFI)


Debit Transaction in an ACH

System

ACH

Network

Payee’s FI

(ODFI)

ACH Debit

Request

ACH Debit

Request

Uses of ACH Debits

❖Cash Concentration

❖Consumer Payments

❖Distributor Payments

❖Utility Payments

❖Tax Payments

❖Corporate-to-CorporatePayments

❖Check Conversions


More ACH Tidbits❖ACH Operators in US▪ Fed, EPN, Nacha

❖Giro Systems

❖Most low-value payment systems are

batch-processed by banks and 3rd-party

service providers

❖Combatting Fraud is a Major Issue▪ Debit filters/blocks to increase security

❖Same-day or near real-time initiatives▪ UK Faster Payments Service

▪ SEPA Instant Credit Transfer

▪ CHIPS Real-Time Payments (RTP)

▪ FedNow


Cross-Border and Foreign Currency

Denominated Payments❖SEPA

▪ Single Euro Payments Area

▪ Credits, Debits and Card Payments

❖Foreign Currency Payment

Systems

▪ Many countries offer these systems

❖Cross-Border ACH Transactions

▪ FedGlobal ACH Payments

▪ Offered to over 25 countries

▪ A variety of transaction currency options

❖Non-Bank Providers

▪ Western Union, Ripple, Earthport


Communications: 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

❖Global Payments Initiaitive (GPI)


Card-Based Payment Systems❖Credit 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)


Other Card-Based Payments

❖Debit Cards (EFTPOS)

❖Other types of payment cards

▪ Purchasing cards

▪ Travel & Entertainment (T&E) cards

▪ Fleet Cards

▪ Ghost Cards or Virtual Cards

▪ Departmental (Unnamed)

▪ Single-use cards

▪ Stored-value cards (SVC)

• Gift Cards, Payroll Cards, Employee Benefits

Programs (Heathcare Savings, etc.)


Credit Card Transaction Process

41

1B/D. Authorization request

3/2A. Charges sent for clearing

1B/D. Authorization granted

Merchant Merchant Bank

Credit Card

Network

Consumer

Account

1. Credit card presented to

merchant for purchase

2C. Hold

converted

to charge

2B/3. Funds remitted

1C. Hold placed on credit limit

Authorization = Clearing = Settlement =

Issuing Bank

© 2020 - The Treasury Academy, Inc. - All Rights ReservedSource: ETM6 - © AFP

Card Security and Fraud

Protection❖Card Security Standards▪ See next slide on PCIDSS

❖Card Authorization▪ Signature-based vs. PIN-based

❖Chip or Smart Cards (EMV)❖Card-Present vs. Card-Not-Present❖Enhanced Security Features▪Dynamic authentication (dual factor)

▪ Tokenization (Apple/Google Pay)

▪ Encryption


ETM6: Chapter 7

43© 2020 – The Treasury Academy - All Rights Reserved





❖ ETM6-Chapter 7:Relationship Management and Financial Service Provider (FSP) Selection

Overview of Chapter 7 Topics

❖Introduction

❖Bank Relationship

Management

❖FSP Selection

❖Assessing the Risk of

FSPs


Bank Relationship Management

❖Number of Bank Relationships

❖Bank Accounts

❖Documentation

❖Performance Measurement and Evaluation

❖Bank Compensation Practices

❖Comparing and Monitoring Costs among FSPs


Bank Account Types

❖Demand deposit accounts (DDAs)▪ Accrual of interest

▪Overdraft availability

❖Time deposit accounts (TDAs)▪Certificate of deposit (CD)

▪ Savings account

▪Money market deposit account (MMDAs)

❖Nonresident accounts


Bank Account Identification

❖Business Identifier Code (BIC)▪ Specifies the FIs or non-FIs involved in a

financial transaction

▪ Most common BIC is the SWIFT code

❖Routing transit number (RTN)▪ Used in the US to route checks and

electronic transactions to the correct FI

❖International Bank Account Number (IBAN)▪ Used to identify bank

accounts across borders


Bank Compensation Practices

❖Billing for Bank Services

▪ Vendors are typically compensated

by fees paid for services or

products provided

▪ In the case of FIs, the fees are typically netted

against any actual or imputed interest earned on

the accounts

❖Value Dating

▪ Outside the U.S., banks often

use value dating as compensation

for services provided to customers

▪ Forward value vs back value date

▪ Review Exhibit 7.1 in text


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

▪ Transaction/item volumes processed

▪ Charges assessed

▪ Earnings credit allowances


Example of

Account

Analysis

Statement


Note: Required Balance

shown in this statement

is Available Balance –

Some banks compute

Collected Balance

instead - read carefully!

Account Analysis Terminology❖Average Ledger Balance

❖Average Deposit Float

❖Average Collected Balance

❖Reserve Requirement

❖Deposit fees

❖Service Charges

❖Available or Investable Balance

❖Earnings Credit Rate (ECR)

❖Earnings Credit Allowance


Earnings Credit

Where:

EC = Earnings credit

CB = Average collected balances

AB = Average available balances

RR = Reserve requirement

ECR = Earnings credit rate

D = Number of days in the month

−

DEC = CB × (1 RR) × ECR

365

D= AB × ECR

365


Source: ETM6 - © AFP

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 $220,000

Less: Reserve Requirement ($22,000)Equals: Average available balance $198,000

−

−

DEC = CB × (1 RR) × ECR

365

30= $220,000 × (1 0.10) × 0.01

365

= $162.76

DEC = AB × ECR

365

30= $198,000 × 0.01

365

= $162.76



Collected/Available Balances Required

Where:

CB = Average collected balances required to pay service charges

AB = Average available balances required to pay service charges

SC = Service charges

ECR= Earnings credit rate

RR = Reserve requirement

D = Number of days in the month

−

SCCB =

DECR × × (1 RR)

365

SCAB =

DECR ×

365



Collected/Available Balances Required

Assume the following scenario:

Monthly service charges $1,000

Earnings 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)



Available Balances Required

Assume the following scenario:

Monthly service charges $1,000

Earnings credit rate 1%

Reserve requirement 10%

Days in month 30

$1,000 = $1,216,693.03

(0.0008219)

SCAB =

DECR ×

365

$1,000=

300.01 ×

365

=



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


Financial Service Provider

(FSP) Selection Process

❖This can be a very effective tool for

acquiring treasury products and services

❖The RFP process can be strengthened by

receiving input from non-treasury

departments such as tax, legal,

accounting, info tech, etc.

❖Consider alternatives to a formal RFP

process such as:

▪ Request for Information (RFI)

▪ Request for Quotation (RFQ)


Assessing Operational Risk of FSPs

❖Assessing Operational Risk

▪ SSAE 16 Audit Reports

❖Assessing Financial Risk of Banks

▪ Bank Monitoring Tools (credit analysis,

regulator’s assessments)

▪ Uniform Bank Performance Report (UBPR)

❖Counterparty Risk

❖Sovereign & Political Risk

❖Confidential Info & Conflicts of Interest

❖Legal Issues (FCPA)


❖What did we learn from this lecture?

❖What topics do we want to learn more about?

60


Session Wrap-upSession #3: Banks, Payment Systems & Relationship Management

TEXPO Conference 2020

Essential Learning for CTP Candidates

End of This Session

We will reconvene at 3:00 pm today.

The topic will be:

More Key Concepts

Financial Statements, Analysis and Decisions


Documents

Essential Learning for CTP Candidates · 2020. 4. 7. · May get more favorable pricing on loans and other services Earnings credits are not taxable, while interest on S/T investments