There are two strategies a treasury department can pursue when determining how to pay their bank fees—fee or balance compensation.

Fee-based method

With a fee-based method, treasurers maintain low account balances, fully aware that they will not earn much by way of an earnings allowance. Why use this strategy? The intent with this method is to forgo any potential earnings allowance and instead pay the service fees incurred. Since the ECRs of most corporate accounts have been ridiculously low, most can find investments with higher returns than the bank-offered ECR elsewhere. When considering the earnings potential of excess funds, the fee-based method may be the best strategy. Outside of investing, paying down high interest debt is also a great alternative for excess funds.

Balance-based method

With a balance-based method, treasurers maintain certain balances in their accounts to earn enough earnings allowance, which then offsets qualifying bank service fees. Why use this strategy?  The ECR is not too low compared to other investment options, the balance compensation method covers the service fees incurred, and the company may stand to gain some benefit from the bank by maintaining high account balances.

Corporate vs. bank perspective

Neither strategy has consistent pros or cons, since both depend greatly on the needs of the company at a given time. Also, there are other issues to consider, such as taxes and the liability of accounting for those high bank balances. Above are some reasons why the fee-based or balance-based compensation methods are used from a treasurer's perspective; there are also various reasons to consider from a bank's perspective as well. It is good to know both and understand both sides of each strategy to understand who stands to gain in either and how best to negotiate, if needed.

One German bank in particular recently notified its balance-based compensation corporate account holders that their billing method will be changed to a fee-based method. The reason cited for the change was the low interest environment and its current financial impact. Sometimes, treasurers make the best decision possible in the interest of their company. Other times, the decision is made for them.

Denisha Burns, CTP, is a financial professional with nearly 10 years experience in treasury and accounting.