Depository Transfer Checks

Depository Transfer Checks

•      Non negotiable, unsigned check  payable only to a single bank account at a particular Bank

•      Used to transfer balances from one bank to another

•      Each check costs $1 and especially valuable when the amount of transfer is relatively small; less than $ 5000

Electronic Depository Transfer (EDT)

•      Also known as ACH debit.

•      Handled by ACH network.

•      Used in place of DTCs.

•      Cash manager authorizes the company’s concentration Bank to originate an ACH debit entry against the Company’s a/c at various gathering Banks.

•      Advantage of EDT is the fund availability at the concentration Bank the day after ACH debit is originated.

Wire Transfer

•      Real time transfer of a/c balances

•      Disadvantages:

–      Relatively expensive – Best for larger balances

–      Immediate availability – Deposited balances must be collected balances not ledger balances

Exhibit 10.1

Cash Transfer Tools

•      Depository transfer checks

•      ACH or EDT

•      Wire transfer

Cash Concentration tasks

•      A Concentration System

Initiation of the Transfer

•      Decentralized

Manager at field offices initiate the transfer and the amount is generally the amount of deposit

•      Centralized

Timing and amount of transfer are determined centrally either at Concentration Bank or at Head Quarter

The field manager simply makes the deposit in the local bank and reports via a 3rd party information vendor who notifies the concentration bank and the Headquarter.

System Costs

•      Opportunity cost of idle balances

-Difficult to transfer the balance when t becomes collected balance.

–      Common to have idle balances in the deposit banks.

–      Can be used to offset service charges yet it does not outweigh the lost interest.

•      Transfer costs

– Depends on the transfer instrument chosen.

System Cost

•      Administrative cost

–      Managing the concentration system

–      Receiving and reviewing deposit  information from gathering banks, 3rd party information provider, concentration bank

–      Managing and maintaining cash forecasting system if transfer scheduling is based on anticipated deposit

Benefits of the System

•      Economies of scale

•      Enhanced visibility and control of balances

•      Dual balance possibilities

Dual balances

•      Inefficiency in the transfer clearing mechanism

•      Generally occur only for Depository Transfer checks

•      They occur when a deposit in the concentration bank receives availability at the concentration bank before the transfer clears the field bank and vice versa

Dual Balance (Example)

Dual Balance (weekend effect)

The Cash Flow Timeline

Cash Transfer Scheduling

•      Complicating factors

•      Objective: minimize transfer costs

•      Transfer rules

Complicating Factors

•      Minimum transfer balance

–    incremental cost = Days Saved x ((k – ecr(1-rr)) x TBAL

–    Solve for TBAL

–    TBAL = Incremental cost/DS x [k – ecr(1-rr)/365]

•      Fluctuating daily deposits

•      Deposits with different availabilities

•      Availability of deposits vs. clearing of transfer instrument

•      Weekends

Objective: Minimize Transfer Costs

•      Subject To: adequate bank compensation

•      TC = Fee + (k x (ACB – RCB))

Where:

RCB = (SC – Fee)/ecr(1-rr)

Transfer Rules

•      Daily transfer: transfer the daily deposit

•      Managing about a target:

–   one-time transfer out to earn interest

–   reduces the number of transfers

•      Anticipation:  initiate transfer prior to deposit

Anticipation

•      Initiation of a transfer at the concentration Bank before cash become available at the deposit Bank. Thus, by the time the transfer clears the deposit Bank, available cash will be there to cover the transfer.

•      Ledger Anticipation- Initiate a transfer on the basis of ledger information from the deposit Bank. Thus it is known with certainty that when a ledger deposit will become an available deposit and will be able to cover a transfer.

Anticipation

•      Deposit Anticipation- Initiate a concentrating transfer before expected deposit in a deposit bank have been reported. Deposit anticipation is riskier than ledger anticipation.

•      One time transfer out- The average available balance in a deposit account is observed to be consistently above the target compensating balance.

Balance averaging

•      Compensation is measured by averaging daily balances over some time period.

•      Target compensating balance need not be met daily.

•      The technique of allowing the balance in the Bank to fluctuate above and below the target level is sometimes called balance averaging.

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