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Earnings Credit Rates in the New Normal

Kiran Rajendran
Senior Principal Consultant, Oracle Financial Services

For banks looking to assist their clients through this phase of financial and geopolitical turbulence, could Earnings Credit Rates (ECR) help offset bank fees amidst the long road to economic recovery? Previously banks have achieved significant value through such initiatives so perhaps corporate treasurers can achieve their financial objectives similarly through appropriate implementations.

Currently, banks worldwide are operating in a risk-averse way, and regulators are ensuring they pass financial safety tests by ensuring capital adequacy. Hence, deposits continue to remain a critical source of funding. Banks will need to continue finding ways to attract good operating deposit balances. Corporate Treasurers will also need to continue using Earnings Credit Rates on deposits to lower bank fees and seek additional operating margins and gross profit.

Defining Earnings Credit Rate

Earnings Credit Rate is defined as the interest that banking customers receive on funds held overnight in a demand deposit or current account. Unlike traditional interest that customers receive as direct cash, the earnings credit allowance can only be used to offset banking service charges.

Earnings Credit Rates are usually calculated in the core banking application. Here, we will give you an alternative perspective by looking at ECR calculations through a Revenue Management and Billing Solution.

The following is a standard formula to calculate daily earnings credit:

The bank decides the Earnings Credit Rate. This interest rate could be a combination of the base currency interest rate (fixed by the central bank) and a margin agreed by the bank. The margin could vary from one customer to another, depending on negotiations by the relationship manager. As banks might hold deposits in multiple currencies, there could be various base rates that need to be maintained simultaneously.

For large organizations with multiple business accounts with the bank, it might be required to consolidate the account balance at a group level before calculating the earnings credit. The advantage of using a Revenue Management application for this type of calculation means that you could offer a tiered rate card, as shown below:
 

Tiers

Rate

0 to 1 Million

Base rate + 1 (margin) %

Above 1 Million

0.1 (Margin)%


In the example above, if the balance is below 1 million, the effective interest would be a variable base rate plus a fixed margin. So, if base rate of EUR is -0.5%, then the effective rate would be -0.5 + 1 = 0.5 %. And for a balance above 1 million, it would be a fixed rate of 0.1 %.

Thus far, I have shared some brief insights regarding Earnings Credit Rates and how they could be a possible base to help offset banking client fees. In my next blog post, I will share more on how banks can utilize Earnings Credit Rates, plus what are the five everyday ECR needs which the right solution can add value to meaningfully.

To learn more, feel free to message me to explore more or have a conversation.

For more information, please visit:
Oracle Revenue Management and Billing Quick Start Program: Link
Oracle Financial Services: oracle.com/financial-services

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