What it means
Many businesses keep large balances in non-interest-bearing accounts and also use bank services such as payments, collections and fraud protection. Rather than pay interest on the balance, the bank gives the customer a credit, calculated at the earnings credit rate, against the monthly service fees.
The credit does not arrive as cash, it simply reduces the fees owed. The rate is set by the bank and usually moves with market interest rates, although it is generally lower than what the company could earn by placing the money in a deposit.
It is stated as an annual percentage and applied to the average collected balance in the account over the month. The bank might use a 360-day or a 365-day year, which slightly changes the result.
An important feature is that unused credit is normally lost. If the credit in a month is greater than the fees, the excess usually cannot be paid out or carried forward, although some banks allow limited carry-forward.
This means a business should compare the value of the credit with the fees and with the alternative of moving surplus cash into an interest-bearing account. Treasurers use the concept to decide how much cash to leave in the operating account.
If the earnings credit comfortably covers the fees, extra balances earn nothing more, so the surplus is better invested elsewhere. If the fees are high and the credit is low, the company may negotiate a better rate or a different fee structure.
Finance teams should read their bank statements carefully, because the earnings credit is often shown on an analysis statement rather than on the main account statement. They should also check whether the credit applies to all services or only some, and how reserve requirements and balance definitions affect the amount.
Elsewhere, ECR can stand for other terms such as efficient consumer response, a retail supply chain approach. When the abbreviation appears in a banking or treasury context, earnings credit rate is the most likely meaning.
In practice
Real-world examples.
Example
A distribution company keeps an average of $500,000 in its operating account. The bank offsets $250 of its $400 monthly fees using the earnings credit, so the company pays only $150.
Example
A property manager holds a large balance of tenants' deposits that is easy to hold in a non-interest-bearing account. The earnings credit pays for most of the account fees, and the manager keeps the balance for flexibility.
Example
A hospital group notices that its earnings credit exceeds its fees by a wide margin every month. The treasurer moves the surplus into an interest-bearing account and keeps only the balance needed to cover fees.
Formula
Calculation
Earnings credit = Average collected balance x ECR x (Days in month / Days in year)
Net fees = Service fees - Earnings credit (not below zero)
Worked example using a 360-day year:
Average collected balance: $500,000
ECR: 0.60% per year
Days in month: 30
Service fees: $400
Earnings credit = $500,000 x 0.006 x (30 / 360) = $3,000 x 0.0833 = $250
Net fees = $400 - $250 = $150
The business pays $150 in fees instead of $400. If the credit had been $450, the fee would be fully covered at $400 and the extra $50 would normally be lost.Case study
Seen in the real world.
This is a fictional story. Tallgrass Logistics, an invented transport company, held an average of $2,000,000 in its main account and paid about $1,800 a month in service fees. The bank applied an earnings credit rate of 0.60%, which produced a credit of about $1,000 a month on a 360-day basis.
The treasurer realised that $2,000,000 of idle cash earned nothing beyond that small credit, and that the same money in a short-term deposit could earn far more. She calculated that keeping $1,200,000 in the account would still produce about $600 of credit and moved the other $800,000 into a deposit.
After the change, the company paid slightly more in net fees but earned several thousand dollars more in interest each month. The treasurer reviewed the arrangement every quarter as rates changed. The company and figures in this story are illustrative.
Watch out
Common mistakes.
- Treating the earnings credit like interest. It is not paid out in cash and can normally only offset fees.
- Leaving large balances in the account just to earn credit. The same cash might earn more as interest elsewhere.
- Ignoring the day-count basis. A 360-day year gives a slightly larger credit than a 365-day year.
Questions
People also ask.
What is the difference between ECR and an interest rate?
Interest is paid as cash to the account holder, whereas the earnings credit only reduces fees charged by the bank.
Can I negotiate the rate?
Often yes, especially for larger balances, so it is worth asking the bank and comparing offers.
Does ECR always mean earnings credit rate?
No. The same letters are used in other fields, so check the context.
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