Why Earnings Credit Rate is a Strategic Asset in a Fluctuating Interest Rate Environment

After a period of high interest rates, the Federal Reserve?cut rates, with the latest cut of 25 basis points occurring in November 2024. This change in the interest environment puts banking deposits under pressure, and banks must focus on differentiated and value-driven strategies to continue to drive sustainable growth and create tangible value for customers. The Earnings Credit Rate (ECR) within the U.S. account analysis framework is a powerful tool for ensuring interest rate management, customer engagement, and sustainability. And banks are already leveraging ECR in innovative ways to drive personalized customer engagement and revenue growth.

ECR is a Critical Tool for Modern Interest Rate Management

Account analysis and earnings credit evolved in response to regulatory constraints decades ago. Banks were not permitted to pay interest on demand deposits or checking accounts. As a result, they couldn’t offer direct monetary interest, making it challenging to attract and retain corporate deposits. Earnings credit rate was created by banks to work around this challenge. It is like interest, but a non-cash benefit, and is limited in its usage—it could be utilized only to offset bank fees like transaction fees and account maintenance fees. At a time when corporate customers were transferring their balance to alternative financial institutions offering higher yields, ECR helped banks retain their competitive edge without violating any restrictions.

Since then, ECR has remained an important part of the overall account analysis function. It is not linked to actual interest, and so it is not counted as an interest expense, allowing banks to maintain optimum cost structures and use it for strategic rate management. In 2011 the Dodd Frank Act allowed banks to pay hard interest in demand deposit accounts, but ECR continued to resonate with banks and customers because it did not impact the bank’s interest expense while offering significant tax advantages for corporates.

It is still a useful tool for attracting customers in a competitive market, as it is a strong service differentiator that is unrelated to interest rate expenses. Banks are now leveraging ECR as a viable strategic tool for attracting deposits amidst fluctuating interest rates. Some banks are offering tiered or customized options based on client profiles and relationships with the bank. Others are bundling earnings credit with other rewards and offers to present a comprehensive value proposition. But they must strike a balance between competitive and differentiated offerings and cost management. They must also work to minimize unused credit to protect corporate balances.

Personalized ECR Strategies

The key to using earnings credit effectively lies in personalization. Unfortunately, the conversation around personalization in banking often gets limited to retail banking only. But innovative banks are now exploring ways to personalize corporate banking offers and create tailored bundles that meet the needs of their customers. They are moving away from old and limited customer segmentation strategies and leveraging advanced data analytics and artificial intelligence to understand each customer as a segment of one. And they are using this information to create customized offerings, bundles, and incentives that meet their unique needs. For example, instead of offering a discount on service pricing, they are offering an ECR boost for increasing average balances or maintaining a balance above a certain threshold for a specified period. Or they offer ECR boosts for using specific banking products or services like hedging solutions or cash forecasting tools.

Some banks have introduced unique personalized loyalty programs where long-term corporate customers (5 years or longer) received incremental earnings credit based on their tenure. And some have even launched seasonal boosts during high liquidity periods, encouraging businesses to deposit more during those times. These innovative offerings are invaluable for banks trying to attract deposits, increase fee incomes, and manage net interest margins even amidst market disruption.

Other Innovative ECR Strategies

Banks are also leveraging earnings credit in numerous other innovative ways to enhance customer engagement, drive business, and stand out from the competition:

• Hybrid Interest Accounts:?Earnings credit is calculated till the point where fees are offset, after which hard interest is offered on the excess amount. As interest rates continue to fluctuate, banks are likely to continue to innovate within this space to attract and retain customers as competition for deposits intensifies.
• Real-Time Account Analysis:?Traditionally, account analysis would be done only at the end of the month. But modern technology makes it possible to aggregate charges, interest, earnings, and credit in near real time. Banks are now using this capability to help companies forecast their monthly earnings credit even before the month is over. This helps customers proactively adjust balances as required, offering them greater visibility and control. In fact, banks can notify customers mid-month about balance adjustments needed to offset fees, thus encouraging increased deposits.
• Green SDRs (Sustainable Deposit Rewards):?Some banks are enabling customers to use earnings credit to purchase carbon credits, in alignment with their ESG goals. This kind of green initiative resonates with environmentally conscious customers and can go a long way in strengthening the bank’s reputation as an organization committed to sustainability.
• Pass-Through Third-Party Services:?Some banks are even working out a third-party ecosystem aligned with earnings credit by allowing customers to pay non-financial bills such as lawn maintenance with earnings credit.

While it started out as a routine back-office function, earnings credit rate has evolved to be a strategic asset for managing interest rates, enhancing customer engagement, and even advancing sustainability initiatives. As interest rates continue to fluctuate, ECR can be an invaluable tool for building a differentiated value proposition. Banks must leverage it creatively to align with customer objectives, adapt to market conditions, and diversify their revenue strategies.

Daniel Gill, CTP | Sam Davidowitz

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