In the Corporate Network, Overnight Accounts are Not Created Equal
SHREWSBURY, N.J. -- In this age of national field of memberships and corporates marketing across state lines, credit unions have more corporate credit union relationships than ever before.
Credit unions are routinely shopping corporate CU Web sites for the best deals on investments, however credit unions may be losing large dollar amounts by not comparing settlement accounts and procedures and how that affects their overnight account return.
Overnight accounts and settlement are talked about together because traditionally where CUs have their overnight funds is where they settle their funds.
Corporates typically pay a very competitive rate on overnight accounts, often near Fed Funds, however some corporates require credit unions to maintain funds in a lower earning settlement account to cover daily settlements. They also require credit unions to determine the amount of money needed to settle each day by a set deadline.
More than half of corporate credit union balance sheets are in very short-term money, a large portion being overnight funds. Overnight accounts are where corporate credit unions earn their biggest spreads. For a credit union, settlement, whether its Visa payments, check clearings, ACH, etc., is a part of doing business. Overnight funds represent for many CUs most of their investment dollars, so understanding the overnight account/settlement process at the corporate is critical.
Many corporates do not clearly explain their settlement account nuances on their Web sites and corporate professionals told Credit Union Times that when they try and study other corporates' settlement procedures/overnight account structures for internal research, it is very difficult to find out exactly how each corporate does it.
Corporates that offer two accounts have a settlement account, which typically pays a very low rate on funds earmarked for settlement. The rate can be as low as 0% as Credit Union Times found in a survey of rates, with many corporates offering rates of 1% or less, not a very strong rate in this five-plus short-term rate environment. The remaining overnight balances not used for settlement can be transferred into a second overnight account that pays the higher rate and is the rate most corporates quote for overnight funds. This two-account structure, also referred to as a managed account structure, also requires credit unions to move funds by a certain time of day into their settlement account. If a credit union underestimates the amount they think will settle and settlement is greater than the amount in the settlement account, a loan is generated to pay the difference. Credit unions typically try to avoid getting in a loan situation where these days they are paying rates of about 5 to 6%. There is also a stigma to having to take a loan for overnight settlement. To avoid a loan situation, credit unions sometimes put more money in the settlement account than is necessary, thus earning the lower rate and leaving dollars on the table. Taking the scenario of a .25% rate on a $1 million settlement balance, adds up to lost income of $50,000 per year given the current Fed Funds rate. One Account, One Rate
Some corporates have moved away from the two-account managed structure and have a single overnight, nonmanaged account.
In this case, credit unions are not required to move money from one account to another for settlement and are guaranteed the higher rate. These corporates believe this method best helps their credit union members manage their daily funds and get the best return.
Michigan-based CenCorp for example has one overnight account per member and all settlement goes into that account--there is no lower-yielding settlement account. The only variable in CenCorp's structure is it offers a 10 basis point bonus to credit unions that have over $10 million in their overnight account. On July 28, CenCorp offered 5.20% (see chart on this page) on its overnight account and 5.30% for those with $10 million or more. Contrast that to a corporate paying a higher rate and it appears that CenCorp isn't offering the best deal, however when factoring the money that may be left in a low-yielding settlement account and CenCorp's rates look strong. CenCorp CEO Bill Walby believes that CUs that have to move money on their own into the overnight account typically do not hit a 100% balance. He said CUs typically move about 95% of funds, leaving 5% extra in the settlement account. Over a year, said Walby, that can add up to some real money. He estimates CenCorp members receive $3 million more in annual earnings by avoiding a low-yielding settlement account. "When you factor in the additional time to calculate and move funds on a daily basis, the benefit is even greater," said Walby. Missouri Corporate also uses the single account structure. CEO Dennis DeGroodt said he wishes more CUs knew about the differences in settlement practices and how it affects overnight account rates so they could make a more apples to apples comparisons on rates. DeGroodt said CUs need to understand that the overnight rates they see quoted on corporate credit union Web sites might not tell the whole story. Missouri Corporate will soon be aggressively going after overnight funds with a new overnight CD, with a minimum investment of $25 million. "There has been a lot of moving around of money by credit unions from one corporate to another. Large overnight balances are circulating. That's what we're going after," said DeGroodt. He noted that a CU could purchase the corporate's CD each day from its Web site with no human interaction necessary. "We think a CD is just an easier way for a credit union to manage this," he said.
Some corporates offer credit unions options. The new Members United Corporate for example has two account structures, or suites as it calls it. The first, an active managed option, allows credit unions to move money from the settlement account to the higher-yielding overnight account, with a 5:00 p.m. Eastern Time deadline. Members United Chief Investment Officer Ron Koza said this account is for those CUs that want to actively manage their daily funds and maximize return.
The corporate also offers a nonmanaged suite. That suite offers a high-yielding account, but requires credit unions to keep a settlement balance in a low-yielding static account. The balance is based on the CU's six-month settlement average. With this suite, credit unions do not have to actively manage their settlement funds, but the static account is earning a low rate.
Koza said it hasn't been very popular with credit unions. "Yes I think it's absolutely possible for a credit union to lose a lot of money by not paying attention to their settlement activity. But the tools are out there to make it automated for them, so they can focus more time on lending," said Koza.
Southwest Corporate has a two-account structure, but the corporate's settlement account rates are competitive. As of press time its cash management account (settlement) was paying 4.42%. Credit unions can transfer their overnight money not designated for settlement to a higher-yielding overnight account, which as of press time (Aug. 2) was 5.37% for CUs that have member capital shares in Southwest and 5.32% for those that aren't capitalized.
Like many corporates, Southwest also tiers its overnight rates based on balances.
Tiered accounts are another area of variation that CUs need to monitor. For example, Midwest Corporate has a dividing line of $3 million. Overnight deposits greater than $3 million earn a 12 basis point premium over those below $3 million.
Most corporates said rate hungry credit unions need to understand the nuances of settlement and overnight account rates and structures to get a true picture of return. They also noted that credit unions should be aware that they do not have to do settlement with their local corporates. In today's ubiquitous corporate network, credit unions can settle at virtually any corporate.