4 min read
Key takeaways
- Earnings credit rate (ECR) can help your business offset bank service fees by earning credits based on your account balances.
- Demand deposit accounts (DDAs) are essential for daily business transactions, offering easy access to funds without withdrawal limits.
- Optimizing DDA balances can help maximize your ECR benefits, reducing overall banking costs.
- Regularly reviewing your DDA and ECR strategy can help ensure alignment with your business needs and market conditions.
Each year, half of newly opened businesses fail—mainly due to cash management challenges. Effective cash management is crucial for maintaining liquidity and reducing costs. Two powerful tools that can help your business achieve these goals are demand deposit accounts (DDAs) and earnings credit rate (ECR). By understanding and implementing these solutions, you can optimize your financial operations and enhance your business’s bottom line.
Understanding ECR
What is ECR?
ECR is a mechanism that banks use to offset service fees for business accounts. It’s a percentage that the bank applies to a client’s account to calculate a credit. Businesses can earn these credits based on their account balances and then use them to reduce or eliminate bank fees. The ECR system incentivizes businesses to maintain higher balances, fostering long-term banking relationships. By applying ECR credits to offset monthly service fees, transaction fees and other banking charges, businesses with higher balances can reduce their banking costs.
How is ECR calculated and used?
Banks typically calculate ECR as a percentage of the average collected balance in a business account, and automatically credit it monthly. Factors influencing the calculation can include interest rates, bank policies and the financial health of the business. For example, if the average ECR offered by banks in a given year ranges from 0.25% to 1.00%, a business with an average collected balance of $100,000 could earn $250 to $1,000 in ECR credits monthly.
The role of DDAs in business banking
What is a DDA?
Demand deposit accounts (DDAs) are accounts used for daily business transactions. They typically bear little to no interest and offer features such as easy access to funds, no withdrawal limits and check-writing capabilities. Examples include business checking, savings and money market accounts.
DDA benefits
Maintaining optimal DDA balances is crucial for ensuring sufficient funds for payroll, vendor payments and unexpected expenses, and can help your business avoid overdraft fees and keep operations smooth. Maintaining higher DDA balances can result in more ECR credits, further reducing overall banking costs.
Optimizing DDA balances
Here are some strategies for optimizing DDA balances to maximize your ECR benefits:
- Review your account balances regularly and adjust them based on your cash flow needs.
- Set up automatic transfers to help maintain target balance levels.
- Use historical data and market trends to help forecast your business’s cash flow requirements. Rolling forecasts can help you adjust for seasonal variations.
- Use cash management software to automate balance monitoring and reporting. For example, J.P. Morgan’s Chase Connect business solutions let you manage your accounts and control cash flow in real time.
Making ECR work for your business
You can potentially achieve significant cost savings by negotiating better ECR terms with your bank. By presenting a strong financial profile and a long-term business plan, you may be able to secure a more competitive ECR.
It’s important to understand that interest rate changes can also have a powerful effect on ECR, and that ECR may fluctuate with changes in the Federal Reserve’s interest rates. For example, a 0.25% increase in interest rates could lead to a proportional increase in ECR.
Evaluating and adjusting your strategy
Regularly reviewing and assessing your DDA and ECR strategy is essential for maintaining financial efficiency. These tips can help:
- Conduct quarterly reviews of account balances and ECR credits to help adjust your strategies based on business growth and market conditions.
- Monitor key performance indicators (KPIs) including average DDA balance, ECR credits earned and total bank fees offset.
- Adjust strategies in response to changes in business needs or market conditions. These adjustments can be crucial; for example, a manufacturing firm could potentially maintain its liquidity during a market downturn by shifting its ECR strategy.
- Evaluate your bank account structures with your corporate treasurers. Optimizing bank account structures can improve efficiency, as each account could potentially have a different ECR. Leveraging APIs is an additional way to help drive financial efficiency.
We’re here to help
With extensive experience in cash management solutions, J.P. Morgan offers the expertise and tools needed to optimize your business’s financial operations. Our treasury team works with businesses to design customized solutions that can enhance cash management and reduce banking costs, allowing you to focus on strategic financial management.
JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
