Depository Transfer Checks

Non negotiable, unsigned check payable only to a single bank account at a particular Bank Used to transfer balances from one bank to another Each check costs $1 and especially valuable when the amount of transfer is relatively small; less than $ 5000

Electronic Depository Transfer (EDT)

Also known as ACH debit. Handled by ACH network. Used in place of DTCs. Cash manager authorizes the companys concentration Bank to originate an ACH debit entry against the Companys a/c at various gathering Banks. Advantage of EDT is the fund availability at the concentration Bank the day after ACH debit is originated.

Wire Transfer
Real time transfer of a/c balances Disadvantages: Relatively expensive Best for larger balances Immediate availability Deposited balances must be collected balances not ledger balances

Exhibit 10.1
Central Concentration Bank Lockbox Regional Concentration Bank 1 Regional Concentration Bank 2 Wire or ACH

Lockbox

DTC or ACH

Gathering Bank 1

Gathering Bank 2

Gathering Bank n

Gathering Bank 1

Gathering Bank 2

Gathering Bank n

Customers...

Customers...

Cash Transfer Tools

Depository transfer checks ACH or EDT

Wire transfer

Cash Concentration tasks

A Concentration System
Feeds cash into Deposit Banks Draws cash from Concentration Banks Disbursement Banks

Short term Borrowing And investment

Initiation of the Transfer

Decentralized Manager at field offices initiate the transfer and the amount is generally the amount of deposit Centralized Timing and amount of transfer are determined centrally either at Concentration Bank or at Head Quarter The field manager simply makes the deposit in the local bank and reports via a 3rd party information vendor who notifies the concentration bank and the Headquarter.

System Costs
Opportunity cost of idle balances -Difficult to transfer the balance when t becomes collected balance. - Common to have idle balances in the deposit banks. - Can be used to offset service charges yet it does not outweigh the lost interest. Transfer costs - Depends on the transfer instrument chosen.

System Cost
Administrative cost - Managing the concentration system - Receiving and reviewing deposit information from gathering banks, 3rd party information provider, concentration bank - Managing and maintaining cash forecasting system if transfer scheduling is based on anticipated deposit

Benefits of the System

Economies of scale Enhanced visibility and control of balances

Dual balance possibilities

Dual balances
Inefficiency in the transfer clearing mechanism Generally occur only for Depository Transfer checks They occur when a deposit in the concentration bank receives availability at the concentration bank before the transfer clears the field bank and vice versa

Dual Balance (Example)

Day
Tuesday Wednesday Thursday Friday

Available balance in deposit bank

10000 10000 10000 0 (DTC Clears)

Available balance in concentration bank

0 (Initial Balance) 0 (DTC deposited) 10000 (DTC available)

Dual Balance (weekend effect)

Day Wednesday Thursday Friday Saturday Sunday Monday

Available balance in deposit bank 10000 10000 10000 10000 10000 0 (DTC clears)

Available balance in concentration bank 0 (initial balance) 0 (deposit DTC) 10000 (DTC available) 10000 10000 10000

The Cash Flow Timeline

T1 T2 T3 T4 T5 T6

Debit field bank account Balance available at the concentration bank Transfer initiated

Collected funds at the field bank

Deposit reported Original deposit at field bank

Cash Transfer Scheduling

Complicating factors Objective: minimize transfer costs

Transfer rules

Complicating Factors
Minimum transfer balance
incremental cost = Days Saved x ((k - ecr(1-rr)) x TBAL Solve for TBAL TBAL = Incremental cost/DS x [k - ecr(1-rr)/365]

Fluctuating daily deposits Deposits with different availabilities Availability of deposits vs. clearing of transfer instrument Weekends

Objective: Minimize Transfer Costs

Subject To: adequate bank compensation TC = Fee + (k x (ACB - RCB))

Where:
RCB = (SC - Fee)/ecr(1-rr)

Transfer Rules
Daily transfer: transfer the daily deposit Managing about a target:
one-time transfer out to earn interest
reduces the number of transfers

Anticipation: initiate transfer prior to deposit

Anticipation
Initiation of a transfer at the concentration Bank before cash become available at the deposit Bank. Thus, by the time the transfer clears the deposit Bank, available cash will be there to cover the transfer. Ledger Anticipation- Initiate a transfer on the basis of ledger information from the deposit Bank. Thus it is known with certainty that when a ledger deposit will become an available deposit and will be able to cover a transfer.

Anticipation
Deposit Anticipation- Initiate a concentrating transfer before expected deposit in a deposit bank have been reported. Deposit anticipation is riskier than ledger anticipation. One time transfer out- The average available balance in a deposit account is observed to be consistently above the target compensating balance.

Balance averaging
Compensation is measured by averaging daily balances over some time period. Target compensating balance need not be met daily. The technique of allowing the balance in the Bank to fluctuate above and below the target level is sometimes called balance averaging.