Earnings Credit Rate

What is the Earning Credit Rate?

The earning credit rate (ECR) is a daily calculation of interest paid by banks on the deposits of customers. The bank calculates earning credit interest on the account balance that customers leave in non-interest yielding accounts and the amount after applying the ECR is used to credit service fees. So, the customer holds large deposits pay lower bank service charges. The financial institutes usually peg the ECR to the rate of the US Treasury bill.

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Earning credit rate is used to offset the fees paid by consumers for the services that the banks provide such as credit cards, debit cards, business loans, saving accounts and merchant services. The ECR benefits both bank and the deposits, as it encourages customers to maintain a large balance with the bank and customers may save sum of cash or bank charges and service fees. Banks may use Earning Credit rate to decrease the fees that customers pay for banking services such as draft fees, debit card fees and loan processing fees. It benefits customers who regularly maintain more than the reserve balance in their accounts. ECR is approximated to the rate of 91-day US Treasury bill.  

History of the Earnings Credit Rate  

In 1930s, at the time of the Great Depression the US government came up with the banking regulations Q, which was enacted by the Federal Reserve Board (FRB) in line with the Glass Steagall Act in 1933, making it illegal for banks to provide interest to the commercial demand deposit accounts. It also placed a ceiling on interest rates for time and saving deposits. Its aim was to discourage commercial accounts to deposit money in banks and encourage them to invest that amount in other investment avenues.

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In 1960s, the banking sector of the US started offering credits on non-interest yielding deposits, used to balance out banking service charges.  So that banks deliver value for their customers and motivate them to avail more services by reducing service fees.

Features of Earning Credit Rate

• Hard interest is taxable, but not the earning credit.
• Customers usually use bank account balance to meet any short-term needs that to use it to offset service fees.
• The hard interest rates are normally higher than the Earning Credit rate.
• The bank service fees that earning credit rate offsets are not deductible although, the fees without offsetting are deductible on the tax return.

Advantage of Earning Credit Rate  

• Efficiency: The Earning credit rate is applied automatically to offset bank service charges. So, the treasury staff does not need to execute it which saves time and resources.
• Cost control: The Earning credit rate reduces bank service fees, which help in enhances the operating margins and profits of the business and increases shareholders value.
• Liquidity Management: Various businesses find it difficult to forecast short-term cash, making it critical to access instantly. But with earning credit rate customers can access to their funds immediately and make it easy to forecast short-term cash.
• Transparency: Demand Deposit Accounts (DDAs) with the applicable earning credit rate offers transparency in managing cash. The bank offers full details of account balance, transaction details and fee details that are accessible on-demand and also includes in the monthly account statements.

Disadvantages of the Earning credit rate

• Applicability: ECR if only applicable on the collected balances and not on ledger or floating balances. The collected balance is the amounts that are cleared and available to invest or transfer.
• Wide variation: ECR consists of a wide variation that are offered to corporate clients, even with the same balance.
• Divergent strategies of banks: Regional banks and money centre banks follows different strategies for Earning credit rate. While regional banks offer higher credit rates to customers with large amount of funds in account and the four largest US banks offers higher credit rates to customers with lower balance.

Future View of the Earning Credit Rate

As the banks are going through innovation Earning credit rates are also going through changes to keep up with the increasing customer demands and market pressure.

Now the concept of Earning Credit rate has been accepted and is also practiced by various governments across the world. It can be expanded to create benefits regardless of geographic area, which help customer to generate higher benefits from worldwide balances.