Corporate Money: value dating

A peek under the mysterious veil of bank value-dating practices can prove profitable.

Derek Ross

The way funds are transferred around the banking system, particularly internationally, is a bit of a mystery to all but the most experienced treasurers. The systems that the banks use have been designed and implemented independently in each country. Furthermore, the banks have built them for their own purposes. It will not always be transparent to the user of the banking networks just how value is given, and how to improve the date on which funds become available.

The concept of value has two aspects. The most prominent is the date from which funds earn interest. For example, if an English cheque is paid into an English bank account, although it will appear on the bank statement immediately, it will not be cleared for value - that is it will not earn interest or reduce the overdraft balance for interest calculation purposes - until the second business day after.

The second aspect is the date when the money can be drawn against. This is known as 'clearance for fate', which happens one or - in the case, for example, of building societies - more days later. This difference is simply because the bank on which the cheque is drawn needs a little longer from the value date to determine whether to return the cheque unpaid; until this later date the cheque may still bounce.

The concept of value applies to many transactions in addition to credits paid in by cheque. For example, it applies to the date on which transfers take effect or the date a debit reduces the balance for interest purposes. For many transactions, banks can apply either forward value or back value such as when errors or mispostings are corrected. The value concept also applies to transactions other than debits and credits on bank accounts. An example would be the foreign exchange market, where a purchase or sale of a currency spot has two days' value applied to it such that if a treasurer buys, say, dollars with sterling on Monday, the account will be debited the sterling and will receive the dollars on Wednesday.

International payments, because they pass through two or more banks and through two or more national banking systems, create more opportunities for the astute treasurer to speed up value for receipt of funds, and conversely of course delay value for remittances. Value-dating practices are not standardised, even within the domestic banking system. They are certainly far from standardised internationally. Each bank is free to apply its own valuedate practices because there is no regulatory requirement for them to be consistent. Treasurers therefore need to establish just what the valuedate practices are and how they can be either negotiated into a more favourable position or worked around by using alternative transaction techniques.

Another term often heard in the context of payments is 'float'. This describes the period between the date a remitter loses the money to the date when the recipient gets it. Float is a major source of revenue for the banks, as you can imagine. This is a particular problem for commercial users of the banking system when making cross-border payments. For this reason many corporate treasury departments undertake a float-time review occasionally. This involves taking a sample of payments and checking with the beneficiary the exact date they obtained value and comparing this with the date the remitting bank debited the company. Obviously, this is a particularly useful technique when reviewing inter-company payments. However, even with third parties, provided both payer and purchaser are prepared to cooperate, they will often be able to compromise on an approach that can reduce delays and thereby obtain a benefit that can be shared.

While the most common form of commercial cross-border payment is simply the instruction to transfer funds from one bank to another, large volumes of paper cheques are still in use. The beneficiary paying in a cheque, even if it is denominated in his own currency, but drawn on a bank outside the country, can incur considerable cost and delay. Any business that regularly remits funds in a particular currency should carefully consider setting up a bank account in that country, thereby making these delays and costs much smaller. Conversely, if a remitter wishes to ensure that the supplier suffers the longest delay possible in obtaining value for the funds sent, then a deliberate policy of using a currency account outside the country of receipt would ensure this result.

In the inter-company environment, many techniques can be employed to reduce such delays. The most common is a netting system whereby at regular periods, typically monthly, all companies in the group will submit to a central point the amount they wish to pay in various currencies to other group companies. All these payments are then netted, with net recipients of funds receiving their net total in local currency from the central treasury and, conversely, the net payers of funds remitting one payment in their local currencies to the central treasury.

The more active corporate treasury departments will go one stage further and include the major third party suppliers and customers in the group structure. If the appropriate information is in place, it is even possible to convert a cross-border and cross-currency transaction into a domestic payment, still further reducing costs and delays.

There are numerous other techniques that the alert treasurer can employ to reduce bank charges and improve value-dating practices. The payment systems on offer to customers are frequently arcane and their value-dating practices mysterious. Even a modest understanding of how they work in practice will pay off.

Derek A Ross is the partner responsible for treasury and financial markets at Deloitte & Touche, and is a past chairman of the Association of Corporate Treasurers.

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