Mention low interest rates and what quickly comes to mind is low-cost borrowing. It’s true that if your organization wants to invest in new equipment, facilities, or growth strategies, or simply finance day-to-day operations, money doesn’t get much cheaper than it is today.
But low interest rates are a double-edged sword. Look beyond their positive impact on borrowing, and you’ll see their negative impact on revenues.
The two sides of low interest rates
Reduced corporate tax rates and several rounds of stimulus payments have infused so much money into the economy that many businesses are cash rich. Being flush with cash is good, but here’s the thing:
Just as businesses don’t have to pay high interest rates on loans, financial institutions don’t have to pay high interest rates on deposits. Earnings credit rates are extremely low as are yields on commercial checking and sweep accounts – traditional repositories for corporate cash. Yet fees for treasury management services have remained static or increased.
As a result, you may be paying more to have your cash managed than you are earning on it. And that imbalance may be reflected in your bottom line.
If fees are eroding the value of your cash reserves, consider making three helpful moves. By adapting your banking practices and investment policy to modern market conditions, you can lessen the repercussion of low interest rates on revenues.
- Move away from paper-based banking service. Paper account statements, reports, and documents incur real costs of handling, printing, supplies, postage, mailing. Those costs are passed on to you, but you can eliminate them by switching to electronic services that are free.
- Give up branch banking. More than 4,400 bank branches in the U.S. closed between 2017 and 2020, according to a report by the National Community Reinvestment Coalition. Electronic services including online and mobile banking, remote deposit, and digital signatures have made branch banking largely unnecessary. The forced transition to a home-based workforce has made it unwieldy. With the high costs of overhead and personnel, branch banking services are expensive. To reduce costs and increase efficiency, give up the branch.
- Revamp your cash investment strategy. Consider moving balances above those needed for everyday operations out of basic, interest-bearing checking accounts into higher-yielding investments. Automated sweep accounts, corporate bonds, and prime funds are among the options that may be acceptable within your investment policy.
Capitalize on the positive and reduce the negative effects of low interest rates for this is certain: they won’t last forever.
For more information, contact your Wells Fargo representative or fill out the Contact Us form on this site.
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TM-3265 | 05/21