Leveraging the Knowledge of the Float Manager
BY BRIAN BOARDMAN
PROFIT TECHNOLOGIES
As The Payments Business Moves From Paper To Electronics, Float Expertise Can Add Value To A Broad Range Of Cash Flow Issues.
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SYNOPSIS | The contribution of float management has been limited to a few functions in banks: sort patterns, transportation issues and general check processing. But Check 21, image processing and other changes in the payments world create an opportunity for float managers to control a significant amount of non-interest income by applying their knowledge and expertise to operations, product development, product management, technology and M&A.
As change accelerates in the payments world, it’s no surprise that some traditional jobs are in flux. A case in point is the float manager or float management function.
A decade ago, the float manager was largely responsible for determining the appropriate clearing agents for various types of checks and the transportation of those checks for the best availability of funds. That was about it. Then came the advent of online banking, image technology, multi-function ATMs and other forms of payments innovation. Suddenly, float managers found themselves with a good bit less to do if they stuck with their traditional role — or a good bit more to do, if they expanded that role.
Today, the float manager has the opportunity to control a significant amount of non-interest income by applying his or her knowledge and expertise to such areas as operations, product development, product management, technology and M&A, to name a few. Banks would be well advised to take advantage of this resource.
Catalysts of Change
Technology has been the driving force in the evolution of float management. Image processing, smart ATMs and online banking are all linked to payment processing, and the float manager has played a strategic role in helping fine-tune these processing channels for optimal contributions to the bank.
For example, float managers throughout the industry and firms with expertise in float management teamed up to develop new payment clearing channels to take advantage of image processing, such as Endpoint Exchange and Viewpointe. These channels have enabled financial institutions to benefit from the investment in image processing technology.
At the same time, the role of the float manager has been affected by management’s heightened focus on generating non-interest income during a sustained period of declining interest rates. Float managers needed to look beyond check processing to continue making a contribution to the bottom line. They began exploring float and cash flow optimization in other areas of the bank, often with great success.
We know of several float managers who took on responsibility for related areas as a means of applying their skill set to identifying improvements in revenues and expenses. They got involved in such activities as the conversion of an acquired bank’s check volumes in a merger, strategic assessment of an image-enabled platform and the cost benefit it would offer and optimization of payment flows, including cash.
On the other hand, we also know of several other float managers who either voluntarily or involuntarily got out of the business as their banks lost their focus on float.
The 2004 introduction of Check 21 provided another significant opportunity for float managers to contribute. The essence of Check 21 is an authority, not a mandate, for institutions to convert checks to images that can be processed more speedily. It is the bank’s prerogative to take advantage of the potential benefits.
IMPACT OF CHECK 21
The greatest impact of Check 21-related check image processing is on deposit funds availability and the posting of check payments. The float manager understands the effects generated in these areas and, more significantly, the ripple effect they have on other areas of the bank. How would a higher collected balance impact the earnings credit rate for corporate customers? How would the posting of check payments impact the overdraft rate for retail customers? The float manager answers these questions.
Clearly, the conversion to a check imaging and processing environment requires a major expenditure in technology and retooled processes, and the anticipated benefits must be weighed against the cost. If a bank has not already implemented Check 21 capabilities, it should look to the float manager for guidance. For example, the float manager will be able to identify and quantify the opportunities for clearing images vs. paper, taking into consideration the savings in the transportation of checks, the savings in clearing fees and the improved availability. The float manager will also be able to assess the feasibility of related opportunities such as remote (or branch) capture of images and how that type of infrastructure might impact the bank’s balance sheet by decreasing float.
While the adoption of Check 21 capabilities industry-wide is not a question of if, but of when, it is apparent that there is going to be increasing demand from businesses and increased competition among banks to become image-enabled. The float manager is most intimately aware of corporate check volume and its impact on float. Since it is now possible to speed the process of check processing and clearing through image exchange, banks need to consider how they want to keep pace, i.e., by simply adjusting their pricing or availability of funds, or by offering more product features such as an image capture solution for corporate customers.
Is your bank better off giving up short-term availability in exchange for a long-term gain in deposit share and customer accounts? Or should the bank squeeze out more profit by keeping the funds as long as possible? Because float managers are among the bank’s experts on payment strategies and networks and customer payment preferences and needs, they are in the best position to analyze these scenarios and guide these types of decisions.
Channel Mix Management
At its simplest, the role of float manager is to ensure that funds go through the bank in such a manner as to reduce money caught in a holding pattern — and to maximize the funds to be applied to various investment strategies. In an environment characterized by a proliferation of channels and shifting customer preferences, it is also in the float manager’s purview to manage float availability to keep pace with changes in payment channel mix.
As payment processing speeds up, the bank must monitor the cash flow and strike the right balance between operating costs and customer pricing. In this regard, the float manager is the bank’s first line of defense in ensuring proper cash flow through various General Ledger accounts every day.
During times of significant M&A activity, float managers also play a major role, whether as part of the acquirer or acquired company. In this sometimes volatile environment, the float manager is responsible for keeping operational hiccups to a minimum. For example, when a local bank offering next-day funds availability is acquired by a bigger bank that offers three-, five- or seven-day availability, the float manager must guide the design, testing and implementation of system changes and settings to support the availability schedule that the merged bank ultimately adopts. Without this guidance, customer satisfaction and the bank’s income and expenses can be impacted negatively.
As senior banking executives assess the contribution of float management as part of overall bank management, they should also remember that float is not going away, or at least shouldn’t be. Last November 1, the Fed announced its 12th consecutive quarter point increase in the Fed funds rate. Measured at this rate, the cost of float has risen 300% since June 2004. And, more rate hikes may be ahead. The sooner an organization can convert float from a non-earning asset to an earning asset, the better off it will be. The float manager can offer expert advice on the best way to make that happen.
Further, the after-effects from Check 21 will continue for at least a couple of years as the consumers of banking services move to more electronics and away from checks. The float management function will be needed to sort through all of the alternatives from an operational, accounting, cost and opportunity perspective. Senior management needs to recognize that the float manager’s focus is really the flow of dollars — not just the flow of checks. The float manager can make a big impact if given the opportunity to work beyond the traditional boundaries.
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