Bank Account 101
InvestMint Team
Jan 6, 2025
Optimize your accounts and build a better relationship with your bank
One of your most critical business relationships is with your bank; however, like every relationship it takes work.
Summary
Every business needs bank accounts and there are a million options when opening one - Chequeing, Savings, High Interest Savings, Sweep Accounts, Foreign Currency Accounts, and the list goes on. It is critical to understand how each of them works and the costs, fees, and interest rates associated with them. Competitive benchmarking is critical to ensuring you are getting the most out of your relationship. However, have you ever thought about the overall risk of your bank or the risk of the cash you hold with your bank? Did you know that every dollar kept in a bank account is actually your business making a loan to that bank with repayment subject to their creditworthiness?
While many institutions will offer tempting rates and fees, it is critical to understand:
Account costs
Other banking needs
Deposit insurance
Creditworthiness
Settlement times
The InvestMint team will walk you through the ins-and-outs of ensuring you are getting the most out of your banking relationships.
Costs and Relationships - Create a strategy to maximize the value of your banking relationship
Bank fees can rapidly add up so sometimes paying a bit more monthly or annually can make sense depending on your Company's needs. We recommend modeling your forecast banking transactions to build a cost estimate and use that to negotiate with your banker. Additionally, you should review your entire banking relationship holistically as you may have multiple products with your bank like credit cards, payroll, trade finance, loans, etc… You have the most leverage in your relationship with your bank if you negotiate all your terms across products at the same time. For example, there's no point in getting a deal on your deposit rates if you are paying top dollar for your credit cards or have off-market loan rates or conditions.
Deposit Insurance - Not all deposits are treated equally
CDIC coverage is automatically applied to your deposit with a member financial institution, up to a maximum of $100,000 per eligible account. This insurance will take effect in the event that your bank isn't able to return your money which is an event of bankruptcy.
Most individuals maximize their CDIC coverage by spreading your money across account categories and member banks. Each account category (non-registered, joint accounts, and registered accounts) is insured for up to $100,000 separately, which is also separate per bank. However, it isn't practical for most businesses to spilt their accounts or banking relationships. That said there are ways businesses can enhance their deposit insurance coverage. One approach is to leverage "ISA" deposit accounts offered by several banks accessible through investment accounts but are legally deposits with funds available next business day. One of the features of ISA deposits is that they are often offered through multiple bank legal entities, for example TD Bank offers ISAs for the following entities:
The Toronto-Dominion Bank
TD Mortgage Corporation
TD Pacific Mortgage Corporation
The Canada Trust Company
ISA deposits with these entities each qualify for the full $100,000 CDIC coverage.
Lastly, remember that if you give your cash to a financial intermediary, those funds are not eligible for CDIC insurance, even if they deposit the funds in a CDIC insured account / institution.
Bank Creditworthiness and Risk - Your choice of who you bank with matters!
Silicon Valley Bank ("SVB") failed due a duration mismatch between deposits and the bank's investments and non-bank financial entities are even more vulnerable
Our American clients and friends are more familiar than Canadians with the concept of bank solvency - anyone still remember SVB? While deposit insurance is a great first line of defense, ultimately the overall creditworthiness of your bank is the key determiner of the safety of your cash as insurance has not kept pace with the growth in deposit amounts. SVB failed not because it made bad loans, but because they didn't have enough cash on hand to pay back their depositors (remember, you "loaned" your bank your deposit so that meant they "borrowed" it). There's no point in earning an extra quarter of a percent to loan your hard earned cash to someone who, however unlikely, might not pay you back.
Here's a link to an interesting recent article that shows fintech depositors getting back ~$0.30 on the dollar!
Settlement Times - Timing of payments and transfers is critical for cash management
Last, but not least, settlement time is a fancy way of saying how long does my bank have to give me back my money once I ask. Demand deposits are available same day which in banking lingo is T+0 or on the date requested and Bank ISA deposits are available the next business day after the request is received. This is different than a maturity date of a term deposit or GIC as they are returned on that future date; however, you should be aware of institutions that tell you they have longer than T+1 settlements for deposits as that is a sign they are using your funds to fund their company and not yours.
The InvestMint Team
InvestMint™ is a financial technology company and not a financial advisor. We do not provide investment advice or services; we provide self-help services at your specific direction.
Investing involves risk, including loss of principal. The contents of this article are the opinion of the author and provided for information purposes only and do not constitute an offer to sell or a solicitation to buy securities. Past performance is no guarantee of future returns.
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