Canada and the US are about as close as neighbouring countries get in the world today. They share the longest unguarded border at 3,308 miles. They are each other’s largest trading partner, with about US$1.6bn in bilateral trade per day. Ninety per cent of Canada’s population lives within 160 miles of the US border and, until 2009, citizens could cross that border freely without passports.
The closeness of these two countries may make the consolidation of banking relationships and treasury operations seem logical to companies doing business in both. However, there are major differences in the banking systems to consider before crossing this bridge. Fully recognising the differences can help a company avoid misunderstandings and maximise the benefits of centralisation.
Canada’s Banks Stand Strong
Canada’s banking system has remained strong throughout the recent global financial and economic crisis. In October 2008, the World Economic Forum (WEF) ranked Canada’s banking system the strongest in the world. None of Canada’s 21 domestic banks has failed, nor has there been any sustained call for government bailouts or intervention in the banking sector. Conversely, 140 US banks failed in 2009, another 37 failed in 1Q10, and government intervention in the banking sector has been massive. What gives Canada’s banking sector such strength in comparison to that of the US and much of the world?
‘Old-fashioned’ banking rules are part of the explanation. As the US and Europe relaxed financial regulations over the past decade, Canada adopted remarkably responsible policies. Canadian regulators prevented Canadian banks from taking on too much risky debt, helping the banks to weather the financial crisis well. Perhaps just as importantly, Canada has a more risk-averse business culture, with Canadian banks typically required to hold larger capital reserves than their counterparts in the US.
Another factor shielding Canada from the worst of the global banking crisis is minimal exposure by Canadian banks to the huge mortgage debt-related losses that brought down many US and European banks. In Canada, mortgage interest is not tax deductible, as it is in the US, so Canadians make borrowing decisions independent of tax considerations. In the Canadian mortgage market, recourse loans are prevalent, while non-recourse loans are the norm in the US. In the US, failure to repay a mortgage results in foreclosure of a home by the mortgage issuing bank but no residual claim on other assets, Canadian mortgages generally allow a bank to seek return of other personal assets of defaulting borrowers. Taxes and the threat of losing everything are disincentives for Canadians to take on mortgages beyond their means.
Tighter lending policies and affordable mortgage debt contribute to the stability of the Canadian housing market. In the US, house prices have declined by as much as 25%, while Canadian residential real estate values declined only half this amount.
Stability Attracts Business
The stability of the Canadian banking sector is mirrored in the strength and success of Canada’s other social institutions and policies. Canada has a universal healthcare system. While healthcare accounts for 15.2% of the US GDP, it accounts for only 9.7% of Canada’s GDP, and the system outperforms that of the US on a number of quality parameters.
Canadian immigration law allows visas to be granted based on criteria such as education level, work experience, and language skills. There is no limit to the number of skilled migrants who can move to Canada. Individuals can apply for a Canadian Skilled Worker Visa, which grants the right to become a legal, permanent resident of the country, without a sponsoring employer or even a job. This immigration system differs greatly from that of the US.
A strong banking sector, effective health care system, and efficient immigration rules have resulted in a strong Canadian economy that is becoming increasingly attractive to US businesses. More and more US companies are choosing to set up shop in Canada and are hiring workers from the large, local talent pool. An example of this is the flood of car manufacturers rushing north to avoid high healthcare costs in the US. Ontario is now the largest car maker in North America, outproducing the US’s legendary automobile powerhouse, Michigan.
Similarities and Differences Influence Consolidation Decisions
Canada is the first place many US companies consider when they decide to expand internationally, and their expansion takes a variety of forms. They may set up a Canadian office or plant as a wholly-owned subsidiary with a separate tax ID. They may establish a sales and marketing arm of the US parent in Canada. Or they simply may engage a few contract employees and a third party-run warehouse for distribution.
If a company’s business is limited to the US and Canada, it often makes sense to centralise treasury, especially if there is no dedicated treasury or accounting staff in Canada. For US companies with wider international operations, Canada is often used as a test case for centralising treasury operations before attempting a bigger centralisation project in other regions. Companies based elsewhere often want to think of and manage their Canadian and US operations as a single North American regional business, at least from a treasury perspective.
Regardless of the parent company country of origin, centralising US and Canada banking operations seems logical for a number of reasons:
English is the predominant language in both the US and Canada. While French is also an official language of Canada, English is the preferred language everywhere except Quebec (where 91% of Canada’s French speakers reside). From a treasury management perspective, having a common language base helps to ensure that managing banking portals and contacting customer service will not be complicated by a language barrier.
For treasury managers, especially those who are tight on cash, timing is essential. The ability to have balance and availability information, as well as to make same-day borrowing or pay-down decisions, has a direct impact on the bottom line. While there are east-to-west coast time differences in the US and Canada, these are easily manageable when compared to doing business between North America, Europe, and Asia. The only problem is Newfoundland, where the additional 30-minute time difference is guaranteed to confound you.
For better or for worse, the US and Canada are two of the few countries still heavily reliant on paper cheques for both corporate and individual payments and receipts. As a result, needs for banking solutions such as lockbox and positive pay are similar. It is often seen as comparatively easy to have accounts payable (A/P) and accounts receivable (A/R) departments manage both US and Canadian banking.
While the similarities described above can make centralisation easier, there are some key differences that, if not understood, can cause a treasury consolidation to falter. Two of the biggest banking differences between the US and Canada stem from differences in government regulations.
The US Check Clearing for the 21st Century Act (Check 21) allows an image-replacement document (IRD) to act as the legal equivalent of an original paper cheque, thus eliminating the need to physically transport cheques for settlement. Canada’s truncation and electronic check presentment (TECP) project, which would have allowed Canadian financial institutions to exchange cheques electronically, has been discontinued. Companies receiving cheques in Canada will need to find an alternative presentment option.
ECR versus interest
Regulation Q of the Glass-Steagall Act of 1933 prohibits US financial institutions from paying interest on commercial demand deposit accounts. However, the defined term ‘interest’ does not include payments to or for a depositor’s account as compensation for the use of the funds on deposit in the account. Therefore, depositors are allowed to accrue earnings credits based on account balances and use those credits to offset service charges on the account. The use of earnings credits is unique to the US; most Canadian bank accounts can simply be set up as interest-bearing. While the net result may be similar, this difference can come as a surprise to a company used to doing business one way or the other.
There also are several non-regulatory differences between US and Canadian banking.
Check 21 decreased the benefits of cheque float in the US, but float still exists and is the reason many US companies still hesitate to move away from using cheques as a payment method. In Canada, settlement is typically backdated to the day a cheque is deposited, thereby eliminating float altogether. As a result, there is less incentive to continue to use cheques in Canada. While controlled disbursement, a common account structure utilised in the US, technically exists in Canada, it is of minimal practical use without float, and so is rarely used.
In the US and Canada, local, low-value payments – electronic funds transfer (EFT) or automated clearing house (ACH) – are often used by companies to pay employees and vendors. In the US, addenda records travel with these electronic payments; in Canada, they do not. Lack of addenda information with a payroll payment generally is not an issue – employees expect these payments and recognise them when they arrive. However, the lack of available addenda information for EFT payments in Canada can be a significant issue with vendor payments.
Companies may pay multiple invoices with a single EFT payment, make partial payments, or need to reference specific payment discounts. In all of these cases, detail needs to be transmitted to the payment recipient. This does not preclude using EFT for payments in Canada, but it may necessitate employing alternative communication methods (separate bank transmission, email, or fax) to send remittance detail to the EFT recipient.
Bilateral Banks Facilitate Consolidation
Major banks recognise that corporates are looking for ways to consolidate the management of US and Canadian cash and have developed solutions to meet that need. A few banks have set up operations in both countries, giving corporates a true single platform for deposits, reporting, and visibility. However, branch access and bank capabilities in the non-native country are typically limited. More banks have implemented some version of a cross-border bank partnership – either in the form of a third-party relationship with reporting or as a white-label solution.
The best bank solution depends entirely on a company’s specific treasury needs in the two countries. Because the solutions vary widely, it is wise to talk to several banks on both sides of the border before selecting the bank or banks that can provide the cash management philosophy and functionality you need.
Cross-border Consolidation Benefits Bumble Bee Foods
Bumble Bee Foods (a US company) acquired Clover Leaf Seafoods (a Canadian company) in 1999. For nearly a decade, Clover Leaf maintained and managed its own banking relationships, did its own daily cash position, and made cash borrowing recommendations to the US parent. Major treasury decisions such as hedging were made jointly, but ultimately were executed in the US.
In 2008, the US parent decided it needed more visibility into and control over the combined daily cash flow. It also wanted greater flexibility over the daily process and to be able to make more strategic banking changes, such as moving from paper to ACH payments. Maureen Walker, treasury manager of Bumble Bee Foods, says, “A lot of idle cash was being kept overnight in anticipation of outstanding checks clearing, and payroll was being funded a day or two early. A better system was needed in order to keep idle cash at a minimum and maximise our capacity to pay down debt.”
The company issued an RFP for the Canadian services, with an eye toward eventually consolidating US and Canadian banking. It ended up choosing a US bank, which Walker says has “made the consolidation even easier.” Since the company’s US treasury department had been monitoring Canadian banking transactions and processes for nearly a decade, they were aware of many of the banking differences but still had to make some adjustments to manage effectively. “Controlled disbursement (or the lack thereof) historically forced us to pre-fund. Remote deposit that we use domestically can’t be used in Canada. So on the CAD side of the business, we have had to adjust accordingly. For our Canadian entity’s US dollar receipts and payments, we have actually set up US-based deposit accounts, which worked around both of those issues.”
Bumble Bee Foods realised a financial benefit from its banking decision. According to Walker, “Between our Canadian entities, we used to keep an average of C$1.2m of idle cash in our bank accounts overnight before we consolidated the treasury function at corporate. Since the change in banking relationship and the consolidation, we keep an average of C$200,000 overnight which saves us about C$4,500 in unnecessary revolver interest each month.”
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