The USA

Introduction

 

About The USA

The USA is currently the world's largest economy and is one of the two world powerhouses. Its currency is the most used currency in international transactions and is the world's foremost reserve currency. Several countries are also using the US currency as their domestic currency. The USA is the world's largest trading nation and the second largest manufacturer in the world, accounting for a fifth of global manufacturing outputs.

The USA features economic freedom to its private sectors with minimal regulations and government involvement. Property rights are strongly protected as well. With its abundance of natural resources, skilled labour and the largest domestic consumer base in the world, the USA is often ranked highly in the Ease of Doing Business Index and is one of the most competitive economies in the world.

The USA has free trade agreements with 20 countries and is also actively involved in regional trade agreements.

Its banking system is regulated by both federal and state governments, with five large multinational banks dominating the financial scene while accounting for more than half of the USA's economy.

The USA and China shares the most important bilateral relationship in the world, being the world's two powerhouses. China is the USA's third largest exporting partner while China is the USA's largest supplier of goods and services.

 

What solutions are available in United States?

Solution Description
Treasury Centres A centralised treasury is one way to reduce the tax burden, centralise risk management, improve liquidity and enhance yield on cash.
Interest Optimisation Maximise your interest yield from for your balances held with the bank.
Notional Pooling Cash balances in different accounts are notionally offset to derive the net balance, which is then used to calculate interest.
Sweeping/ Zero Balance Account (ZBA) ZBA are checking accounts with zero balances where funds are physically swept to eliminate excess balances and maintain greater control over disbursements.
In-house Banks (IHB) In-house banks provide corporate treasurers with another method of centralising and consolidating their business.
Intercompany loans Similar to bank loans, intercompany loans refer to lending between entities within the same group.

Corporate Treasury in The USA

The US is the world’s largest economy and has the world’s biggest debt markets. Here, we highlight some of the key benefits relevant to treasury and cash management in the US.

 

Financial Market Development

  • The World Economic Forum ranks the US fifth in the world for financial market development in The Global Competitiveness Report 2015-2016.
  • It states the US has an overall well-developed financial sector and sound financial markets and banks, as well as good access to financing through local equity markets.
  • The US has excellent business infrastructure with a highly skilled workforce, strong rule of law and international regulatory standards. The Global Competitiveness Report 2015-2016 ranks the US as the third-most-competitive market in the world.
  • There are no restrictions on capital flows in and out of the US.

 

Sophistication of Banking Systems

  • There are nearly 1,800 commercial banks in the US.
  • The US banking industry is closely linked to the UK, with the largest US banks holding nearly 70% of their on- and off-balance sheet assets in the UK (IMF).
  • The US is the second-largest foreign-exchange market in the world (Bank for International Settlements triennial global survey 2016).
  • The US has the largest bond market in the world, with US7.19 trillion of government debt and corporate bonds issued in 2016.

 

Regulatory Bodies

  • Banks in the US are regulated at both a federal and state level. At a federal level there are five industry regulators: the Federal Reserve System, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the National Credit Union Administration and the Office of Thrift Supervision. State-level supervision is carried out by individual state bodies.

 

Tax

  • Resident US companies are taxed on worldwide income, including capital gains, at a progressive rate ranging from 15% on income of up to USD 50,000, rising to 38% on income between USD 15 million and USD 18.3 million, with income above this threshold taxed at 35%. Foreign corporations are taxed on income from US business.
  • Companies are also taxed at a state and local level with rates generally ranging from 1% to 12%.
  • Tax rates on branch profits are the same as on corporate profits. An additional 30% branch profits tax may be imposed on profits from a US branch’s earnings.
  • Tax deferral enables US companies to delay paying tax on foreign subsidiaries’ profits until the earnings are brought to the US.
  • Sales tax varies from state to state and ranges from 2.9% to 7.25%. Local jurisdictions, such as cities and counties, can impose their own sales tax on top of this.
  • US companies can deduct 70% of dividends received from other US corporations from their taxable income.
  • Withholding tax is charged at 30% on interest and dividends. Rates range from 5% to 30% on dividends and 0% and 30% on interest where a tax treaty is in place.
  • A tax deduction is allowed at a federal, state and local level for interest expenses incurred by companies in carrying out business activities.
  • The US has tax treaties with nearly 60 countries and territories.

 

Benefits for Regional Treasury Centres

  • The US has highly developed, liquid, and efficient financial markets.
  •  It offers strong corporate governance.
  • The US time zones overlap with European trading hours.
  • Cash concentration services are available in the US. Notional pooling is not available.

 

Banking

 

Banking System

  • There are 1,799 commercial banks and 5,906 credit unions, the latter of which are mostly small and local and account for only 7% of total banking and credit union assets.
  • The large proliferation of small, local banks is mainly due to banking restrictions that limit bank holding companies from buying banks interstate.
  • The US’s highest-ranking 15 banks make up 53% of all bank deposits in the US.
  • The subprime crisis of 2007/08 had a major impact on the banking sector, leading to an estimated 500 banks failing. The Federal Reserve has since introduced financial regulation to strengthen banks and safeguard them from failure.

 

Bank Accounts

  • Residents: Foreign-exchange and domestic currency (USD) accounts are available both domestically and overseas. The foreign-exchange accounts are freely convertible.
  • Non-residents: Foreign-exchange and domestic currency accounts are available, however, foreign-exchange accounts are not commonly on offer, but when they are, they are freely convertible. 
  • Interest: Available on corporate demand deposit accounts (known as DDAs or corporate checking accounts). Interest is also paid on idle funds, known as earnings credit, and this offsets and thus reduces bank service charges. The earnings credit rate is calculated daily and there is a fixed banking fee, therefore, large deposits and balances tend to have lower overall banking fees.
  • Banks may charge deposit insurance on customers’ accounts, which is related to the bank’s risk as assessed and charged by the Federal Deposit Insurance Corporation (FDIC). However, it is not a mandatory charge to the customer and it is not a requirement of the FDIC.
  • Banks are required to provide account analysis statements on a monthly basis, which include a summary of treasury management services and cheque account activities.

 

Legal and Regulatory

  • The Federal Reserve System (the Fed) is the US central bank. It is split up into 12 District Federal Reserve Banks, each with responsibility for overseeing banking activity in their district. Each financial institution has an individual nine-digit ABA routing number that is used as an identifier for all financial transactions. ABA numbers may vary within the same bank according to the payment method being used or where the account was opened.   
  • As a federation of states, the US financial sector is supervised at federal and state level. At federal level, bank supervision is carried out by the Fed, the FDIC and the US Treasury’s Office of the Comptroller of the Currency (OCC). State-level supervision is done by individual state bodies.
  • A resident company is one that was created or abides by the laws of any US state or the District of Columbia.
  • The US has anti-money-laundering and counterterrorism-financing legislation in place. It is a member of the Financial Action Task Force (FATF) and has set up a financial intelligence unit called the Commissioner of Internal Revenue Financial Crimes Enforcement Network (FinCEN), which is a member of the Egmont Group.
  • Financial transactions in excess of USD 10,000 per day have to be reported to FinCEN.

 

Payments

 

Payment Systems

Fedwire

Funds Transfer System

USA's Real Time Gross Settlement (RTGS) system

  • Owned and operated by the Federal Reserve.
  • Connects the 12 Federal Reserve banks and depository institutions.
  • Processes high value and urgent domestic USD-denominated credit transfers (no value threshold).
  • Fedwire transactions fall into two categories: interbank and third-party transfers.
  • To participate, financial institutions must have an account with the Fed.
  • There are 7,866 participants.

 

CHIPS

(Clearing House Interbank Payment System)

 

Electronic clearing house database system

  • Operated by the New York Clearing House (privately owned).
  • Payments cleared and settled in real time.
  • There are 49 participants.
  • Open to all US commercial banks, and foreign and private banks with branches in New York City, provided they satisfy specific state and federal requirements.
  • Mainly used for international USD-denominated credit transfers, but can be used to clear high-value interbank transfers (international and domestic)(no value threshold).  
  • All CHIPS participants have a six-digit identifier code, the CHIPS UID (universal identifier), which contains all the information necessary to process transactions.

ACH

(Automated Clearinghouse)

Electronic funds transfer system

  • ACH operators in the US are the Federal Reserve System (FedACH) and the Electronic Payments Network (EPN).
  • Processes low value and non-urgent credit and debit transfers (no value threshold).
  • Credits used for consumer, commercial and government payments and debits for consumer bill payments.
  • Approx. 20,000 participants
  • Available to commercial banks, savings and loan banks and credit unions.

NSS

(National Settlement Service)

Multilateral settlement system

  • Operated by the Federal Reserve.
  • Processes private sector clearing arrangements through master accounts held at the Federal Reserve.
  • Settles and exchanges transactions multilaterally.
  • System reduces settlement risk by processing settlement same day.
  • There are approximately 17 NSS arrangements.

 

 

Payment Instruments

 

Credit Transfers

  • ACH credits are used for regular payments, such as payroll, supplier and government bills, as well as one-off or irregular payments. These can be low- or high-value payments that are not urgent.
  • Fedwire is used for high value and time-critical electronic transactions, referred to as wire payments, mainly for domestic USD-denominated payments, while CHIPS is used for cross-border USD-denominated payments, both same day. This form of payment is commonly used for interbank transfers and large payments between commercial and financial institutions.

 

Direct Debits (auto-debits)

  • Commonly used for low-value, regular payments such as utility bills.
  • Significant increase in the use of direct debit payments from the proliferation of cashless payments and online facilities.
  • Uses ACH debits to process with settlement next day.
  • FedACH SameDay Service allows the settlement of ACH debits on the same day.

 

Cheques

  • Are a common form of payment, but are increasingly being superseded by electronic payments for low- and high-value transactions.
  • Cheques are truncated before being processed and are settled either same day if they are ‘on us’ cheques (whereby the issue bank and deposit bank are the same) or up to five days if they are interbank.

 

Card Payments

  • The main credit cards in circulation are Visa, MasterCard, American Express, Discover and Diners Club.
  • Debit cards are either PIN-based (online) or signature-based (offline), with the latter being more popular, although the fees and risk are higher. Most payments using debit cards are settled via Visa and MasterCard.
  • Limited-use proprietary cards are commonly used, and these are usually issued by retail or oil companies.
  • There are approximately 425,000 ATM terminals and 12.7 million POS terminals. There are a few national network ATM providers, including NYCE, Pulse and Star.

 

Other Payment Schemes

  • Lockbox banking: Payments are made to a designated post office box where the recipient can retrieve the payment and process and deposit the funds into their bank account (see below).
  • Mobile wallets: These are reloadable mobile apps that hold credit and are used to make payments. They are becoming more popular and are forecast to continue to grow significantly in future. Apple Pay and Samsung Pay are two of the most prominent in the US.
  • Mobile shopping (mcommerce): Shopping using a mobile phone (as opposed to online) is still in its early stages in the US, held back by technological problems such as the current limitations of Wi-Fi or 3G/4G reception. However, it is forecast to make up 45% of the ecommerce market by 2020.
  • Prepaid debit cards: These are reloadable payment cards, many of which are linked to the major financial institutions, and these are also increasing in popularity. The most common in the US are American Express Serve®, Paypal™ Prepaid MasterCard® and KAIKU Visa Prepaid Card.

 

Cash Management

  • Notional pooling: This has limited availability in the US and cross-border notional pooling is prohibited.
  • Cash concentration: Resident and non-resident companies may carry out single and cross-currency cash concentration on a domestic and cross-border basis using one or multiple legal entities. Same-day funding usually defers to Fedwire and next-day funding, an ACH debit.
  • Collections:
  • Lockboxes – These are commonly used by companies for the countrywide collection of cash or cheque payments, in lieu of the popular use of cheques combined with a reliable, efficient post office service. The lockbox facility collects, processes and deposits payments for the company. Statements of all remittance information is passed onto the recipient company electronically, including electronic cheque images and returned items’ data, to be used in the receivables system. This service is offered by banks and non-bank institutions.
  • Accounts Receivable Conversion (ARC) – This is a type of ACH transaction which involves converting a cheque collected in a lockbox into an ACH debit, given advanced notice to the recipient (although with an option to opt out). This practice is only used in the case of consumer bill payments.
  • Back Office Conversion (BOC) – This is the conversion of cheques (maximum value of USD 25,000) into ACH debits by retailers and companies in their back offices from point of sale.
  • Remote capture and deposit service – This involves the scanning of USD-denominated cheques and using the electronic images to use as substitute cheques to deposit funds into an US bank account. All major banks offer this facility and it is a method popular with retailers, brokerages and other types of companies.
  • Cross border: Cross-border payment instructions are usually delivered through SWIFT or CHIPS. There are several payment methods:
  • International ACH Transaction (IAT) – The IAT Securities and Exchange Commission (SEC) code and the National Automated Clearing House Association (NACHA) rules require every ACH payment to enter or exit the US as an IAT and are therefore subject to US Office of Foreign Assets and Control (OFAC) screening. FedACH deals with ACH credits from the US to Canada, Mexico, Austria, Germany, the Netherlands, Panama, Switzerland and the UK. FedGlobal ACH Payments deals with ACH credit to 35 countries across Europe and Latin America. ACH payments with Canada are dealt with via a payments system developed by NACHA.
  • Short-term investments:
  • Time deposits – These are available with maturities from seven days to one year in USD with a maximum value of USD 150,000 per bank.
  • Commercial paper – These are available with maturities from one day to 270 days and an average term of 30 days in USD and with a minimum value of USD 100,000.
  • Certificates of deposit – These are available with maturities from seven days to over a year (typically three- to six-month terms) in USD and with a minimum value of USD 100,000.
  • Treasury bills and notes – These are issued by the US Treasury Bureau of Public Debt and must have a minimum value of USD 100.
  • Banker’s acceptances – These are a popular investment and have maturities from one day to six months.
  • Repurchase agreements – These are available overnight.
  • Money-market funds – These are available with a minimum value of USD 1,000.
  • Custody and securities settlement:
  • Depositories – There are two depositories in the US: the Depository Trust Company (DTC) and the Federal Reserve Bank. The DTC is the central securities depository subsidiary of the Depository Trust and Clearing Corporation (DTCC), which is responsible for the settlement of all equity, corporate and municipal debt trades and money-market instruments. It also provides custody and asset servicing for securities from 131 countries and territories.
  • Central counterparties: The central counterparties in the US are:
  • National Securities Clearing Corporation (NSCC) – This is the central counterparty for equities, corporate and municipal debt, American depository receipts, exchange-traded funds and unit investment trusts.
  • Fixed Income Clearing Corporation (FICC) – This is also responsible for the Fixed Income Clearing Corporation Government Securities Division (US Treasury and agency securities) and the Fixed Income Clearing Corporation Mortgage-backed Securities Division (mortgage-backed securities).
  • LCH Clearnet LLC.
  • ICE Clear.
  • The Options Clearing Corporation.
  • Chicago Mercantile Exchange Inc.
  • Minneapolis Grain Exchange Inc.
  • Settlement cycle;
  • T+2 for equities, corporate bonds and municipals – In 2017, the Securities and Exchange Commission shortened the standard settlement cycle by one day, from T+3 to T+2.
  • T+0 or T+1 for money market instruments and government securities.

 

Demographics

Recent developments

 

Digital Competitors Threaten Large Banks

Large banks are in danger of losing their small and medium-sized enterprise customers to digital competitors. Although 80% of SMEs in the US said they were happy with their provider, many were considering switching banks, particularly those who banked with larger financial institutions, according to a study by financial services technology group FIS. Common reasons for switching were uncompetitive fees, dissatisfaction with products and services, outdated bank processes and being declined a loan.

Read more about the development here

 

Regional Banks Face Amazon Challenge

Regional banks face a growing challenge from online retail giant Amazon, which is in early discussions about launching a checking account product for consumers. Amazon already acts as a lender to small businesses, and the launch of products aimed at retail consumers would move the group’s offering further into the core area of smaller banks. Banks are responding to the potential challenge by becoming more digitally focused and increasing partnerships with or acquisitions of FinTech startups.

Read more about the development here

 

JPMorgan to Use Blockchain for Cross-border Payments

JPMorgan is piloting the use of blockchain technology to speed up the processing of cross-border interbank payments. The bank has filed a patent for the application of the technology on its enterprise-ready distributed ledger and smart contract platform Quorum. It has invited other large banks to join the new Interbank Information Network alliance to try out the platform. The use of the technology will slash transaction times from weeks to hours.

Read more about the development here

 

 

This Market Profile is brought to you by DBS. Get in touch with us for further insights on doing treasury in The USA and take advantage of our innovative solutions to empower your business. Click here to find out more.

 

 

Sources: IMF World Economic Outlook database, October 2016; CIA World Factbook; Trading Economics; PwC

Please note that the information contained in this document, assembled based on information available and accurate as at July 2017, is of a general nature only and is subject to change whether for economic, political, social or other reasons.

 

Last updated on 07 Jun 2018