Q&A: What is an 822 File?

When I thought to write Q&A posts I assumed I'd run out of questions to answer but, from outside the field, very few Bankers or Treasurers understand Account Analysis so it has given me more to write about and - hopefully - this space remains informative.

What is an 822 file?

An 822 file is an EDI (Electronic Data Interchange) transmission of a bank account statement; account balances, service activity, charges, service fees, applicable rates, adjustments, etc.  Also included is basic information such as the bank itself, its routing and transit number, the company/account holder, account names, account numbers, classification of account levels and various service and charge classifications.  The vast majority of bank account holders receive a paper and/or EDI 822 file monthly.

Which financial institutions can produce an 822 file?

Most of the big banks can produce an 822 file and a couple does so very well as far as adhering to the standard format.

A common misconception is that the 822 file shall always match the paper statement.  In theory, the same data should be translated from common layman's terms and dollar amounts found on the paper statement to an EDI format without altering the data itself.  In the event this does not happen, it is likely the EDI language is not understood and/or its format was not followed.

EDI is a terminology/format that is not as common as I'd originally thought.  For example, if they place the word "CREDIT" in any segment on the 822 file it will not read as "CREDIT" in EDI terminology. To communicate successfully, those responsible for the construction of the EDI 822 file must be fluent in the EDI 822 terminology and standard.

Without a good understanding, your file may be called an 822 but it's really just an alphanumeric file with special characters that Person A believes translates into something that Person B cannot comprehend.

Happy Analyzing!

Q&A: Adjustments

Q&A: Every question deserves an answer...

Balances, charges, and fees are sent on an EDI 822 file.  What happens if something was sent incorrectly or omitted entirely?  Usually, a bank sends a restated 822 file with the mistakes now corrected.  But, when a restated 822 file is not sent, any adjustment is made.

Adjustments (ADJs) are made on the bank's end, sent on the EDI 822 file, and then applied to the appropriate balances.

What is sent on the EDI 822 file?

From my end, I cannot see when the bank has made an adjustment until it is sent on the EDI 822 file.  At that point, I can tell...

1. Which charge/balance the ADJ is for
2. The amount of the ADJ
3. The original charge/balance amount
4. Whether the ADJ is for the current or prior period
5. When the original transaction requiring the ADJ occurred 
6. How the ADJ is being applied

Adjustments can be sent for either a ledger balance, float balance, or service charge.  All three have specific ways in which they must be formatted on the EDI 822 file according to AFP standards to signify to which of the above 3 areas the ADJ is for.  But, banks cannot just send the ADJ information alone.

Application is important...

There are 2 balances in particular whose sole purpose is to apply ADJs for either the ledger or float balances.

• Balance Adjustment – Prior Period Ledger
• Balance Adjustment Prior Period Average Float

Let's say your EDI 822 file has an ADJ for Ledger.  Based on the information sent you can see how ledger was adjusted, by how much it was adjusted, and for which period the adjustment applies.  The same goes for any float adjustment.

For service ADJs, these should be sent as service line items in the account's service detail section of the EDI 822 file.  Some are sent with "credit" or "adjustment" in the service description with the charge sent as a negative or positive to deduct that amount from the total service charges due.  But, each bank is different.

Without sending Balance Adjustment – Prior Period Ledger for a ledger ADJ, Balance Adjustment Prior Period Average Float for a float ADJ, or an adjustment service line item - the ADJs will not apply towards your final balances/charges so the information on the 822 file becomes nothing more than a memo entry.

Happy Analyzing!

*Have an Account Analysis question? Send me an email girlmeetaa@gmail.com

DDA Balance Reserve Requirement (6/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

DDA Balance Reserve Requirement

DDA means Demand Deposit Account.  A DDA is essentially your typical non-interest-bearing checking account you can open at just about any bank.

Prior to the Great Recession, the DDA Reserve Requirement balance for corporate accounts was ~10% of the Balance Subject to Reserve.  Balance Subject to Reserve is the final balance used by financial institutions to compute the balance percentage they will deduct for any reserve requirement.  This deducted amount is not subject to the Earned Credit Rate (ECR) of the account and thus not eligible for Earnings Allowance.

Why is this 10% reserve requirement (RR) deducted at all?

The Federal Reserve (Feds) required financial institutions to place 10% of their total deposits on reserve.  This 10% requirement must be sat aside at the Fed so it is exempt from any interest-bearing activities the bank would have otherwise invested it in. Most financial institutions make money off the deposits of their account holders.  You deposit funds into your account at Bank XYZ.  Bank XYZ then takes those deposited funds and loan them out, at interest, to some other entity thus making money off your money you've allowed the bank to "hold" for you.  If the funds are not loaned out, they are invested in various securities again potentially earning the bank a return off your money.

When the Feds implemented the 10% RR, this left the bank access to only 90% of their total deposited funds since they could no longer invest the other 10%.  The banks were losing out on the investment opportunities and potential earnings for this 10% so instead of absorbing that loss they passed that loss down to their corporate account holders.  Since the bank could not benefit from earning interest on the entire 100% of their deposits then neither would their corporate demand deposit account holders.  This 10% deduction from the account holder's end is shown in the DDA Reserve Requirement balance which is 10% of the Balance Subject to Reserve balance.

So, what changed the 10% RR rules?

For some time, Regulation Q prevented corporate DDA holders from earning interest on their bank account balances.  But, they are allowed an ECR which does not violate Reg Q since it is considered a "soft" interest.  According to Wikipedia, Reg Q was enforced from 1933 following the Glass-Steagall Act to 2010 when it was repealed by the Dodd-Frank Act.  What was also changed during the Great Recession was the Feds now allowing financial institutions to earn interest on their 10% RR.

No longer were financial institutions required to forego earnings on those funds sitting at the Fed.  This now gave 100% of the bank's deposit balances the right to earn interest which made it difficult for those same banks to justify the 10% RR they had passed down to their corporate DDA holders. This change was eventually reflected on the EDI 822 files when the DDA Reserve Requirement balance was sent as $0.00.  When one bank made the RR change there was a "hooray!" heard across the land (the small Account Analysis land).  This resulted in a little nudge to other corporate DDA customers asking them, "why isn't your bank now subjecting 100% of your balances to ECR? Hmm."

Current day Reserve Requirement calculations...

The following balances may play a part in the DDA Reserve Requirement calculation:

• Compensating Bal Req-Credit Facility-Subject to Reserve
• Other Balance Subject to Reserve

Both Compensating Bal Req-Credit Facility-Subject to Reserve and Other Balance Subject to Reserve may be sent but I don't usually check for them unless there's a calculation issue which will cause other subsequent balances to be off.

We have already discussed this balance which, as its name states, is the balance subject to the reserve:

• Balance Subject to Reserve

The balance which displays any reserve requirement deduction is:

• DDA Balance Reserve Requirement

This topic opened the door for both soft and hard interest to be seen on the EDI 822 Account Analysis files.  I have seen only one thus far so not enough data to compile an informative blog post.  We shall see...

Happy Analyzing!  

Q&A: Netting vs Summing Fees

Q&A: Every question deserves an answer...

Since both the Netting and Summing of fees involve an account's earnings allowance I'll start there.

Earnings Allowance is the dollar equivalent of the credit rate earned for the balances held in your account.  However, this earnings allowance can only cover analyzed charges so the netting or summing of fees will only involve these particular service charges.

When the earnings allowance of an account is more than the analyzed charges due for that same account, the account has an excess earnings allowance balance. 

When the earnings allowance of an account is less than the analyzed charges due for that same account, the account has a deficit earnings allowance balance.

Whether an excess or a deficit, this balance is shown as either Excess/Deficit Earnings Allowance or Excess/Deficit Earnings Allowance-Adjusted. 

What's the difference between Ex/Def EA and Ex/Def EA Adj?  

Ex/Def EA considers any adjustments to Earnings Allowance or Analyzed Charges.

So...

        Earnings Allowance
less Analyzed Service Charges
       Ex/Def Earnings Allowance

No adjustments? Then Ex/Def EA Adj should equal Ex/Def EA.

Adjustments? Then the difference between Ex/Def EA and Ex/Def EA Adj should equal the total adjustment amount.

What is Netting Fees versus Summing Fees?

If a financial institution allows a company to apply excess earnings allowance from one account to the deficit earnings allowance of another account, this is called Netting Fees.

If a financial institution does not allow a company to apply excess earnings allowance from one account to the deficit earnings allowance of another account, this is called Summing Fees.

Both of these scenarios involve two balance:

Excess/Deficit Earnings Allowance-Net Settlement Period to Date; the last place to hold a sign to indicate an excess or a deficit earnings allowance.

Excess/Deficit Earnings Allowance Due This Statement; indicates whether a Netting or Summing relationship exists since all excess balances zero out leaving only deficits.

Whether a bank does or does not allow netting, the excess for an account will appear as a positive value in Excess/Deficit Earnings Allowance-Net Settlement Period to Date while a deficit value will appear as a negative value.

If the bank does not allow netting, the excess for an account will appear as $0.00 in Excess/Deficit Earnings Allowance Due This Statement.  But, a deficit for an account will appear as an absolute value in Excess/Deficit Earnings Allowance Due This Statement since this balance can only carry a positive value.

Whether a bank does or does not allow netting, the excess for an account will appear as a positive value in Excess/Deficit Earnings Allowance-Net Settlement Period to Date while a deficit value will appear as a negative value.

Excess/Deficit Earnings Allowance Due This Statement tells the relationship...

Most know that numbers can tell a story; in this case, so does how those numbers appear in certain balances.  Have an Account Analysis question? Send me an email girlmeetaa@gmail.com

Happy Analyzing!

Average POSITIVE Collected Balance (5/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

Average POSITIVE Collected Balance

This balance may be pretty straightforward since its value is computed as Average Net Collected Balance plus Average Negative Collected Balance.

         Avg NET Collected Balance
plus  Avg NEG Collected Balance
         Avg POS Collected Balance

What is not included in the computation above is Balance Adjustment Prior Period Avg Float.  This balance, as its name states, is for any adjustments made to your Float balance from the prior period.  Since most adjustments from prior periods are sent during the current period, this balance will fall between the Avg Net Collected and the Avg Neg Collected.

        Avg NET Collected Balance
plus Balance Adj Prior Period Avg Float
plus Avg NEG Collected Balance                
        Avg POS Collected Balance

The balance in red because, as with all adjustments, an account may not have any from a prior period so this balance may be zero if it is sent at all.  If sent as a non-zero value, this balance may either be a negative or positive value which determines how its calculation is treated in the above equation.

Happy Analyzing!

**Note: Average NET Collected Balance has been updated**

Average NEGATIVE Collected Balance (4/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

Average NEGATIVE Collected Balance

This balance is sometimes referred to as Collected Overdraft (OD) Balance.  To compute this balance, the sum of the daily end-of-day uncollected balances (negative collected) in the analysis period is divided by the number of days of the analysis period.  Taking the sum divided by the days in period is what computes the average value for this balance.  Obviously, this balance will equal zero if there were no collected balance overdraws during the analysis period.

This balance should always be sent as a positive value (no negative sign).

Since this balance directly corresponds to any account ODs which occurred during the analysis period, you can expect to see corresponding service line items on the account statement.  Some example OD-related service descriptions are:

• Negative Collected Balance Fee
• Daily Overdraft Occurrence Fee
• Overdraft Interest
• Drafts Handling Charge
• Daily Ledger Overdraft
• NSF Items Paid/Returned

Happy Analyzing!

What are Waived Charges?

From my experience, banks send service charges one of four ways: analyzed, hard, waived, or debited.  Usually, most bank services are sent as analyzed charges on an account analysis statement but what are waived charges?

Waived means the charge for this bank service is not charged to the account holder so although the charge may be sent on the account analysis file, the charge is not part of the account's final billing invoice.

Waived Charges are sent on an account analysis statement as Service Charges - Line Item Waived. All waived charges for one account during a particular time frame should be shown in this balance. 

Service Charges - Line Item Waived is a memo balance. 

It serves only to display the total of all waived service charges for the period.

But, there is also another balance called Service Charges Waived.  While this is a memo balance, a sent value for this balance will be included in the calculation of bank services to compute the final total service charges due this statement. 

It creates a clean audit format where the account holder can track the calculations from beginning to end.

Most financial institutions do not send or know how to send waived charges.

One of the common complaints I get from customers is that their paper statement does not match the data captured from their EDI 822 file.  Once I check the raw data for sent service charges (which ones are analyzed, which ones are hard, etc) against the balances sent by the bank, it solves the mystery.  Although there are specific AFP balances for each service charge type, financial institutions usually don't know they exist.  This results in showing the bank how the charges are formatted on the file versus how they should be formatted on the file according to the AFP implementation standard for the EDI 822.

Note: one clue that a service charge may be waived is if the bank sends the charge as $0.00.  There may be both a sent price and a sent volume but the sent charge is $0.00.

Happy Analyzing!