Economic and Political Environment
The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $47,400. In this market-oriented economy, private individuals and business firms make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off surplus workers, and to develop new products. At the same time, they face higher barriers to enter their rivals' home markets than foreign firms face entering US markets.
US firms are at or near the forefront in technological advances, especially in computers and in medical, aerospace, and military equipment; their advantage has narrowed since the end of World War II. The onrush of technology largely explains the gradual development of a "two-tier labor market" in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits. Since 1975, practically all the gains in household income have gone to the top 20% of households.
The war in March-April 2003 between a US-led coalition and Iraq, and the subsequent occupation of Iraq, required major shifts in national resources to the military. Soaring oil prices between 2005 and the first half of 2008 threatened inflation and unemployment, as higher gasoline prices ate into consumers' budgets. Imported oil accounts for about 60% of US consumption. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups.
The merchandise trade deficit reached a record $840 billion in 2008 before shrinking to $506 billion in 2009, and ramping back up to $630 billion in 2010. The global economic downturn, the sub-prime mortgage crisis, investment bank failures, falling home prices, and tight credit pushed the United States into a recession by mid-2008. GDP contracted until the third quarter of 2009, making this the deepest and longest downturn since the Great Depression. To help stabilize financial markets, the US Congress established a $700 billion Troubled Asset Relief Program (TARP) in October 2008. The government used some of these funds to purchase equity in US banks and other industrial corporations, much of which had been returned to the government by early 2011. In January 2009 the US Congress passed and President Barack OBAMA signed a bill providing an additional $787 billion fiscal stimulus to be used over 10 years - two-thirds on additional spending and one-third on tax cuts - to create jobs and to help the economy recover. Approximately two-thirds of these funds were injected into the economy by the end of 2010.
In March 2010, President OBAMA signed a health insurance reform bill into law that will extend coverage to an additional 32 million American citizens by 2016, through private health insurance for the general population and Medicaid for the impoverished.
In July 2010, the president signed the DODD-FRANK Wall Street Reform and Consumer Protection Act, a bill designed to promote financial stability by protecting consumers from financial abuses, ending taxpayer bailouts of financial firms, dealing with troubled banks that are "too big to fail," and improving accountability and transparency in the financial system - in particular, by requiring certain financial derivatives to be traded in markets that are subject to government regulation and oversight. In November 2010, in an attempt to keep interest rates from rising and snuffing out the nascent recovery, the US Federal Reserve Bank (The Fed) announced that it would purchase $600 billion worth of US Government bonds by June 2011.
Key economic indicators:
- Population : 313,232,044 (July 2011 est.)
- GDP (purchasing power parity): $14.72 trillion (2010 est.)
- Per capita GDP: $47,400 (2010 est.)
- Real GDP growth: 2.7% (2010 est.)
- Unemployment: 9.7% (2010 est.)
- Public debt: 58.9% of GDP (2010 est.)
The United States has a dual banking system that is regulated at the federal level and at the individual state level. At the federal level, three agencies share bank supervision: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Banking boards and commissions regulate at the state level.
Acting as the Central Bank, the Federal Reserve performs a variety of functions, including operator of the payments system, bank regulator, lender of last resort and controller of the money supply.
Traditionally, the financial environment has been segmented with barriers for banks to conduct business across state lines and product offerings. The Glass-Steagall Act of 1933 prohibited the combining of banks, insurance companies and securities entities under the same corporate umbrella. Most major banks are structured under a holding company umbrella enabling them to offer investment services, insurance products, etc.
In 1999 these restrictions were broken down and the regulatory environment has been relaxed since then. However, national banks may still consist of many individual operations and the degree to which they are linked operationally and technically is still subject to officially imposed barriers.
Although there are many banks, the branch density of individual banks is low, and commercial banking operations often involve the customer connecting physically not with a branch but an operations centre – using courier or truck services organised by the bank.
requires banks to leave a percentage of certain account balances on their books in a non-interest earning account with the Federal Reserve.The FDIC insures deposits up to $100,000 for each depositor. To cover this insurance, premiums are assessed on demand deposit and savings accounts. Balances at the end of a quarter are used to calculate premiums and banks charge customers and make required payment to the FDIC.
prohibits payment of interest on commercial demand deposit accounts. However, customers may be given earnings credit for balances left in DDA accounts, which can be used as an offset for bank fees, including cash management fees. Demand deposit accounts (current accounts) are intended to facilitate operational activities and are not to be used as a form of finance through overdrafts.
Overdrafts are penalised and expense charged to the customer.Corporate customers may hold many current accounts. An account is required at every bank where customers intend to do business.
Customers generally do not hold accounts in currencies other than USD. This is an outcome of the combination of Regulations D and Q (no DDA interest), timing, and the absence of investment vehicles in the respective currencies that are as attractive as the ones available in the currency centre or in London/Singapore. Non-USD dollar and/or Eurodollar business is generally conducted outside of the U.S., or in special Edge Act subsidiaries or an IBF. These entities can transact certain business with corporate customers without certain restrictions of the FDIC or certain provisions of Regulation D.
Features of the U.S. Banking System
Electronic payment system is well-developed enabling wire and ACH transactions across the large number of banks.
Cheque usage continues to be high compared to other developed countries.
Developments to improve the efficiencies and timeliness of cheque clearing have introduced features such as electronic cheque presentment, MICR Capture at Point of Sale, and distributed electronic cheque conversion.
The recently passed “Check Clearing for the 21st Century” Law will drive additional development to move from paper clearing and delivery.
Technology supports risk management tools and greater control for the customer by providing capabilities to match cheques against issue file, images of cheques and matching of payee names.
Account openings and ongoing activities are subject to increased due diligence under regulations regarding Anti-Money Laundering and the USA Patriot Act.
Cash Management Features
Cash management practices and products in the United States have been largely driven by particular features of the banking structure, mail system and payment conventions. Although changing as a result of recent developments and legislation, there are key differences that distinguish the U.S. from other developed countries:
The United States has a large number of financial institutions (30,000+ consisting of approximately 8,000 banks and another 22,000 credit unions, savings and loans, and “non-bank” financial institutions)
No comprehensive nationwide banking organisations
Expansive geography with significant differences in mailing times across the country
Cheques are a prevalent way to pay bills
No bank giro credit system allowing receiving payment without holding an account
Dictates reserve requirements to be held by banks in an interest-free account at the Federal Reserve for different types of deposits.
Establishes procedures, duties and responsibilities for check collection and settlements.
Prohibits paying interest on corporate demand deposit accounts.
Establishes rules for speedy collection and return of checks, as well as standardised endorsements to follow in depositing and clearing checks.
Uniform Commercial Code:
Generally uniform laws adopted by states that establish rules for the collection and payment of wire transfers, checks and other items.
Many of the cash management services subsequently developed by banks, such as lockbox, controlled disbursement, zero balance and sweep accounts were introduced to minimise the customer impact of weaknesses in the system or to address regulatory requirements.
It is important that account holders have a good understanding of their business activities and payment flows. This will assist in putting an effective and advantageous solution set in place. Monitoring of cash flow and funds availability should be used to explore further features to enhance and maximise business benefits.
Few banks are positioned to effectively support a broad and deep range of business needs across the country.
Corporations are subject to withholding tax on dividends and interest payments of 30%. Income deriving from foreign operations that may already have been taxed in another country could qualify for relief under treaties held between the United States and a number of countries worldwide.
Central Bank Reporting
The Federal Reserve imposes no reporting requirements on corporations.
Foreign Exchange Controls
There are no restrictions on moving foreign currency in and out of the United States.
Commercial banks offer a variety of electronic services for their customers, depending on level of activity and technology deployment at the customer site.
Product offerings continue to be broadened, running the gamut from simple funds transfer initiation to a treasury workstation, providing more than transaction processing and reporting tools.
Depending on the customers’ business needs, banks have basic products in their offerings and those are comparable to electronic solutions in other countries.
Not all banks can address the increased demand for Internet access and imaging capabilities, but these key needs are driving further developments or are affecting banks’ competitiveness in the market.
Payments and Collections
Payment instruments in the United States fall into four categories:
Cash continues to be the most widely used payment method, followed by cheques with yearly volumes of about 17 billion. The largest share in terms of dollar value is transferred electronically using one of three networks:
- Automated Clearing House (ACH)
- Clearing House for Interbank Payment System (CHIPS).
Often the business situation determines the method of payment. A time-critical transaction such as a securities settlement or a real estate closing, or simply a very large dollar amount, may require a wire transfer with same-day value. Typically, a supplier sends an invoice to the buyer and in return receives payment by cheque. The cheque is usually accompanied by invoice information, including discounts and deductions taken and the shipping confirmation. Capturing this accompanying information determines, to a large degree, the method of settling the invoice.
Cheques can be cleared in several ways:
- On-Us Check Clearing
- Clearing Houses
- Federal Reserve
- Correspondent Bank Relationships
Availability of funds is determined by the end point, i.e. the bank that the check is drawn on, and time of deposit. Banks publish availability schedules to assign collected balances vs. actual balances. These schedules can differ based on customer volumes, as the float generated through check deposits has value and is used in pricing decisions.
Customer perspectives differ whether the cheque is received as payment or customer is issuing cheques to make payment. Cheque collection activities differ from disbursement activities and objectives. Banks have developed products and features to address both sets of business needs around customers’ receivables and payables activities.
The most basic approach is for customers to receive cheques in the mail by their payers and then deposit those cheques in their bank accounts. The bank will submit the cheques into the U.S. clearing system and customers receive available funds based on the applicable availability schedule.
Cheques returned unpaid will be debited to the customer’s account. Returns must be handled in a timely fashion and are governed by Federal Reserve Regulation CC and by state laws (Commercial Code). The returning bank has until midnight of the day following receipt to initiate sending the return item back to the bank of first deposit. This rule is from the UCC.
Regulation CC has a different/additional test – the 2-day/4-day test. A paying bank has to return an item in an expeditious manner so that the depository bank would receive a local item no later that 4 p.m. local time 2 days after the item was presented to the paying bank and 4 days after for non-local items.
Cheques returned due to insufficient funds can be resubmitted for payment one time; if they are resubmitted via ACH, they may be resubmitted twice. Cheques that are returned because of a closed account or stop payment or similar reason are returned to the customer.
The timeline from issuance of check to receiving available funds can represent a substantial opportunity cost in a situation where there is a large volume of cheques or cheques of large value. Efforts to reduce collection time introduced lockboxes.
A lockbox is a unique post office box assigned to a corporation by the bank, bypassing mail delivery to the customer. Cheques are picked up and processed by the bank and the appropriate availability is assigned to customers, based on the cheques included in the deposit.
Lockboxes have developed into one of the most important cash management tools, reducing mail, processing and availability float by choosing a receipt location and point of entry to the clearing system as close to the location of the payers as possible.
A lockbox also offers control benefits such as providing an external audit trail and enabling the segregation of cheque processing from other account receivable operations.
Electronic access to information on lockbox transactions and files to update receivables systems are commonly available. Customers also have the option to receive physical photocopies of the cheques and accompanying paperwork. Images of cheques and supporting documents are emerging as a standard product offering.
This is a value add to the customer, as it assists in cash application, a tool that lets customers do a quick inquiry, and as an archival tool.
After reviewing their receivables customer base and weighing financial benefits, companies may choose to operate lockboxes at multiple locations to maximise benefits, even if this requires holding multiple accounts. There is no standard solution and a customer should look for a bank that can support an optimal solution through their lockbox network capabilities.
The customer perspective on issuing cheques is different from collections, although the same float components exist. Customers are concerned with paying bills on time, receiving available discounts, avoiding late fees, or overdrafts, maximising usage of funds, minimising idle balances and, increasingly important, managing the risk associated with fraudulent cheque activities.
Customers have the option to issue cheques in-house or have a bank or external provider generate the cheques:
- At customer site by manually issuing cheques on bank-issued cheque stock*
- At customer site issuing system-generated cheques on bank-approved cheque stock*
- At bank by transmitting data file to bank for issuance of cheques at bank site
*Issuance at customer site may allow for inclusion of more extensive remittance information.
Customers can also determine where the cheque will clear to control the length of clearing time and possible float gains. They can:
Use a main DDA at the bank to issue all cheques regardless of geographic destination
Use DDAs at controlled disbursement sites, to maximise clearing times and gain on float.
When working within a controlled disbursement arrangement, there are two cheque clearing notifications per day. This information is available through current day reporting. This takes place early in the day, allowing corporate treasurers the reassurance of a funding position that will not be altered by additional debits later in the day.
Early notification also supports more favourable funding decisions. Any balances at controlled disbursement sites are zero-balanced into the parent DDA.
Banks also offer account reconcilement services allowing the customer to outsource this responsibility. In addition, an electronic feed of disbursement transactions to the customer’s receivables system is commonly provided.
Storage solutions are moving from the original cheques to include imaging and CD-ROM solutions. Additional features that add value have been developed for disbursement accounts to benefit companies in managing risk objectives.
Positive Pay service:
This allows the matching of presented cheques against issued cheques. Companies pre-advise the bank by supplying an issued cheques file. Any mismatched items are identified and then referred to the customer for decision on honouring the item or returning it in a timely manner.
Further risk management tools are emerging to expand positive pay features due to the demand to address high level of fraudulent activity associated with cheques.
Payee Positive Pay is possible through now readily available technology. Banks will compare the payee name on the cheque received with the payee information supplied as part of the issue file. A check with altered payee information can be detected and consequently returned.
While not every fraudulent activity can be caught, these features are adding value to a customer’s control environment. Control features such as positive pay, reporting timeliness of disbursement totals, accuracy of processing and reconcilement services are key considerations when choosing a disbursements bank.
The Federal Reserve provides the Fedwire Funds Transfer Service, the U.S. real-time gross settlement system in which more than 9,000 depository institutions participate. Participants can initiate and receive payments. Fedwire offers finality of payment.
This system handles large-value, time-critical payments, such as the purchase, sale, and financing of securities transactions; the disbursement or repayment of loans; and the settlement of real estate transactions. The Fedwire system operates from 12.30 a.m. to 6.30 p.m. E.T. Monday through Friday.
The system is reliable and secure but relatively expensive for companies when compared to cheques and ACH transactions.
Corporate customers will typically use electronic payment initiation software or the telephone to initiate a payment with their bank.
The bank will execute the payment with the Federal Reserve provided funds are available in the customer’s account.
The Federal Reserve has the responsibility to facilitate settlement of funds between the sending bank and the receiving bank/beneficiary bank.
This settlement can cross Fed districts. The receiving bank will credit the beneficiary’s account on its books and advise the customer accordingly.
Although the Fed operates until 5:30 p.m. CT, customer cut-off times are typically around 4:30 p.m. CT to allow for processing prior to the end of day.
CHIPS (Clearing House Interbank Payments System)
Another large-dollar payment option is CHIPS, an independent funds transfer network operated by the New York Clearing House. Established in 1970 to substitute electronic payments for paper cheques arising from international dollar transactions between foreign and American banks, it is also used for payments under letters of credit and documentary collections and for third party transfers.
CHIPS handles 90% of the world’s interbank United States dollar payments by value.
CHIPS have implemented a real-time netting system with finality when CHIPS releases the payment. Member banks, approximately 60 in number, transact payments all day and the individual positions with CHIPS are settled through the Fed at the end of the day.
CHIPS provide a viable alternative to Fedwire, especially for interbank transactions and payments between members. It is not a payment method specifically requested by corporate customers, but rather an option for banks to settle U.S. dollar payments.
ACH (The Automated Clearing House)
ACH is an U.S.- wide system, which supports batch processing of electronic files of credit and debit transfers. The network is comprised of regional processors, many operated by the Fed, and interbank associations as well as private-sector processors.
The National Automated Clearing House Association (NACHA) is a membership organisation, which has established rules, standards and procedures governing the network. Standard ACH formats have been developed for consumer and corporate payments.
The Federal Reserve is expanding internationally with delivery into Canada currently available; introductory delivery services to certain European countries will be available by the end of 2003.
ACH transactions are typically of low value, although higher values are becoming more accepted as well. ACH transaction types support both payments and collections. Value date is 1 or 2 days forward.
The acceptance by consumers has increased and the most common ACH credits are direct deposit payroll and payments to vendors and contractors. Common ACH debits include insurance premiums, mortgage payments and other bill payments.
Corporations use the ACH because it provides a low-cost and convenient alternative to cheques or Fedwire transfers. Potential benefits to the payee include reduction in float, reduction of receivables processing cost compared to cheques.
However, there are start-up costs to put the software and hardware environment in place.
Cards are widely used by consumers and accepted in the U.S. There are card types that are emerging as effective payment methods for corporations as well.
Credit Cards enjoy widespread acceptance by retailers and are frequently used. Customers benefit from attractive rates in a competitive market. Some cards have reward programs associated with them or support organisations. While credit cards are mostly used by consumers, businesses are now also using cards to make payments.
Debit Cards are not as widely used in the United States as they are in other developed countries, although inroads are being made to replace cash and check transactions.
Smart Cards are being deployed in a variety of business situations as stored value cards as a way to reduce cash transactions and/or reducing expenses by providing ability to reload.
Purchasing Cards, also referred to as procurement cards, have been delivered high value to corporations. A purchasing card programme will allow card payment for approved vendor purchases covering supplies, equipment or services. A significant reduction in purchasing expenses can be achieved.
US Legal Entity Types - Mainstream
|Legal entity type||Constitutional documents|
- Certificate of incorporation
|Limited liability company|
- Certificate of incorporation
- Limited liability company agreement
|Limited liability partnership|
- Certificate of limited partnership
- Partnership agreement
US Legal Entity Types - Non-mainstream
|Legal entity type||Method of constitution||Documents|
- Stock Corporation
- Non-stock corporation
- Close corporation
|Sub-types of Corporation||Same as for a Corporation|
US Legal Entity Types - Other legal entity types that exist:
|Other legal entity types|