The transfer of funds between banks, or from one branch to another, is a serious source of expense, a fact which is frequently overlooked by the banks in attempting to meet competition and the demand of the public for "par facilities."

Generally speaking, out of every $100 deposited, over $90 consists of checks; the balance consists of bank bills and legal tenders, the species is negligible, except in special cases. All the cost of the special machinery required for the handling of this vast volume of checks and drafts, for their transfer from bank to bank in the same city or in outside cities, is borne by the banks. Local transfers are handled without any remuneration and, in the case of outside transactions, at a charge frequently insufficient to cover the actual expense involved. True, this one feature may be considered but a small part of a bank's business. It is usually looked upon as one not worth considering. Yet, in acting as a clearing house in this connection, the banks of Canada render an inestimable service to the country, at a cost of millions of dollars annually.

The average amount of outstanding items held over night for the daily local clearings of the Canadian banks is over $70,000,000. This offsets nearly three-fourths of the average circulation of the banks. At six per cent interest it represents over $4,000,000 annually. In addition to local clearings there is a much larger number of items in transit between branches and correspondents, some of which business is transacted at a loss.

A customer of a Toronto bank, for instance, meets a note by depositing a check on another bank in Toronto; interest stops when the note is charged up to his account. But his bank does not receive returns for the check thru the clearing until the following day, a loss of one day's interest. If the check had been drawn on a bank in Montreal it would be two, or in some cases three days (where Sunday intervenes) before the branch at Montreal would receive clearing returns for the item. Even if the check were only for $100 the loss at six per cent would amount to over 3 1/4 cents. Broadly speaking, a day's interest at six per cent is equivalent to a little over one sixty-fourth of one per cent. It is important to bear in mind that a check or sight draft outstanding seven days has exhausted the equivalent of one-eighth of one per cent in interest alone.

In making an exchange charge to a customer there are three elements of expense to be considered and adjusted to meet the special conditions of the customer's business, namely:

1. Postage and the actual cost of stationery, clerical work and the like

2. Interest for the time outstanding 1

3. (a) If a branch: the cost of the ultimate transfer of funds between branches

(b) If a correspondent: the actual commission charge

4. Profit to bank.

The first three clauses - expenses - are incurred in connection with every transaction, whether with a branch or correspondent or whether put thru at par or not. It is advisable for every branch to test out its exchange charges on the above basis and see if the bank is being fully remunerated for its services. As an example, we shall work out the details of handling a check between two such important centers as Montreal and Toronto.

1 The time element in clause 2 is frequently overlooked, with the consequent absorption of the profit into expense.

Take a check by $100 cashed in Toronto:

Office and postage charges.....................

2 cents

Interest for time outstanding (2 days) at 6% .............................

3.288 cents

Total cost.................................................

5.288 cents

In other words, a check for $100 between the two branches costs approximately 5 1/4 cents.

It may, of course, be advanced that a bank is not out any interest when the check is between two customers of the bank at different branches. This is true when the account of the drawer is in funds at the time the check is cashed. But, theoretically, the transaction must be dealt with as it concerns each customer and each branch.

No merchant would sell an article at a loss to one customer simply because he expected to make a sale to another customer at a profit.

There is a tendency on the part of some customers to expect, almost as a right, all sorts of par privileges and concessions from their banks, presuming on the fact that the bank would be sorry to lose a good account. This is a peculiar trait in men who are otherwise honorable and free from petty motives. If a bank manager, in buying goods from one of these same customers, tried regularly to beat down the price or expected to get all small wares for nothing because they did not cost much, what would the merchant say ?

With the change in the time only, the foregoing figures would apply to a check remitted thru any other branch. Should the item be sight instead of a check the interest period would be increased to seven days, or 7/64 per cent; approximately 11 cents.

A collection sent to a correspondent, however, has to stand a double charge in the interest. Take a check for, say, $100 sent from Toronto to Carleton Place, the cost would be as follows:

Office charges and postage...................

2 cents

Interest for time outstanding, Carleton

Place and return, 2 days at 6%........

Remittance sent to Montreal, 2 days.............

6.575 cents

Exchange charged on check by correspondent at Carleton Place...........

10 cents

Total Cost

18.575 cents

If 25 cents was collected on this item, the bank would have earned a profit of six cents; which is little enough. Had this been a sight item, the bank would have lost three cents or more. Of course, amounts below the hundred on which a minimum is charged help to improve the average profit.

Average Time Occupied In Clearing Between Branches

N.S.

P.E.I.

N.B.

Que.

Ont.

Man.

Sask.

Alta.

B.C.

N. Y. Post.

Nova Scotia

2 2

3

1

2

2

3 3

4 4

6

6

6 6

6

6

7

7

2

Prince Edw. Isl..........

2

New Brunswick

2

2

1

3

3

6

6

6

7

2

Quebec

3

3

2

2

2

5

6

6

7 6

?

Ontario

3

3

3

2

2

4

5

5

3

Manitoba

5

6

5

4

4

2

3

3

5

6

Saskatchewan

6

7

6

6

5

3

3

4

5

6

Alberta

6

7

6

5

5

3

3

2

3

6

British Columbia

7

7

7

7

6

5

5

4

3

7

A small table (Figure 57) showing the approximate time and interest cost to various parts of the country, to and from a branch, will greatly assist in these calculations. The figures above are based on the supposition that only the larger items received in the morning mail are cleared the same day; the smaller ones being cleared the following day. It is, therefore, very important for branches to remember the necessity of using the mail services intelligently with a view to saving interest; in other words, if a large item is cashed during the day, to see that it gets out 1 day's interest at 6% = 1/64, approximately.

Therefore, the cost of interest (say) between points in Ontario and Manitoba is 4/64 = 1/16, if sent to a correspondent the item would be 8 days outstanding, or 8/64 = 1/2 of 1% for interest, as it would take the same time to clear the return remittance.

INTEREST ON $1,000

Days

2%

4 1/2%

6%

Decimal Values of

64ths

l/32nds

1

.0548

.1233

.1644

.15625

1

....

2

.1096

.2466

.3288

.3125

2

1/32

3

.1644

.3699

.4932

.46875

3

....

4

.2192

.4932

.6575

.625

4

1/16

5

.2740

.6164

.8219

.78125

5

....

6

.3288

.7397

.9863

.93750

6

3/32

7

.3836

.8630

1.1507

1.09375

7

1/10

8

.4384

.9863

1.3151

1.250

8

1/8

9

.4932

1.1086

1.4795

1.40625

9

....

10

.5479

1.2329

1.6438

1.5625

10

5/32

11

.6027

1.3562

1.8082

1.71875

11

....

12

.6575

1.4795

1.9726

1.87500

12

3/16

13

.7123

1.6027

2.1370

2.03125

13

....

14

.7671

1.7260

2.3014

2.18750

14

....

15

.8219

1.8493

2.4658

2.34375

15

1/4

Figure 57 330 by the first mail even if a special letter is necessary.

Tho in the above examples we have not included any charge for the transmission of funds on the individual item, this expense must eventually be met in some form or other in the adjustment of balances between branches, either by remittance of legal tender or bank notes, etc. Express charges run from 30 cents to three or four dollars per one thousand dollars.

The above facts establish conclusively that the cashing of checks at par at the branches is a constant source of loss to a bank and that outstanding items in the course of collection or in transit from a more serious and unavoidable expense for which a bank should be compensated.