Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings Allowance

What it is:

The earnings allowance is the minimum amount a bank requires a customer to have available in a checking account in order to avoid monthly service charges.

How it works (Example):

Let's say Company XYZ has a cash account with Bank ABC. To calculate the earnings allowance for Company XYZ's account, the bank applies its earnings credit rate. The earnings credit rate takes into account the rate at which Company XYZ uses the bank's various services. Banks usually calculate earnings allowances daily, and the rate for the earnings allowance is traditionally based on a percentage of Treasury bill rates. 

Why it Matters:

Each bank determines its own earnings allowance, and so the amounts may vary widely. A customer has to decide if they want to keep their cash balances high to avoid fees or whether to keep cash balances low to optimize the efficiency of the business.  

Usually, accounts with high balances have higher earnings allowances, which means that large account holders pay lower fees. However, the best way for a company to lower its banking fees is probably to shop around.