It’s been nearly two years since the passage of the Dodd-Frank Wall Street Reform Act, which for the first time since the Great Depression allows interest to be paid on business checking accounts.
For the most part, banks were still offering business interest checking accounts to larger businesses through sweep accounts, which use money market accounts for deposits each night and are then moved back the following business day.
Industry watchers have noticed that some of the larger banks such as Bank of America and Wells Fargo have been quiet in their efforts to offer business interest checking accounts. However, the impact may be greater among community banks, which often compete squarely with credit unions.
The Independent Community Bankers of America has been very vocal in its stance against the removal of Regulation Q, the business interest checking account provision in Dodd-Frank. In a March 1 letter to Congress, the trade group said small businesses will ultimately pay the cost.
“Repeal of Regulation Q will increase the cost of borrowing for most small business customers as community banks are forced to pass along the increased cost of funding business deposits,” ICBA wrote. “In those areas where loan demand is not strong, community bank margins will be further squeezed since the banks will have to absorb the costs.”
The ICBA said it is also concerned that the repeal will deprive municipalities of an important source of funding and force them to pay more for their borrowing and cause community banks to lose market share to larger banks who can afford to pay more interest on deposits and lead to further consolidation of the financial industry, creating greater systemic risk.
As an alternative, the community banking trade group has proposed an exemption from the definition of demand deposit, which is a money market deposit account that allows up to 24 transactions a month for entities not eligible for NOW accounts. The ICBA said this would allow community banks to sweep daily between a business checking account and the new MMDA without having to establish expensive sweep programs or using overnight repos.
Meanwhile, credit unions have been steady with their business interest checking account activity. According to a survey from economic research firm Moebs Services Inc., 94.3% of banks and 27.8% of credit unions offered business checking in 2009, the latest year tracked. Nearly 41% of financial institutions offered free business checking.
Both credit unions and banks still have a command on better rates. Of the 2,000 financial institutions surveyed, banks with more than $500 billion in assets charged $35 per overdraft. The fee was much lower at credit unions and banks, ranging from $3 to $25.
The balance to avoid a fee on the accounts at large banks was $2,250 in 2009, up from $1,250 in 2008, Moebs found. At credit unions and community banks, the balance amount stayed the same for both years at $500 and $1,000, respectively.
With the heavy emphasis on building business loan activity, some credit unions that gave short shrift to business deposits in the past may have to beef up their offerings now that banks are starting to offer interest on business checking accounts.
According to a CUNA Community Credit Union Committee white paper, “CU Business Services: Making it Real and Keeping it Safe,” many small businesses come to the financial institutions to meet their deposit needs first. More than 99% of those surveyed opened a checking account compared to 79% for a credit card, 58% had a bank credit line, 26% borrowed for equipment and 13% had a commercial mortgage.
“Credit unions should expect that banks such as Bank of America, JPMorgan Chase and Wells Fargo will not cede their business relationships easily,” according to the CUNA committee. “As an example, Bank of America recently announced it would be recruiting 1,000 new small business bankers to work in its nationwide branch network to drive growth and better service in this segment.”
The repeal of Regulation Q has upped banks’ concerns about profitability and competition, the CUNA committee noted. Still, because banks have billions of earnings embedded in a legacy product offering known as commercial account analysis, it is unclear how fast bank competition will actually step up and begin paying interest on commercial checking, according to the white paper.
According to Treasury Strategies, cited in the white paper, business deposits account for 8% or $21 billion of banking industry pre-tax earnings, the research showed. This is roughly five times the entire earnings of the credit union industry today, illustrating the great potential that growth in core small business deposit services could provide credit unions.
“Because of their limited market share today, credit unions may decide to jump in early on the interest bearing business checking as a differentiation opportunity,” the paper read.