What Regulation Q's Repeal Means for Business CheckingBy
A provision of 2010′s Dodd-Frank Act, which went into effect on July 21, makes it possible for banks and credit unions to offer interest on corporate checking accounts for the first time since 1933. In today’s low-interest-rate environment, the new accounts are unlikely to make a major impact immediately, but small business owners should talk to their banks about whether they will begin offering interest in the next few months.
"I think the small and middle-market businesses will benefit eventually, because they will be able to earn interest on money that they have sitting in the bank," says Brian Boardman, a consulting director at Fiserv, a Brookfield (Wis.) technology provider to the financial services industry. "Today, that money is either sitting idle or they have to move it around to get interest and incur the costs of doing that."
Gene Marks, president of technology company Marks Group in Bala Cynwyd, Pa., who has contributed opinion columns to Businessweek.com, agrees: "One of the main concerns I hear from business owners is that they’re forced to dedicate time and energy to transferring funds from one account to another to earn interest. That’s time that could be better spent taking meetings with clients or growing their businesses."
CAPITAL ONE TAKES THE LEAD
Several regional banks, particularly in the Northeast, are planning to introduce new interest-bearing account options to their business customers in the next few weeks, Boardman says. Capital One Bank just introduced Clear Interest Business Checking, a first-to-market business checking account that will offer high-interest checking rates for the first 12 months and a market-competitive rate thereafter.
Capital One will also provide specialists to work with new account holders and help them maximize earnings. This is in line with a move by several larger banks to hire more small business bankers in an attempt to draw in businesses by wrapping the new interest-bearing accounts with an enhanced banking relationship, Boardman says.
Community banks, which do not have the hefty credit-card portfolios of Capital One and other large banks, are more hesitant about interest accounts at this point, he says. "A lot of banks are taking a defensive, wait-and-see position, though some of them have removed the language from their website saying they can’t pay interest on corporate checking."
"THE LEAST OF THEIR WORRIES"
The repeal of Depression-era Regulation Q does not obligate banks to offer interest-bearing checking accounts, but it opens the door for them to do so. The regulation, originally part of the Glass-Steagall Act, regulated interest rates on various bank accounts, but it was whittled away by 1980s deregulation legislation. The prohibition on interest payments for commercial accounts, other than to sole proprietorships and nonprofits, survived until Dodd-Frank.
While many banks opposed repeal, it was "the least of their worries" in the overall financial reform legislation, Boardman says. "This regulation’s repeal has been before Congress many times in the past, so the banks knew eventually it was going to happen. In some ways, [interest-bearing checking] is an opportunity for them to get more business if they look at their whole commercial offering to small business customers and figure out where it fits."
Bob Seiwert, senior vice-president for commercial lending and business banking at the American Bankers Assn., says banks will be offering new packages to viable small businesses as the economy recovers, but he predicts that banks will not jump on the interest bandwagon immediately.
Many small businesses with sales of $500,000 to $10 million already get some credit for bank balances by taking advantage of bank sweep accounts and earnings credit allowances. "The banks give them credits for multiple transactions, and those credits offset the fees the banks charge," Seiwert says. "These companies can also use sweep accounts that move their excess funds into separate accounts where they are invested overnight, and they earn interest that way."
Interest-bearing accounts will be taxable, whereas the bank credits are not. Another factor small companies should take into account is that non-interest-bearing accounts get unlimited insurance through the Federal Deposit Insurance Corp. through the end of 2012. Such insurance is not available for interest-bearing accounts.
"Small businesses will need a sharp pencil to analyze their options" on the new accounts as they become more common, Seiwert says.
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