After eight decades of being handcuffed by governmental mandates, the nation's bankers, particularly community bankers, now have a golden opportunity. It is the repeal of Regulation Q, which prohibited banks from paying interest on business checking balances.
This is the first time since the Great Depression that a new provision of this much significance to business banking has been passed, and community bankers would be well served to pay attention to it if they don't want the big banks to take over the market share that should rightfully be theirs.
It is a brilliant yet simple legislative change that would allow banks to offer their best business customers fairer value for their checking deposits on a fully transparent and more accountable basis than before. Those business customers represent the essence of the free enterprise system and account for the core of new jobs and much of the hope for economic recovery; they deserve new hybrid checking products that offer a combination of soft-dollar earnings credits and hard-dollar interest, products that can capture their economic imaginations with solid checking balances of modest five-figure amounts and more. The repeal of Reg Q will facilitate this evolution.
Gone will be the days in which unused monthly earnings credits expired when not immediately used. Gone also will be the days of sweep fees, and the days when swept funds moved from the community to the amorphous money market funds. Banks will once again be able to base relationship solicitations on business checking. Enhanced checking accounts will provide substantially improved connectivity to attractive bank offerings of remote deposit capture, ACH originations, energized merchant services and other fee income-based services. Creative bankers are positioned to compete more effectively against nonbank lenders with soft-dollar reduction or elimination of interest.
Why did it take eight decades for this change to come about? The bankers didn't want it any other way. Many saw business checking accounts as merely "cost-free" funds. Although most have some type of program for earnings credits to offset fees, they tend to favor minimal rates and a limited array of services, hoping that excess funds will be left in the bank without compensation.
In a way, bankers have been asleep at the wheel; in essence, Congress is now forcing them to wake up. What bankers need to remember is that any bank service, including interest payments, creates additional profits when banks accept earnings credits as payment (as long as the earnings credit rate is less than the funds value rate).
At stake here is more than $2 trillion. That includes $700 billion swept out of banks daily, and other funds directly placed by businesses in short-term investments, which may now be recaptured. Business checking balances are already a major priority of bankers, but their desire has not been matched with effective-enough checking products; in addition, their solicitation efforts lack the confidence derived from offering attractively enhanced business checking products.
Yet the repeal of the outdated prohibition on commercial checking balance interest payments will enhance the attractiveness of bank-exclusive business checking offerings. The community bankers with whom I've spoken are cautiously optimistic, although many show some anxiety over the change in products and procedures, and the host of other modifications that are often required by reform. But they shouldn't be anxious. They should be thrilled. This is the most exciting and positive win-win scenario of recent financial reform legislation.
The reform is scheduled to take effect in July 2011, but the time to start planning is now. We may not be hearing a lot about it right now, but once the spring of 2011 rolls around, there will be so much information coming at the banking community — some of it likely to be convoluted — that many bankers may be tempted to stick their heads back in the sand. They mustn't. Now is the time to huddle in an offensive instead of defensive position and plan their plays, to wake up and smell the roses, to act.
The public is rooting for community banks to match their passion for the community and the businesses and individuals they serve. That passion can only be matched with enhanced products that are better suited for a very competitive financial services marketplace. Community banks have the ability to provide the financial bedrock on which small businesses can be built. If they don't seize this golden opportunity they will likely lose market position and share of deposits held in business checking to the big-bank conglomerates. They will weaken opportunities to move big-bank business accounts to their own smaller community banks — which many in the community regard as the banks that really count.
