LAKE FOREST, Ill.—In a change from what is usually the case, the Federal Reserve has created a “distinct advantage” for credit unions and smaller banks with a new policy on business checking accounts, according to one analyst.
The Fed’s decision to allow financial institutions to pay interest on business checking accounts has been accompanied by reduced reserves requirements on transaction accounts and simplified calculations. Financial institutions can now raise prices on fees to businesses and offset these increases with paid interest, according to a Moebs Services’ Study on Business Checking that the company said shows how changes in business checking can benefit both providers and users.
The good news for credit unions, according to the study, is that FIs do not pay reserves if their business checking account portfolio is less than $14.5 million, and only pay 3% reserves on checking portfolios up to $103.6 million. That means that 88.9% of all FIs pay 3% or nothing, said the Moebs study.
“With their smaller checking portfolios, Main Street FIs have a distinct marketing advantage over Wall Street. Wall Street FIs pay $10 in reserves for every $100 in checking in contrast to $3 for Main Street FIs,” the company said in its analysis. “If a business averages $10,000 in checking, Main Street FIs can therefore make $700 more available to their business owners by paying less in reserves.”
In its analysis, Moebs Services found that 98.6% of banks offer two types of business checking, while 62.3% of credit unions offer just one business checking product. The company said that just 4.2% of Wall Street FIs greater than $50 billion in assets will offer free business checking.
Free checking for businesses, Moebs Services said, is unlike free checking for consumers: there are no compliance regulations. “Free checking for business always includes limitations on transaction volume. The median transaction volume limit is 200, exceeding the limit carries a median fee of 25 cents per transaction.”
In its analysis, Moebs Services explained that basic business checking has a minimum balance and a monthly fee for falling below the minimum. “Often, basic business checking has limits like free checking on the number of transactions and charges for exceeding limits,” the company said. “Analysis checking charges for all transactions with different prices for different transaction types such as deposits, items deposited and checks. Analysis checking often pays interest although some FIs still limit interest paid to the amount of service charges. Interest business checking pays interest, yet has fee features similar to basic checking.
The Moebs study suggests that the “best practice” is analysis checking, since this offers revenue opportunities, especially with low interest rates, to FIs while providing businesses with more information about how they handle their money.
These changes open up opportunities for FIs to pay interest beyond service charges, according to the Moebs’ study. “Accordingly, lifting the restriction on interest has moved some FIs to increase service charge prices on business checking while increasing rates for interest paid. Since 2008, low rates have not allowed businesses to take advantage of earning interest beyond the cost of service charges, thus many business checking portfolios are profitable.”
In short, said the Moebs’ analysis, “The Fed’s reserve calculations favor Main Street FIs. Community banks and credit unions can use these system changes to get new business while increasing fee revenue offset with interest rates.”
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