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BirdsEye View

Our industry is amidst a significant quandary:  to change or not change?  This is the question.

As Reg Q has been repealed, the opportunity to offer interest on business checking account is now available to all of us.  Many wish we didn’t have this golden opportunity to raise our cost of funds yet again (wasn’t the fDIC premium hike shocker enough?), but here it is and we must deal with it.

Bankers around the country are grappling with this issue.  No one wants to be left out of the competitive landscape, yet pre-empting is costly and might not be the best strategy for customer retention and acquisition.

Recent conversations in our Forums, as well as other studies, indicate the following sentiments, which might help you formulate your individual bank strategy.

In general, banks of all sizes are planning on taking a conservative posture to this change, largely maintaining the status quo.  A small minority (comprised mostly of non-mega-banks) is considering bleeding edge innovation.

The vast majority of banks anticipate paying interest in business DDAs going forward.  Most are considering a unique formula to determine the interest rate, rather than using Earnings Credit Rate (ECR) on the new business interest checking product.

Some banks already offer hybrid products combining interest and ECR to government entities.  Those are largely mega-banks.  Smaller institutions who do not offer such hybrids are planning to do so as well going forward.

Most everyone is planning to continue passing through FDIC fees on analysis accounts, which I consider the best option in the current volatile environment.

The most change in product line offering is contemplated by the $1-$50B banks.  The largest banks already have a robust product suite and sweeping change will be not only painful but possibly not necessary.  Community banks are adopting a “wait and see” posture.  They are almost evenly split between those who intend to change fees and interest rates on commercial accounts and those who plan to sit tight and let the market take its course.

It is the SuperCommunity Banks who have the most to gain, and many are focused on using this change as an opportunity to build share.  Those banks are planning more aggressive fee changes and product restructuring to their entire deposit and treasury management product line.

Almost all banks are planning to continue the sweep product, which is a U turn after many initially considered dropping the product with the advent of the interest checking product.  Many plan to continue leading with the analysis DDA account as their default product.

In summary:

·                    It is premature to “kill” your ECR product or your sweep account

·                    Assume your cost-of-funds will rise as commercial customers migrate to the interest checking product

·                    Precipitous action in this case is not advisable unless you have a clear strategy to capitalize upon being first in market

·                   This can be a competitive (possibly expensive) opportunity for banks which revamp their treasury management product line and take an aggressive posture to build share.