When the Federal Reserve announced the repeal of a law banning interest-bearing business checking accounts, Capital One responded near-instantaneously with a new deposit account, Clear Interest Business Checking. Small business owners were previously required to sacrifice interest yields in order to keep their cash easily accessible, and either performed accounting gymnastics or suffered the consequences of effectively stuffing their money under a mattress.
As of July 21st, however, that landscape is changing. The 1933 law banning interest on business checking fell away, and Capital One is now the first bank to offer yields on business checking, finally giving small businesses a chance to do something with their cash.
Regulation Q: the forgotten clause in Glass-Steagall
The repeal of Glass-Steagall gained its fair share of attention in the aftermath of the financial crisis; the exclusion of the Volcker Rule was a major point of contention between President Obama and the GOP when the Dodd-Frank financial reform bill was crafted. But amidst the sound and fury over separating investment and depository banks, the repeal of one small but significant provision slipped by unnoticed.
Regulation Q prohibited banks from paying interest on business checking accounts in order to encourage investment. The year was 1933, remember, and the government tried everything in its power to get credit flowing again. But when the Depression ended, the regulation grew to be a burden on small business owners. Earning interest on the tens of thousands in a checking account required transferring money to and from money markets, so business owners either paid banks to automate the process or had their bookkeepers handle the financial acrobatics themselves.
With the repeal of the Depression-era policy, business owners can now earn interest without devoting much-needed (believe us, we know it’s needed) brain space to figuring out how.
Capital One’s Clear Interest
The first-to-market account is Clear Interest Business Checking from Capital One, which earns 1.1% interest (0.5% in Louisiana). The account gives 300 free transactions a month, waives monthly maintenance fees on balances of $10,000+, and pays interest as long as 25 transactions are made each month.
Small business expert and entrepreneur Gene Marks admitted to complicated transfers from checking to money market and back in order to earn interest. “If you’re a small business and you’ve got $25,000 just sitting in your checking account, you feel like strangling someone.”
Capital One may be hoping that small businesses will be drawn to the first-of-its-kind interest-bearing account, and from there expand the relationship to business credit cards, loans, and the like. Marks commented on the importance of building a solid relationship between a bank and its small business customers: “It says something about a bank when they’ll voluntarily pay out interest to their customers,” he says, “especially when no one else is doing it.”
If a regulation falls in a forest and no one is there to hear it…
Perhaps because the business and political worlds are consumed with the debt ceiling, the repeal of Regulation Q passed largely without notice. Many small business owners were unaware of the regulation’s existence, let alone its end. How much will interest checking affect small businesses, if they ever hear about it?
Two opposing factors make the short-term effect uncertain. Businesses are sitting on more money than ever before: slashed expenditures mean higher cash reserves. On the other hand, interest rates are abnormally low. But interest checking is essentially free money for businesses, and it’s likely that they will jump on these new accounts.
“As small businesses become more and more aware of accounts like Capital One’s,” says Marks, “they’ll ask their banks, ‘Why aren’t you offering this?’ The banks that care about the customers, the ones that recognize that times are tough, they’ll follow through.”
Smaller community banks and credit unions may lack the resources to do so. While Capital One can offset the expense of interest-bearing checking accounts with more lucrative products like rewards credit cards, small institutions are known for offering low interest rates on loans but little by way of interchange fee-heavy rewards cards. What’s more, checking accounts became far less lucrative after the Durbin Amendment. Nearly half of all credit unions are considering cutting back on rewards or free checking to begin with, and may struggle to offer yet another checking product.
This leaves an opportunity for larger banks to draw businesses in and perhaps nudge them towards credit cards, which are far more lucrative. Of course, for interest-bearing business checking to catch on, small business owners will first have to hear about its existence.