For many years, financial institutions were unable to directly pay interest on business accounts. This restriction prompted the creation of innovative solutions by financial institutions to provide their business clients with a variety of cash management services and incentives to maintain account balances without actually paying interest. The repeal of Regulation Q changed all that and altered how business products now function. Restoring financial institutions’ ability to pay interest on business accounts has spurred the need to develop new product and service structures as well as new rate and fee pricing models. Financial institutions must design new strategies for providing products and services for their business members.
Banks are ahead in this race. The business financial services market is saturated with accounts and services offered by banks. Product and service development at banks is mature and varied in offering across business segments. At many institutions, business accounts are broken down into multiple categories targeting small businesses, as well as commercial clients, with tailored services. For instance, out of the top 25 financial institutions that offer an analyzed checking account, 75% offer separate small business and commercial analyzed accounts. Additionally, five of the top 25 financial institutions that offer a hybrid account, also offer a separate hybrid account for small business and commercial customers.
Out of the top 200 credit unions, only half offer business services. Of those same top credit unions, only 15% offer analyzed business accounts designed for more sophisticated business needs. Some examples of those institutions are America First FCU (UT), Mountain America FCU (UT), ESL FCU (NY), and Robins FCU (GA). These credit unions apparently see the value of targeting business members as part of their overall growth strategy.
A simplified look at current business offerings is displayed below:
|Business Banking Products
|Analyzed Business Checking
|Hybrid Business Checking
|Business Interest Checking
|A business checking account where balances earn earnings credit to offset eligible fees.
|A business checking account where balances earn earnings credit to offset eligible fees and earn interest on excess balances.
|A business checking account where balances earn interest only.
|Average Interest Rate
|Average Monthly Maintenance
|Statistics based on top 25 institutions. Best rate at $100K tier November 2013.
As a credit union, understanding your members’ business needs and your institution’s strategies for growth will help you better select the appropriate business product offerings.
So, the real question is – which type of account is the best choice? The answer depends on your members’ behavior.
- The traditional analyzed checking account allows a business member an opportunity to offset monthly fees through the earnings credit system. Members that perform a high volume of transactions and therefore incur monthly charges should use a traditional analyzed checking to help offset those fees.
- The hybrid account offers the ability to offset monthly fees and to earn interest on excess balances. Members that keep a high account balance and receive an earnings credit beyond what they need to offset all the fees should try a business hybrid account in order to enjoy the best of both worlds.
- The business interest checking allows a business member to earn interest on all the balances kept in the account throughout the monthly cycle. Members that keep a balance high enough to waive most fees should take advantage of a business interest checking.
While each business account type has its advantages, there are some disadvantages as well. With interest only business checking, not only will a business member have to pay hard dollars for all the services rendered, but the interest earned will also be considered a taxable event. With an analyzed checking account, a business member may offset all or a majority of their fees; yet if there are any remaining earnings credits, there are no additional benefits. For this product, the earnings credits are definitely a “use it or lose it” proposition. And finally, the business hybrid account also has the disadvantage that the interest earned is considered a taxable event, along with the highest monthly fees out of three account options discussed.
On the topic of offering business service for your members, ask yourself the following questions: Is offering business services a viable growth strategy for your credit union? Would offering a wider variety of business checking accounts attract new business members? Do you see the need to offer more complex business accounts in order to compete with other financial institutions?
The reality is that credit unions are not simply competing with only banks and other credit unions, but also with alternative services providers. Costco, PayPal, and Square are just a few of the alternative services providers competing for your business members’ attention. The business services landscape has become rather complex. In order for the credit unions to create a “level playing field,” they must be willing to expand their business product portfolio to include the new types of business accounts.
Credit unions that currently do not offer any type of business products, should implement, at a minimum, a business interest checking account. In order to compete well with financial institutions and larger credit unions, an analyzed checking account could also be considered. In our opinion, with the current low rate environment, the introduction of a hybrid product could be delayed until rates start increasing again. Having a hybrid account, however, would, undoubtedly, put you one step ahead of the competition.
Business services are an untapped market for most credit unions. The competitive landscape for business products has changed significantly in the last three to five years as have technologies available to financial institutions. A credit union’s ability to attract new business members requires ensuring that their business products and services are relevant and competitive.
Randy Rosen, CTP, Informa Research Services