Actionable Insights From APT's Financial Services Practice

Are you ready for the demise of Regulation Q?

January 18th, 2011 | Posted by Will Weidman in Uncategorized

The repeal of Regulation Q goes into effect on July 21st, 2011 under the Dodd-Frank Act.  Banking Strategies recently published an article about the impact the repeal will have now that “banks will be able to offer interest on demand deposit commercial checking accounts for the first time in more than 75 years.”

So far, “experts predict the vast majority of banks will play wait-and-see.”  However, Joshua Siegel of StoneCastle Partners believes that smaller, regional banks will start offering interest as a way to steal business accounts from larger rivals.

Reacting to competition is not the right strategy for any bank, large or small.  By the time you respond to a competitor offering interest, you’ll likely have already lost business accounts that will be difficult to gain back.  At the same time, offering interest too broadly will erode net interest margin more than is necessary.

As soon as Regulation Q is repealed, banks should immediately try different interest offers with a small number of business accounts.  Testing will allow banks to measure the actual response to offering interest and will provide insight into the optimal interest rate as well as which types of business accounts respond best to design a more targeted approach.

Banks also do not need to wait until July 21st to start testing.  While accounts cannot offer interest until that date, there are hybrid approaches that can currently be used.  Banking Strategies describes how banks currently get around Regulation Q by offering an “earned credit rate.”  Banks can apply fees and charges against the ECR, which ends up being similar to paying interest on the account.

In advance of Regulation Q’s repeal, banks can try different ECR tactics to start building knowledge on how businesses may respond to offering interest on checking accounts.

As with any change in regulation, the key is to get out ahead of it, test different strategies, and quickly develop the best approach.  This maximizes potential gains, minimizes losses, and provides a leg up on the competition.  Start acting now to come out of this Regulation Q change as a winner.

Click to read more about the Test & Learn Approach.


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