New Law Requires Financial Institutions to Offer Interest-Bearing Checking Products to Business/Commercial Accounts

A law on the financial institution books since the Great Depression of the 1930s was nullified by the Dodd-Frank Wall Street Reform Act, which was signed into law on July 21, 2010. Buried somewhere in its 2,300, give or take a few, pages is Sec. 11001. INTEREST‐BEARING TRANSACTION ACCOUNTS AUTHORIZED, which repeals the prohibition on the payment of interest on corporate checking accounts, effective one year from that date.

Up until now, many financial institutions have offered the option of “sweep” accounts to their business customers. Sweep accounts provide a means to automatically manage the transfer of funds between a primary cash account and an investment account (i.e., money market account, CD). These types of accounts were devised as a workaround to provide business customers with a way to earn interest on cash that could easily be moved to the primary account, as needed, with a minimal amount of personal intervention. Cash over a certain pre-designated limit in the primary account is also “swept” into the investment account where it can earn interest. When the new regulation requiring financial institutions to offer interest on business/commercial checking accounts takes effect next year, these accounts will become obsolete.

This new regulation will have a major impact on both large and small financial institutions who will be looking for creative solutions to offset the costs associated with the new interest-bearing business account products. One alternative may be to require that a minimum account balance be maintained in order to qualify for interest each month. If an account falls below the minimum, a standard fee will be deducted from to the account.

Many may wonder whether the days of business-free checking will fall by the wayside. The answer to that really depends on how the banking industry will market and sell these new business products. According to Richard Grossi, Vice President/Compliance at Unity Bank, headquartered in Clinton, NJ, “Smaller community banks, like Unity Bank, will look to be competitive on fees as they focus on attracting new business accounts after the new law takes effect. Every financial institution, large and small, will have to deal with the inherent challenges imposed by this new regulation, and somehow, they will want to make their relationships with their business clients mutually beneficial for both parties.”

One final thought…although the new regulation requires that financial institutions offer interest on business/commercial checking, banks are permitted to continue to offer non-interest bearing accounts as well.

Unity Bank has branches in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. The bank began as First Community Bank in 1991 with two branches and thirty employees. It now has over one hundred and sixty employees.
For more information about Unity Bank, call Rosemary Fellner at 800.618.BANK(2265), or visit www.unitybank.com.
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