After a sluggish start to the implementation of new commercial products, Informa analysts are finally seeing an uptick in their development and creation in this post-Regulation Q environment. This slow response can be largely attributed to the low rate environment and a distinct lack of customer interest.
Analysts at Informa Research Services Inc. have observed that new offerings can be primarily categorized as hybrid or commercial interest checking type accounts. According to a recent study by Informa, all top 25 financial institutions have created a combination of one or more of these products or are currently in the planning and development stage.
Since the repeal of Regulation Q in August 2010, Informa has observed a growing trend of institutions offering one or more of new commercial product options. As of August 2012, 60% of institutions surveyed offer both a commercial hybrid checking and a traditional analyzed ECR (Earnings Credit Rate) product, while 68% offer only a commercial interest checking product, and 56% of institutions surveyed offer all three product options.
The following Informa data for institutions size of $100 billion-plus at the $100,000 tier level as of August 2012 clearly shows how the competitive landscape has intensified with more financial institutions creating products to meet the demands of their commercial client base.
The ECR Only Account Rate Average is 0.28%, with a high at 0.45%, a low at 0.15% and its Monthly Fee Average is $21.10. The Hybrid Account ECR Rate Average is 0.198%, with a high at 0.30%, a low at 0.12% and its Monthly Fee Average is $25.27.
The rates for these traditional commercial accounts are primarily based on regional pricing strategies for the earnings credit products. For the hybrid accounts, rates are typically priced on a national level rather than a regional level. This strategy explains why there is a significant variance between the high and low rates on the traditional ECR, but a much smaller variance with the hybrid account.
The average earnings credit rate variance between traditional checking and hybrid checking is eight basis points. This differentiation in rate is a byproduct of the interest earned on excess balances for the hybrid product, which is a liability for the financial institution.
The monthly maintenance fee for traditional commercial accounts ranges from $14 to $27. For the hybrid accounts, the monthly fee ranges from $16 to $40. The traditional commercial account is a more mature product and the current rates vary across regions and competitors. The hybrid account is a product in its infancy and has fewer competitors. Hence, there is no incentive at the moment to price this product competitively, especially in a low rate environment.
Through the analysis, Informa observed a trend that showed there is an inverse relationship between rates and fees with the hybrid account. As the data showed, the earnings credit rate on the traditional commercial account is typically higher than on the hybrid account.
At the same time, the data also demonstrated the monthly maintenance fee on the traditional commercial account is lower than the hybrid account. With financial institutions keeping the interest rates low and fees higher on the new commercial hybrid accounts, institutions are, in fact, discouraging commercial clients from switching to their new products.
Informa's analysts do not anticipate seeing any significant changes in fees or rates associated with the traditional or hybrid commercial products, at least through the end of 2012. In the opinion of our analysts, 2013 could bring notable change based on multiple factors, including pending FDIC-related amendments, interest rate increases and an overall higher demand for the new commercial products.
Our analysts strongly recommend investing time and resources into understanding the entire commercial spectrum of services. This entails reviewing and analyzing the product make-up of not only ECR/Hybrid rates, but also of all the fees associated with those products.
In this fierce marketplace one should consider the right mix of products and services in order to remain competitive and profitable at the same time.
Randy Rosen, CTP, and Zoya Lieberman, CTP, are product research managers at Informa Research Services Inc., a market research company specializing in the financial industry. They have over 30 years of combined experience in banking product research and analysis.