For many years, financial institutions have had to devise innovative solutions to provide their corporate clients with a variety of cash management services and to maintain account balances without being able to pay an actual interest rate.
The repeal of Regulation Q changed that. Restoring the ability to pay interest on corporate accounts has spurred the need to develop new product and service structures as well as new rate and fee pricing models.
Financial institutions have to design a new strategy for providing products and servicing their commercial clients.
In the last quarter of 2010 our company conducted a survey on the repeal of Regulation Q that included questions related to cash management services, investment sweeps, earning credit rates and Federal Deposit Insurance Corp. insurance. We aimed to capture the overall strategy that financial institutions were planning to deploy in 2011 and beyond. While it was too early to see any specific results of the repeal, it was interesting to observe the patterns and strategic thinking that emerged in this survey.
The vast majority of financial services providers are planning to use a rather conservative approach when it comes to making changes to their commercial products, which include cash management, earnings credit and investment sweeps.
In other words, financial institutions are maintaining the status quo with their product options. There is a small group of financial institutions that are planning to make radical decisions and to drastically modify, or even eliminate, some of their commercial products.
Regardless of the decisions being made on an existing product set, there are product innovations in the works, based on the repeal of Regulation Q. Specifically, many financial providers are working on introducing a hybrid ECR/interest commercial checking account. This type of account will allow commercial clients the opportunity to offset account fees through earning credit analysis first and to earn interest on the potential excess balances. A commercial checking interest-only product is another option that will be available to commercial clients. This product will offer no earning credit analysis and all the account fees will be in hard dollars.
As new products are being developed and financial institutions receive much-needed customer feedback, financial services providers may modify their strategy and product offerings.
Financial institutions should be designing and developing products and pricing strategies now, so that products can be introduced to the market in the next six to 12 months.
This approach will allow financial institutions to keep their client base along with attracting new commercial clients while maintaining their competitive edge.
