Marketing new interest-bearing checking accounts.

• Author: Pry, Carl G.

ONE OF THE FEW PARTS OF THE DODD-FRANK ACT that should make our jobs easier is the elimination of the prohibition against paying interest on demand deposits, which was in the Fed's Reg. Q (in fact, that's all there was to Reg Q). For years, banks were forced to craft creative sweep arrangements in order to provide returns to commercial customers on their demand deposits

The Dodd-Frank Act subsection's title says it all: "Interest-Bearing Transaction Accounts Authorized." It did exactly what it says, by eliminating provisions of federal law that prohibited banks from paying interest on demand deposits. It's an equal opportunity get-out-of-jail-free card too, as the change doesn't specify consumer or commercial customers, but consumers were always allowed NOW accounts. Paying interest to commercial customers was always the difficulty.

The change was effective July 21, 2011, and banks are now fully allowed to offer interest-bearing checking accounts to everyone. Everyone should now be happy, right? But there is just a little gray to go along with the silver lining, and when marketing these new accounts, a caution.

The first temptation is to say, "Now we can eliminate all those complicated sweep arrangements, since now we can just pay straight interest to our commercial customers." And of course that's exactly what you could do if you so chose, and indeed life for you will be easier.

Unlimited deposit insurance or interest?

The Dodd-Frank Act also made significant changes to the FDIC deposit insurance rules, including providing unlimited coverage for noninterest-bearing transaction accounts until the end of 2012. This replaced the FDIC's Transaction Account Guarantee (TAG) Program, which provided unlimited coverage for noninterest-bearing transaction accounts, but also for low-interest NOW accounts and IOLTAs (Interest on Lawyer Trust Accounts).

The TAG Program essentially offered the same protection as the new rule...