There are several reasons why most banks offer next to zero interest rates on small business accounts, especially when compared to potential returns on other investments or even rates offered to larger corporate clients:
High Cost of Servicing Business Accounts
More Complex Needs
Small business accounts typically require more complex services than individual consumer accounts. This can include higher transaction volumes, more frequent deposits and withdrawals, access to business-specific tools like payroll services, merchant services, and cash management solutions.
Dedicated Support
Small business clients often require more specialized customer support and relationship management, which increases the bank’s overhead.
Liquidity and Transactional Nature
Checking Accounts Primarily for Transactions
Small business checking accounts are primarily used for day-to-day transactions, paying bills, and managing immediate cash flow. Banks need to maintain high liquidity for these accounts, meaning the money needs to be readily available. They are less incentivized to pay high interest on funds that could be withdrawn frequently.
Focus on Accessibility
Small businesses prioritize easy access to their funds over earning significant interest in their primary transaction accounts.
Profitability and Business Model
Banks Make Money Through Lending and Fees
Banks primarily generate revenue through lending activities (charging interest on loans) and various fees associated with their services. Offering high interest rates on all deposits would significantly increase their expenses and potentially reduce their profitability.
Cross-Selling Opportunities
Low-interest business accounts can be a way for banks to attract small business customers and then cross-sell them other, more profitable products and services like business loans, credit cards, and investment products.
Low Federal Funds Rate Environment (Historically)
While interest rates have fluctuated, for a significant period, the overall interest rate environment set by the Federal Reserve was very low. This reduced the banks’ cost of funds and lessened the pressure to offer higher rates on deposits across the board. However, even with recent increases in the Fed Funds Rate, many traditional banks haven’t significantly raised interest rates on small business checking accounts.
Why Large Corporations Often Get Better Rates:
Higher Deposit Volumes
Large corporations typically hold significantly larger amounts of cash in their accounts. This gives them more negotiating power with banks to secure better interest rates.
Sophisticated Treasury Management
Large corporations often have dedicated treasury departments that actively manage their cash and seek out the best possible returns. They are more likely to move their funds to institutions offering better rates.
Different Types of Accounts
Large corporations might utilize specialized accounts like commercial paper or money market accounts with different rate structures than standard small business checking accounts.
In essence, traditional banks often prioritize convenience, services, and the potential for cross-selling when it comes to small business accounts, rather than offering competitive interest rates. However, the rise of online banks and Fintech companies, such as LiaFi, is starting to challenge this status quo by offering higher interest rates on business accounts, recognizing the value of these deposits. Give LiaFi a try and ditch the low rates!
