First of all, there's a misconception on this discussion here. The Fed is PAYING banks the Fed Fund Rate (currently sitting at 0.5%) for parking their excess reserves with the Federal Reserve overnight. So a negative interest rate means that the banks have to pay the Fed money to hold their money. You can think of this as if your bank charges you to hold your money for you.

Why would the Fed want to do this?

Banks make money by lending out deposits and charging a higher interest rate than what they pay out. To support their lending operations, banks need to hold a percentage of the asset as reserves. In recent years, banks have been holding $2.3T [1][2] more than the minimum reserve that is required. This means that the banks are sitting on the deposit and not lending it out. The excess reserve are then deposit with the Federal Reserve earning 0.5% interest. What the Fed wants to do is encourage banks to lend out the money rather than sit on it so that it stimulates the economy. (More lending->increase asset prices->people feel richers->people buy more stuff->companies hire more people->stimulates economy)

Why aren't banks lending?

There are a number of reasons why banks are not lending as much as they used to. After 2008, banks have become much more risk adverse. In addition, regulations have forced tighter lending standards on the banks reducing the amount of loans issued[3]. In addition, Dodd-Frank credit risk retention regulation now forces banks to have "skin in the game" when they issue and securitize loans and mortgages [4]. Because of this and the collapse of 2008 is still fresh in the bank's minds, they have increased lending standards and reduced their risk profile.

So, the result is that they sit a huge pile of excess reserves that they can't lend out.

In normal environments, the market resolves this problem itself. Banks that are lending will offer higher rates to attract deposits from the banks that are not lending and offering lower rates.

However, in recent decades, there's been a major consolidation of banks. Between 1990-present, 37 regional banks have combined into or acquired by the 4 large banks (Citi, JPMorgan Chase, BoA, Wells Fargo)[5]. These top 4 banks alone hold 6.46T of the $10.6T in consumer deposits. These four banks have pay an interest rate of 0.01%. The national average interest rate is 0.06%.

On the other hand, commercial lending banks, like CIT, Sallie Mae, and Synchrony, are trying to attract deposits paying over 15x the national average interest rate. These traditionally lending banks have had to set up high yield online banking operations to attract deposits to support their lending operations.

The issue is that most consumers don't shop around for high yield accounts. Many don't realize that there is such a drastic difference between the high yield accounts and their local banks.

This leads to a significant amount of assets being locked up at the large banks that aren't lending. Lenders, like Sallie Mae, end up paying higher rates on deposits and need to charge higher rates for their student loans.

What happens to consumer deposits when Fed Fund Rate goes negative?

For the past couple of years, these large banks have been trying to shed excess deposits. They have lowered their interest rate to practically 0%. The large banks have even charged large institutional depositors to hold their money [7]. If the Fed Fun Rates go negative, banks will try to charge greater fees for banking services and/or encourage consumers to move their funds to other banks. The difficulty here is that the banks want to maintain the relationship with the consumer to generate future revenue while not holding the deposits.

This misallocation and inefficiency in the deposit marketplace is what we are trying to solve with smart technology.

[1] http://www.federalreserve.gov/releases/h3/current/

[2] https://research.stlouisfed.org/fred2/series/EXCSRESNS

[3] http://www.urban.org/research/publication/impact-tight-credi...

[4] https://corpgov.law.harvard.edu/2014/11/16/a-closer-look-at-...

[5]http://www.upworthy.com/how-37-banks-became-4-in-just-a-few-...

[6] http://www.federalreserve.gov/releases/lbr/current/

[7] http://www.wsj.com/articles/big-banks-to-americas-companies-...