> Why is it so crucial to their business model that the customers' deposits are deposited directly with the Fed
Note that whether interest was earned via IOER or via the Fed Funds market, the funds would be deposited with the Fed either way (whether in the bank's own Fed account or overnight in the Fed account of the counterparty of a Fed funds loan).
It wouldn't be possible to accept transfers from other banks, to send funds to other banks or to participate in the Fed Funds market unless the bank had an account with the Fed.
On the point of "risk-free", the TED spread was north of 1% for much of the 20 months between August 2007 and April 2009, and peaked at over 4%. So it's not always what I'd call negligible risk. https://fred.stlouisfed.org/series/TEDRATE
Note that whether interest was earned via IOER or via the Fed Funds market, the funds would be deposited with the Fed either way (whether in the bank's own Fed account or overnight in the Fed account of the counterparty of a Fed funds loan).
It wouldn't be possible to accept transfers from other banks, to send funds to other banks or to participate in the Fed Funds market unless the bank had an account with the Fed.
On the point of "risk-free", the TED spread was north of 1% for much of the 20 months between August 2007 and April 2009, and peaked at over 4%. So it's not always what I'd call negligible risk. https://fred.stlouisfed.org/series/TEDRATE