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High Yield Reward Checking Account News and Reviews - Future of High Yield Accounts?

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High Yield Reward Checking is starting to receive more exposure. This Bankrate article reports on this new product with interviews from executives of two banks that offer nationally-available reward checking accounts, State Bank of Toledo and EVB.

High yield reward checking accounts offer very high yields (some currently as high as 6.25% APY) as long as the customer meets 3 typical monthly requirements:
  • around 10 debit card transactions (non ATM)
  • direct deposit or auto debit
  • electronic statements

If the customer doesn't meet these requirements during the month, the rate falls to some low yield for that month. Typically, this base yield is under 1%. The high yield will return for the month that the customer meets these requirements. Even though the customer may not receive the high yield when requirements are not met, there's never any monthly service charge regardless of balance.

In addition to very high yields, the reward checking account typically offers refunds of ATM fees charged by other banks.

One other catch regarding these reward checking accounts that wasn't mentioned in the Bankrate article is that these accounts usually cap the balance that will earn the high yield. The cap is typically $25,000. There are a few banks (State Bank of Toledo is one) that don't have this cap. Some have caps that are $50K or $100K.

Does It Have a Future?

The interesting question that was discussed in the Bankrate article is the question of whether these high yield reward checking accounts will last. As you would suspect the CEO of Bancvue, one of the main suppliers of reward checking to financial institutions, is optimistic. He mentioned that reward checking accounts are twice as profitable to banks as free checking and the attrition rates are 70% lower. This is done by reducing costs with technology (electronic statements) and from revenue from check card usage (most people will use it way more than what's required). However, as one industry analyst mentioned in the article, you have to wonder of how much impact can e-statements have. The e-statement might save the bank around $2 per month, but that doesn't pay for an extra 4% interest on a balance of $10K or more.

Some other supposed advantages that the article didn't mention, are described by Strunk & Associates, another provider of reward checking accounts to financial institutions. These include:
  • Increases online banking (less in-branch services)
  • Direct deposit and other ACH transactions increase dramatically (lowers processing costs)
  • Increase overdraft revenue (every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue)
  • Increase customer retention

I've mentioned this issue of increased overdraft revenue in a previous post. There were many commenters who had doubts that banks would actually see more profits from this in their reward checking accounts since people should be keeping larger balances in these checking accounts to benefit from the higher yield. That should reduce the overdrafts. However, you have to remember that the average person doesn't have much savings. He or she may have good intentions of building a savings in one of these reward checking accounts, but will often end up with a smaller balance than planned. Being forced in the habit of using this debit card rather than a credit card, a few large unexpected expenses could quickly cause overdrafts.

Reward Checking Downsides?

In addition to the obvious downsides like debit card usage requirements, there's another potential downside related to customer service. Small banks that offer these may not have the resources to offer the customer service that you expect. A reader just told me of the problems he had when he was outside the US and lost his ATM card at a bad ATM machine. State Bank of Toledo was unwilling to waive a $10 fee for the ATM card replacement and offered no assistance in sending emergency cash or helping him get his card back from the bank that owned that ATM. So the small banks offering these reward checking accounts may not have the resources to offer the customer service and fee waivers that you might expect.

From the Bankrate interview of the State Bank of Toledo executive, it seems State Bank of Toledo is very happy with the number of out-of-state accounts they've opened. As I mentioned in my first post on this bank, it's a very small bank with only 21 employees and total assets of $85 million as of 6/30/07. So you have to wonder with all this new publicity, will they need or be able to keep the rate so high (currently 6.01% APY)? And with all these new customers, will the customer service suffer?

Finding a High Yield Reward Checking Account

During this year I've posted on dozens of reward checking accounts around the country. Most have been offered by small banks and credit unions and require customers to visit a branch to open the account. However, a few like State Bank of Toledo allow customers from any state to open an account. Here's a list of banks and credit unions that I've found that don't have local restrictions:


For other reward checking accounts in other parts of the country, please see my reward checking account page and my best checking account post.

Update 12/14/07: State Bank of Toledo is now listing a new rate of 5.01% APY for balances up to $70,000. Please see this post for more details.

Update 3/13/07: For more history of reward checking accounts, please refer to this post.
  Tags: checking account, reward checking account

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Comments
34 comments.
Comment #1 by Anonymous posted on
Anonymous
I have my doubts the banks and credit unions will keep their interest yields high for the long run on these products. I hope I am wrong.

I haven't jumped in on one yet because I would have a very hard time meeting the 10 to 15 debit card transactions a month. I guess I am old fashioned, but I still like the choice of writing a paper check at the grocery store or, heaven forbid, paying cash.

I can see these being popular with the younger generation savers who seem to dispise carrying money or a wallet.

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Comment #2 by Anonymous posted on
Anonymous
I do not belong to younger generation but still hate to write a check where a CC is accepted. I have not used any check for last several months.
My reason for not using a DC is because I can get free ride for a month and get rebates too.
It more than compensates a little extra interest that I may get.

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Comment #3 by Anonymous posted on
Anonymous
I avoid these high interest checking accounts because of the number of debit card purchases one has to make. Like the previous poster, I put everything I can on a credit card to earn cash back and enjoy a free ride of 30 days on my money. In my opinion a good solution to these high interest checking accounts is a Salem Five Bank checking account. There are no minimums, no monthly fee, and no hoops to jump through. It’s just plain and simple. Best of all they are paying a higher rate of interest than some money market accounts including GMAC. Their current rates range from 4.70% APR to 5.10% APR. In addition to free bill pay they also give you the option of writing a paper check. And to put the icing on the cake, the first box of checks is free. Their web address is http://salemfivedirect.com/.

2
Comment #4 by Mario (anonymous) posted on
Mario
Here's what I do, my regular purchases go on a CC and some monthly recurring small purchases go on my reward checking DC (these are some online transactions I can split up easily in ~ 50 cent chunks). I still get my CC rewards, and my CU gets its DC revenue.

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Comment #5 by Anonymous posted on
Anonymous
This account is designed to be profitable only if consumers fail to meet the requirements and rack up NSF fees. I think that says something about the bank/credit union offering it.

If consumers don't fail, don't rack up NSF fees and the bank/credit union most likely has to pay Bankvue a hefty fee on top of that, there is no way this can be profitable.

It will be interesting to see what happens in a year to see if these accounts did make sense for both consumers and financial institutions.

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Comment #6 by Mario (anonymous) posted on
Mario
I think we may be looking at these accounts too simplistic, i.e. "DC revenue and savings on mailed statements don't offset the extra 4% interest."

If you look at it in more detail, every dollar of additional deposit creates a revenue stream (from loans, which are higher interest than they pay us on reward checking) and a cost (administration + interest expense). The pennies on the dollar for interest will be constant, but the administration expense goes down with higher deposit. They explained in the article that reward checking tends to attract larger deposit, therefore reducing administrative expense. (Maybe for regular free checking accounts with small balances, administrative costs are higher than interest expense?)

Now, if someone doesn't have the high balance they hoped for, the person would become more likely to be hit by overdraft fees.

So the only way that this model doesn't work is if the balance is somewhere in the middle, where it neither reduces administrative expense nor generates overdraft fees.

Just my analysis, feel free to comment!

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Comment #7 by SVG (anonymous) posted on
SVG
 

Banking Guy,

I too wonder how long these 'Reward Checking' will keep offering such high yields.

 

Readers,

I'm definitely not a part of 'young generation', but I like these types of checking accounts and I'm using these. I don't find making 10/15 check-card transactions an issue at all. Often times at the cash register, I simply ask the cashier to make two separate bills for the items I'm buying to help me reach the requirement of lots of check-card transactions.

- SVG

 

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Comment #8 by Anonymous posted on
Anonymous
Two separate bills for items being purchased at the same time?

That is why I complain and say stores should have check-out registers for "cash only" customers like myself! Get in and get out without annoying delays.

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Comment #9 by Goldie (anonymous) posted on
Goldie
I am from the younger generation.

To meet my DC transactions I visit Dunkin Donuts or Mcdonals and buy a coffee. I buy coffee everyday anyway so why not profit from it?

It is doubtful if the high yield checking accounts will live forever, but if you have to means to take advantage of it...enjoy it while it lasts.
***Thanks bank guy. Have learned so much from this site.**

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Comment #10 by SVG (anonymous) posted on
SVG
 

Anon,

>>Two separate bills for items being purchased at the same time?<<

Indeed !


>>That is why I complain and say stores should have check-out registers for "cash only" customers like myself! Get in and get out without annoying delays.<<

Absolutely. I guess you are completely justified in making this complaint.

Retailers do need to service many different types of clients. A few enjoy quick in-out. A few enjoy chatting about weather/products/deals with the cashier holding-up everyone else in the line. A few (yours truly included) may request the cashier to make two bills for items being purchased at the same time !

... Well ... retailing is not an easy business. *smile*

- SVG

 

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Comment #11 by Anonymous posted on
Anonymous
I think Schwab's High Yield Checking is the best compromise. Nearly-savings account interest rate, with no requirements to use debit card, etc.

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Comment #12 by Anonymous posted on
Anonymous
Since I opened the high interest checking account, I usually make payment separately, one transaction/item. So After one shopping, I can get 7 or more transactions.

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Comment #13 by Anonymous posted on
Anonymous
I agree that Schwab checking account is hard to beat . It is easy to use, little or no restriction or requirments, free checks and ATM use and no monthly charges. Also has free bill pay if you are in to that. Pays 4% now which I know isn't the best rate available but 4% along with everything else the account has makes it #1 with me. I keep several thousand in checking but I have it there to use and not for interest reasons. The 4% interest is icing on the cake for me.

1
Comment #14 by Mario (anonymous) posted on
Mario
After reading the discussion on checkout times, I'm thinking maybe the express lanes should say "10 transactions or fewer" instead of "10 articles or fewer" ;)

I like to think of myself as still part of the young(er) generation and I like CDs, so the bankrate article is not exactly correct.

1
Comment #15 by Anonymous posted on
Anonymous
bankrate.com article makes it clear that this account is a variation of CD with no paperwork. Customers would use this account just for deposits and withdraw only in emergency that amounts to early withdrawal penalty on Cd's.

1
Comment #16 by Anonymous posted on
Anonymous
To avoid avoid annoying other customers standing in line at cash register, you may choose to fill up you gas tank 10 times with $1 each and not bother any one. It requires just one trip to gas station. You will lose at best just 50¢ @ 5% rebate CC card.

1
Comment #17 by Anonymous posted on
Anonymous
It's very easy to meet the monthly usage requirement, without giving up credit card rewards. As mentioned above, pay-at-the-pump gas purchases are great, I squeeze in a few cents at a time, then rinse and repeat. You can get a whole month's usage done in about 5 minutes.

If you're too shy to do this, there are other ways: the McDonalds dollar menu; the self-service kiosk at the post office; automated $1 charitable donations (see Fat Wallet thread on this).

1
Comment #18 by Anonymous posted on
Anonymous
Ingenious thread! I am from the “old school” where debit cards were unheard of, so I never have used them. Consequently, I never considered taking advantage of these high yield reward checking accounts that would require me to make about a dozen purchases in a month with a debit card. I never would have thought that I could fulfill the debit card requirements at one time at the gas station, or by giving an automatic donation of $1.00 to a dozen different charities. Thanks for everyone’s input.

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Comment #19 by Anonymous posted on
Anonymous
LOL

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Comment #20 by Anonymous posted on
Anonymous
Re alternatives to Rewards Checking and their requirements, I want to second/endorse the earlier comment about Salem 5 Direct's E-One Checking, which currently is paying 4.7 APY on its smallest balance tier -- $0 to $10K, and higher rates for larger balances.

While I can't speak to the also mentioned Charles Schwab account (4%???), the E-One checking is simple and great, and so have been the bank staff at Salem 5 Direct. No fees, no minimums, up to $15 in other bank ATM fee reimbursements per month, and consistently good interest rates.

In addition, another Salem 5 benefit that I discovered through a recent move: Those of us who live or travel abroad will benefit from $0 fee and 0% (no) foreign currency transaction charge when using other banks ATMs abroad to access your funds.

The "bandits" at Bank of America (my original bank) charge a couple bucks transaction fee and also a 3% foreign currency exchange fee for every international ATM transaction. HSBC used to charge 1%, but recently went to 3% also. I'd call that close to highway robbery, and won't put up with it. Bye-bye business, guys.

--John, formerly from Los Angeles

1
Comment #21 by Anonymous posted on
Anonymous
I'm thinking about opening the eOne checking account at Salem 5 Direct. Thanks for the feedback.

1
Comment #22 by Anonymous posted on
Anonymous
Can anyone tell me some details about the eOne account online banking/billpay experience? Also, can you link external accounts to eOne?

1
Comment #23 by Anonymous posted on
Anonymous
Has anyone tried paying there cell phone bill online 10 times :-)

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Comment #24 by Anonymous posted on
Anonymous
I recenlty signed up for reward checking. I did not use debit card frequently. So, it is kind of newbie question. To meet 10 POS transactions, is using debit card like a credit card, except that the amount is gone right away from my account? Do I need to sign? or do I need to enter the pin code for the debit card? I heard some times, debit card transactions come with a fee from the bank. TIA -Ram.

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Comment #25 by Joy (anonymous) posted on
Joy
Just today I emailed that question to my new bank, Bank of Little Rock. (I live in IL!!) Carrie has been helping me set up my rewards checking (6.01% up to $25,000)and says that either way counts as a debit transaction. Credit with signature, or Debit with PIN. I highly recommend working with this bank. It has been a wonderful experience so far!! Joy

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Comment #26 by Joy (anonymous) posted on
Joy
And yes, the amount is taken from your account immediately either way. Joy

1
Comment #27 by mike (anonymous) posted on
mike
I just open an account also with Bank of Little Rock. I agree with Joy, it's been a very nice experience so far.

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Comment #28 by Anonymous posted on
Anonymous
It appears that many, many banks are now offering the so-called "rewards checking" accounts.

Apparently, they have seen increase in some kind of revenue, or else they would shut those down immediately.

These banks have several levers for controlling the "cost" side of the accounts:

- reduce the rate on deposits (SBoT did just that),
- impose a threshold amount on which a high rate of interest is earned (almost all the banks have reduced that level to to 25K),
- introduce more rules in the hopes of reducing the number of accounts that earn the high rate.

It appears that the banks earn good fees on some segment of the population unable to take advantage of the benefits.

Just like anything in life, this is a case in which a careful consumer can greatly leverage the benefits without falling into the rule traps.

So I am hopeful that many consumers who are unable to use the rules to their advantage will end up effectively carrying the cost of paying higher interest to the rest of us. Let's not forget that the bank is able to fund their overdrawn checks, etc because other customers keep their accounts funded at $25K.

Long live the 6% reward checking and the financial consultants who convince the bank executives that this is a good deal for the banks.

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Comment #29 by shannon (anonymous) posted on
shannon
since i became eligible for the rewards program on my credit card, i have been making credit card transactions everywhere just for the points. i've even paid my utility and grocery bills on my card over the last six to eight months, and i'll be on my way to a decent vacation soon!!

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Comment #30 by Anonymous posted on
Anonymous
I'm curious as to what percent of customers who sign up for these high yield rewards accounts actually meet the requirements and get the higher yield? I would think this account could turn into a customer service nightmare with good customers missing one or two debit transactions each month and wanting the higher yield.

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Comment #31 by georgepds (anonymous) posted on
georgepds
You can always pay your phone (verizon) or cable (comcast) $1/transaction. You can also pay your self at paypal $0.01 ten times in a row (requires basic and premiere account, both free), but you will lose the 10 cents because paypal keeps the result of small transaction. You can also put the transactions into a macro(imacro has a freeware version) so that you only have to push one button / month.. how hard is that.

I'm closer to older than younger, but money is still money, and if someone is offering you more of it if you jump through a simple hoop, I say jump

--G

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Comment #32 by Anonymous posted on
Anonymous
I've been using this account at Southern Community (Winston-Salem, MC) for 3 months now and love it. I had already been a customer of the bank for 9 years though - I just converted my account. I love this bank. I moved away two years ago, but I still have maintained the account. I got a bonus from my company so I nearly maxed out the 25k match. I get my eStatement, which I used to create anyway from their website. I already had everything automated bank draft and automatic deposit. The 10 debit card transactions for me was new, but EASY. At my company cafeteria, instead of paying cash, I use my debit card. Same for small things. I still use my rewards credit cards for big purchases. Being that I'm out of town, the no fee ATM has been a big help to me. The only thing I don't like is that I don't have a place to make deposits. Right now I have a local savings account and I put deposits there. Then I use ACH transactions to move to my Fidelity investments and then to Southern Community if need be. I hope they keep this account forever. And as for the folks racking up NSF fees because they have no minimums -- well, they're helping me earn interest.

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Comment #33 by Banking Guy (anonymous) posted on
Banking Guy
Thanks for sharing your experience with this bank and reward checking account.

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Comment #34 by Anonymous posted on
Anonymous
Guys-
Forget all these $1 and less transactions you keep talking about in order to **** your rewards checking bank. Use your check (debit) card to buy normal stuff- a whole tank of gas, a week's groceries- money you'd spend anyway. These little community banks deserve to make a little something on the transactions. They are NOT the enemy. And neither are the rest of us who have those accounts. If enough people abuse the system, those of us who use it responsibly will get hit with more transactions required, lower interest rates, or worse- discontinued rewards checking accounts. Don't be greedy- the big banks are greedy enough for everyone.

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