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New Reward Checking Account Stats: Profitable for Banks?

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Many reward checking accounts continue to offer yields of 5% APY, and several still offer 6% APY. The best reward checking yield in the nation is 7.01% APY that has been offered by MidWest America Credit Union since at least February of 2008. The average yield of about 250 of these of accounts is 5% APY. As a comparison, most online savings accounts have non-promo yields under 4%.

These reward checking yields have proven to be more than just teaser rates, but the question remains if these reward checking accounts can keep the high yields and be profitable for the banks for the long term. When people hear about these reward checking accounts, they're very skeptical about how banks could offer such high rates. It's important to note the two most important features of these accounts:
  • Monthly debit card usage requirements (typically 10 purchases per month)
  • Balance cap that limits the amount eligible for the high yield. Balances over this cap earn much lower yields (median cap is $25,000)
The debit card requirements is an important feature since banks make between 1% to 2% from each debit card purchase in what's called interchange fees.

These reward checking accounts also require electronic statements and a monthly direct deposit or ACH transaction. These can reduce the cost a little for the banks and make the accounts more sticky, but I don't consider these to be the main reasons why the yields can be so much higher than the online bank yields.

New Reward Checking Stats

I've come across some new metrics regarding reward checking accounts. First, this NetBanker post reports on data that BancVue provided. BancVue is the main company behind these accounts. Some of the interesting statistics include:
  • 381 financial institutions offering reward checking
  • $5.5 billion in deposits in the accounts
  • $9,000 average balance

I've also found more stats in this Credit Union Times article. The article includes interviews with Ritch Van Duzer, the CEO of Clearstar Financial, and Brian Caird, the marketing VP of Northern FCU. Here's an interesting quote from Duzer:
"We've been pulling in $17,000 to $18,000 per month in interchange income, which goes a long way toward mitigating the dividend payout," Van Duzer said. "We're averaging $7.50 in debit card revenue off each reward checking account per month, compared to our standard free checking account, which averages $3.50 in interchange revenue per month. That's a big difference."

And, Van Duzer added, only 70% of his members meet reward qualifications in any given month, so before even figuring in fee revenue, the true cost of funds is about 100 basis points less than the advertised rate, which puts it in line with CDs.

I assume that the interchange fees average around 1.75%. That would mean the average Clearstar Financial reward checking customer makes $429 in debit card purchases per month. One thing that's not mentioned is the average balance. If it's $9,000, the $7.5 would only cover about 100 basis points of the interest.

One thing that should be noted about Clearstar Financial is that the yield on its reward checking account has gone way down in the last year. When I first reported on it in February 2007, it was paying 6.10% APY on balances up to $25K. Now it's paying only 3.04% APY. However, the balance cap did go up to $50K. So if the interchange fees cover 100 basis points of this and the members who don't meet the requirements covering another 100 basis points, that means the credit union is paying only about 1% interest which seems reasonable.

But a 3.04% APY is no better than most online savings accounts. In my opinion, reward checking has to pay at least 100 basis points above an online savings account to make the extra work worthwhile. In the current rate environment with many online savings accounts paying 3.75% APY, that means reward checking has to maintain a yield of at least 4.75% APY.

Northern FCU's reward checking yield has also gone down, but not by as much. In March 2007 it was paying 6.01% APY on balances up to $25K. It's now at 5.01% APY for the same cap. Perhaps Northern FCU is making more interchange income.

The debit card purchase requirement is probably the most important element of the reward checking accounts that allow the banks to pay a high yield. If the average balance is $9,000 and the average debit card purchases are around $500 per month, perhaps the banks can continue to afford 5% yields. However, if the average debit card purchases are only $50 per month, then 5% yields are going to be hard to maintain.

Reward Checking Poll

So how much do you spend per month on average with your reward checking debit card? I've created a poll on the sidebar of my high yield checking website. Base your amount on only one account. I would suspect that readers of this blog probably spend less on their debit cards than the average reward checking customer.


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Comments
20 Comments.
Comment #1 by marc (anonymous) posted on
marc
Nice post. I am looking forward to reading the links of the studies. I have wondered how they can make money on this and it must be the people not qualifying, because it can't be NSF/Overdraft fees with people keeping large balances. Miss 2 months of the requirements in a year on a 5% account and you're down to 4.16% (assuming 0% if you miss). The question I have is if it's a good deal for small banks, why don't the big ones do it? Is it simply because they get the deposits for being big anyway and don't need to and any additional debit revenue and deposit spread would be offset by cannibalization of their existing deposits that they pay nothing on? I am surprised someone like BofA hasn't come out with something similar (paying something like 2%) but perhaps the average customer is already a heavy debit user. And then there's the OD/NSF fees which will go down once you encourage people to hold higher checking balances. I could also see an outcry from merchants when a big player tries to get people to run their card over the more expensive network just to get rewards, which goes to my next point below...

The specification of non-PIN debit transaction is a big deal for these RC accounts because of the fact that revenue for these transaction go over a different network at a substantially lower interchange rate. (I'm still confused as to why) Many stores that allow for cash back with debit cards (drug stores and supermarkets mostly) automatically steer the customer to enter a PIN and you have to hit cancel or credit (not intuitive) to get it to process through the "credit card" network (and hence count as one of the qualifying transactions). See page 57-69 of this link:

http://www.mastercard.com/us/wce/PDF/MasterCard%20Interchange%20Rates%20and%20Criteria%20-%20April%202008.pdf

One thing merchants have in their favor is the cash-back ability when you use PIN (and the merchant pays no fee on this portion), but so long as the Reward Checking account has surcharge refunds, we don't need that feature.

Having started up an account at West Bank a few months ago, I find that the requirements aren't too bad. More than 12 would force me to worry a little more, but 12 or less is easy. You just use the card for small transactions and then put it away after you got them. I just don't like that I normally would use cash for these small transactions like work lunches, but with many places not requiring a signature, the speed of the debit transaction is actually faster than cash. The ACH /Dir Dep requirement isn't too much of a pain if your bank recognizes Countrywide or similar transfer as counting.

I agree with BG, though, that these accounts need to pay at least 1% higher for the trouble, especially given that for many the account is not at a local bank making deposits and withdrawals sometimes cumbersome.

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Comment #2 by marc (anonymous) posted on
marc
last part of the URL that was cut off in the comments...

MasterCard Interchange Rates and Criteria - April 2008.pdf

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Comment #3 by Anonymous posted on
Anonymous
I have a couple and use them basically as savings accounts. I rarely spend more than my interest earned the previous month and always try to keep my balance just under the max. When I get over, I siphon off any extra back into a regular online savings account.

I doubt they make money off of me.

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Comment #4 by Anonymous posted on
Anonymous
Same here. I get about $125 in interest a month, I pay $15 via billpay to a credit card and make 10 debit card purchases that total around $100-110. I'm usually done with those debit card transactions by the 10th of the month and use my 2% cashback credit card exclusively from then on. Sometimes, when the grocery totals a bit much, I make two orders, pay the smaller one with the debit card and the rest with my credit card. So, basically I use up the monthly interest for expenses while leaving the principal (which is maxed out at 25k) untouched.

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Comment #5 by Anonymous posted on
Anonymous
I have one account that takes 3 to 5 days to post transactions. Because of this I sometimes have the required useage done on the first day of the month becaus I use my card to pay a few bills the last couple days of the month. For example, my phone bill can be paid in $5 dollar increments 4 times a day. In 3 days I can have 12 done. Unfortunately, they are increasing POS transactions from 10 to 13 starting in Oct....But they have kept the interest rate at 6.01%

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Comment #6 by Anonymous posted on
Anonymous
I forgot to add; while I do use small purchases to make sure I reach my quota, later in the month I have used my card for larger purchases. Usually only in an emergency and not because I want to.

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Comment #7 by Anonymous posted on
Anonymous
Banking Guy, I've raised this point before, but it needs to be raised again and each time consideration of these kinds of accounts are being done.

Given that these cards can be used like credit cards (hit the credit button) without a need to enter your PIN, it's extremely dangerous if one of these cards are stolen. One does NOT receive the same kind of federal law protection with debit/check cards as one does with credit cards.

It doesn't matter if MasterCard or Visa has policies in place which says such and such. It's NOT protected by federal law. MC and Visa can change policy at time.

Money is directly taken out of these checking accounts when an unauthorized transaction transpires, unlike a credit card, where one won't have to pay the disputed charges.

For this huge security risk reason, I just cannot risk opening any of these kinds of 'rewards checking' accounts. Although I'm very tempted with these high rates that's been offered.

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Comment #8 by Banking Guy (anonymous) posted on
Banking Guy
Yes, that is a downside to these reward checking accounts. What I found interesting is that the Clearstar CEO reported a fair amount of debit card usage on their free checking account. I don't know why people would choose debit cards over credit cards when there are no extra rewards.

I should have provided a link to this previous post comparing protections of credit cards with debit cards.

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Comment #9 by Anonymous posted on
Anonymous
Because many people can't get credit cards...And many people don't want credit cards.

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Comment #10 by Jano (anonymous) posted on
Jano
There's very little risk involved if your debit card does get stolen. I'm banking with Charter Bank now that offers a very lucrative 6.01% APY on its rewards checking account. The limit on daily transactions is only $300. So even if my card does get stolen — no big deal. Worst that can happen is I lose that 300 bucks. It's common sense to report the card stolen or lost, the moment you realize it is... and that would be what, the same day?

I also use the debit card for small transactions, usually in the beginning of the month, intermittently using my rewards AmEx for bigger purchases, and as soon as have 10 transactions down, I use my AmEx exclusively for everything else for the rest of the month. I don't think that the total exceeds $100 bucks a month for the debit card transactions.

People that prefer cash over credit cards lose either way you look at it. Credit cards boost your credit score if you use them right, plus give you all kinds of benefits and rewards. It's a win win situation if you live within your means and never carry a balance. Besides, its flexibility and security won't ever be able to match those of cash.

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Comment #11 by Anonymous posted on
Anonymous
I have two rewards accounts. One is with Heartland Community Bank which I have had for 6 months and it is a great account and bank. The other is with Lee County Bank which I have had for 2 months and it seems to work well for me. The 10 debit card requirements at each bank is not a problem. I use my debit cards for normal purchases and don't worry about it. My ACH deposits are made on the same day every month from Countrywide and GMAC so that is not a problem. To those who are always afraid of theft I say, maybe you shouldn't leave your house and that way you won't get run over by a car.

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Comment #12 by Anonymous posted on
Anonymous
I am one of those customers who do not contribute anything in interchange fees. I use 10 debit transactions ranging from $0.10 to $1.00 within the first week of the new month and then don't touch my cards at all and keep my balances just a few $ short of the cap.
I have stopped using any CDs at all since RCs pay so much more and money is not locked.
I use Alliant for my ACH requirements which still pays 3.75%.
I use rebate credit cards for all my purchases even if it is just $1.

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Comment #13 by Anonymous posted on
Anonymous
And I forgot to mention that all my DC transactions are done online only so that the cards just stay in my safe deposit box without any risk of theft or misuse.
Only DC that sees light of the day is from Alliant which is used for depositing checks only and never for withdrawals.

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Comment #14 by Anonymous posted on
Anonymous
Nice posts indeed! Maybe that's why starting Oct 2008, turbochecking (Charterco.com) is increasing requirement from 10 to 13 debit credit transactions. They need the extra interchange fees and transactions. (Rates vary depending on Visa or Mastercard, type of merchant, purchase, transaction, etc.; info from merchant interchange rates at Visa and Mastercard websites.) Another downer is that most reward checking accounts' online statements do not include check images; instead, you gotta 1-by-1 click on each check and print/save them within a 30 or 60 or 90 day period (otherwise, if you may need it down the road for any reason, you'll have to pay a fee.). Also, i've seen the daily ATM withdrawals are much less than most checking accounts. However, recently I noticed CharterBank raised their limits: ATM from 300 to 500; POS from 1500 to 2000. Of course, if your debit card number or the card was ever used unauthorized or stolen, you risk possible NSF/overdraft/ below 0 fees and additional charges until days or weeks after the day you log in your account or the day you get in the US mail letter about NSF. Bank investigation takes time and you are still out of your money. However, a plus that i've seen in some disclosures of Reward checking accounts: refund of another bank's ATM fees=nationwide ATM fees; ATM withdrawals outside the US will be charged Foreign Currency conversion fee of 1% of the network amount. I wonder if these Reward Checking banks factored the ATM reimbursement ATM refunds in their considerations?

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Comment #15 by Anonymous posted on
Anonymous
marc said,
I am surprised someone like BofA hasn't come out with something similar (paying something like 2%) but perhaps the average customer is already a heavy debit user.

Actually, BofA does indeed have something similar, but with even less cost to them/benefit to you. Anytime you make a debit card purchase as "credit" they round it up to the next dollar, and put the additional change in your savings account. You think you're earning rewards but you're really not.

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Comment #16 by Anonymous posted on
Anonymous
As I have written in messages earlier Charter's raising DC usage to 13 would make no impact on me since meet them with minimal purchases. I am also not concerned with check images since I do not write any checks with this account and use only ACH withdrawals.

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Comment #17 by Anonymous posted on
Anonymous
I am off of debit cards. Some person, a thousand miles away, has made a debit card with my number on it. All they have to do is hit "credit", no pin required. So far they have run up $1000.00 at gas stations, Ross, Office Max etc. I have to fund the $1000.00 until the paper work is done to replace the money. I only used this card at Walgreens twice and Walmart once. I am a guy that shreds everything and hides the keyboard when putting in my pin. I have had the bank disable the credit part of the new card. It now requires a pin for all charges. I don't think they got the pin as no cash was taken out of the ATM. There is a story in the paper this morning about the guy that had $107000.00 removed from his account over time, and like me, his card was in his wallet. I decided that the hackers are to smart for me. I am on the defensive now.

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Comment #18 by Anonymous posted on
Anonymous
Sorry to hear from Anonymous10:58am 9/5. That's the risk with using the debit card as "credit" for these RC accounts; can you imagine if you only check your account info once a month? I'm curious to learn how many days or weeks it takes the bank to finish investigation and credit your account and credit lost interest and such, whether they do that or not.

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Comment #19 by Anonymous posted on
Anonymous
The BoA's version, is their "Keep the Change" Savings Service. Nowadays, BoA match 100% of the amount of your Keep the Change transfers during the first three months after you enroll, and we will match 5% thereafter, with max at $250/year, and match upto 5 checking accounts per depositor or household, whichever is less. The matching funds credited to savings account annually, within 8 weeks after the month of your anniversary in enrolling to the service. So, buy soda for $1.04 at store, BoA will transfer 0.96 more from your checking to savings, and BoA will give you $0.96 in "interest income" to your savings; payable ~2 months after your 1year anniversary,. After 3-initial months, that 1.04 transaction will earn you only 5cents.

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Comment #20 by Anonymous posted on
Anonymous
The landscape has really changed here. Checking accounts are now paying interest, almost as high as Certificates of Deposits in some cases. Schwab, Etrade and ING have some pretty good offers.

I've found a few www.topcheckingaccounts.com and at www.bankrate.com but that Bankrate has become a bit of mess.

The only downside to these accounts, is that none of these banks/brokerages have local or nationwide branches. So you'll probably have to have one of these online checking accounts in conjuntion with a local/nationwide bank. Once it's open though you can setup direct deposit and start earning interest and have cash readily available.

-Sam

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