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Media and Consumer Advocates Report on the Value of Reward Checking Accounts

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Bankrate recently published this article: High-yield checking: A good bet. As stated in the article, "there are high-yield checking accounts that continue to sport very good yields despite the low-rate environment." These accounts continue to spread to more banks and credit unions. The first company to bring reward checking to the market was BancVue. According to the article, other companies are creating similar products, and some financial institutions are coming up with their own versions. According to the BancVue CEO, institutions offering BancVue's reward checking accounts have grown from 350 in 2007 to 526 today.

Another interesting topic mentioned by the BancVue's CEO is how banks decide on availability:
Some banks and credit unions choose to offer the product only in their local area, others allow consumers nationwide to sign up. "Some (institutions) will go national for a while and get a good number of new accounts, then change to only go local for a while," Krajicek says. "Others will stop being strictly local and go national. The reason is that sometimes the institutions will be so successful when they go national that they achieve their goals pretty quickly and can back off. But from a bird's-eye view there are always quite a few national offerings on site."

We've seen this happen to several banks in the last year in which a bank starts offering the account nationwide and then limits it to local residents.

Larry Daniel, direct of retail banking at First Arkansas Bank & Trust was interviewed in the article. I first posted on this bank's nationwide reward checking account in December 2007 when it was offering 6.06% APY with no balance cap. By February of 2008, it cut the rate to 4.44% APY with a $50K cap. However, after that rate cut, the bank has held steady. It has been over a year, and the bank continues to offer this same rate with the same balance cap.

Daniel provides some insights into how they can maintain the high rates. According to Daniel:
the structure of the accounts is what allows the bank to maintain the yield.

"These are electronic-driven, behavioral accounts. The customers aren't as demanding, we don't have to provide people face-to-face, we don't have to have bricks and mortar, and because of the electronic nature, we've either decreased expenses or increased revenue, and we're able to share a piece of that savings or that increased revenue with the customer."

Daniel doesn't directly mention the debit card usage requirement. It seems that banks downplay the revenue from debit cards. I still maintain that the debit card usage requirement is a major reason why they can offer rates higher than internet savings account rates (see my post on the math behind reward checking).

Perhaps the banks don't want to reveal how much profit they make on the debit cards. The consumer advocate Clark Howard has often made this claim. Here's an excerpt from his show notes from 2007:
The banks love debit cards because they make huge profits on them. Most of us have had the experience of making a purchase with a debit card and being asked if we want to do it as debit or credit. If you go for credit, the merchant will pay $1.50 in processing fees.

In that post, Clark also discusses the added risks of using a debit card vs. a credit card and the issue of holds being placed on part of your checking account balance when you use debit cards at gas stations and hotels. Even though Clark Howard still dislikes debit cards, he does see the advantage of reward checking accounts for savers. Here's an excerpt from his March 25th show notes:
some checking accounts come with very high interest rates because they're essentially funded by retailers! Merchants pay exorbitant fees whenever you run a debit transaction as a credit card and sign for it. So the bank, in essence, rips off the merchant and then passes along a part of the bounty to you.

This is similar to a checking account equivalent of a credit card company offering big cash back rewards funded by heavy merchant fees, according to Clark.

As Clark mentions, the rewards that we get from these checking accounts are like the rewards that we get from cash back credit cards. However, most of the rewards go to savers rather than spenders.

Reward Checking Account References:


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Comments
11 Comments.
Comment #1 by mooLah (anonymous) posted on
mooLah
great work spreading the knowledge of these accounts!

a month ago i signed up with my local bank. i dont think the requirements on these accounts are asking too much, especially considering the current environment... but if the fed starts increasing rates, will these reward checking account rates go up too?

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Comment #2 by Anonymous posted on
Anonymous
Thanks but No Thanks to these reward checking accounts.
I will just continue to stick with my laddered CDs and hope that interest rates will begin to climb sometime in the future. Not too distant, I hope. But it doen't look good for rates to rise any time soon.

1
Comment #3 by Laurence Witherington (anonymous) posted on
Laurence Witherington
Moolah, I'm a writer at Smart Money magazine and would like to interview you about your move to a local bank. Please call me 212-830-9222 if you have time for a quick chat. Or email lwitherington (at) hearst (dot) com

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Comment #4 by Anonymous posted on
Anonymous
I just got back from opening an awards checking account at Bank 1440 (AZ) after being turned down by an on-line bank (Heartland Community Bank).

I've gotten so used to opening accounts on line that I don't like to waste time going into a bank but so far the deal sounds good.

5% on balance up to 25K, 2% on balances over 25K. After reading all the good info on this site I was able to ask all the right questions.

I can use the Visa debit card either as a debit card or credit (10X per month) to qualify for the good rates. I'm also guaranteed no liability over $50 if someone gets a hold of my Visa number.

They also said I can put a max limit on the card if I want. Now lets see how much of a hassle it is to meet the 10 transactions each month.

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Comment #5 by Bill (anonymous) posted on
Bill
Had a bad experience this month when my credit card company failed to process my ACH payment. Credit card account is paid but the funds were never debited from my reward checking account. Cost me about $180 of lost interest as that would have been my one required ACH transaction.

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Comment #6 by Anonymous posted on
Anonymous
After making 10 debits for the month, I returned an item to the store receiving credit in full for my one debit purchase. The bank recorded this as a "Reverse Debit", effectively turning my 10 debits into 9 debits. Had I not noticed this before the month ended, I'd have only made 9 debits and not received the 5% interest. And yes, as "Bill" the previous writer notes, this may cost you a couple hundred dollars in lost interest if you have $50,000 in the bank. These Rewards accounts are great "IF" you make sure to do 100% of the monthly requirements. My recommendations: use the U-Scan at the grocery store, scanning 10 inexpensive items individually, then be done with it for the month. Direct deposit is great as my employer allows a limitless split of my paycheck, so in goes a buck to each Reward account for the month (that part is easy!).

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Comment #7 by Anonymous posted on
Anonymous
Is it true that a supermarket pays $1.50 per credit transaction?

I don't believe it. But I would like to know the actual fee.

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Comment #8 by Rick (anonymous) posted on
Rick
To make sure I get my 10 transactions on both of my cards I will aim for 13 transactions each. That way I'm covered if one or two are not counted. Currently I have one out of state and one local account, each paying 5%. I have a piece of card the size of a credit card in my wallet where I check off each purchase. Recently I put together a table that lists banks paying 5%+ and have a Bauer Financial rating of 4 or 5 stars: http://www.rickety.us/2009/03/highly-rated-banks-offering-rewards-checking/

I've been using rewards checking now for over 8 months, changing banks once when they dropped their rate to 3%. I have not missed my full interest once. I highly recommend these FDIC insured accounts. Hope this helps.

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Comment #9 by Anonymous posted on
Anonymous
These reward plans are proven by actuaries to be worth it to the bank. Most everyone eventually ****s up. That's why the banks do it after all. And a month of interest can drop the effective APY by 1-2 points. When you consider this risk, plus for those of use whose time is money, these accounts and the worry involved are just not worth it. - sfchris

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Comment #10 by Anonymous posted on
Anonymous
These reward checking rate gimmicks remind me of mail-in rebate programs. The rebate promoters hope that some of the buyers of the product forget about submitting the rebate and they can make even more money when customers lapse and forget about submitting them.

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Comment #11 by Smart Money (anonymous) posted on
Smart Money
A reporter at Smart Money magazine would like to speak to anyone who has recently switched banks to get a higher interest rate. Please call Daren Fonda, 212-830-9298, if you have any thoughts on the subject.

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