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Future of High-Yield Reward Checking Accounts?

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It has been about four years since I first began reporting on high-yield reward checking accounts. At that time some considered these accounts as gimmicks that wouldn't last. Reward checking has indeed survived. There are now 100's of reward checking accounts available throughout the nation. However, reward checking hasn't survived at all banks, and those that survived have lower rates and balance caps. But rates cuts are nothing unique to reward checking as anyone with an internet savings account can tell you. In addition to the continued low interest-rate environment, reward checking will likely face additional head winds as new overdraft and debit card regulations take effect. My concern is whether reward checking accounts can continue to be a good alternative to internet savings accounts.

I was reviewing the website of the company that created reward checking, BancVue, and found this marketing brochure (pdf) that is intended to sell reward checking to banks and credit unions. This has been around for a few years, but I thought it would be useful to review it again. Below is a snapshot of a table in this brochure that compares the profitability of reward checking to regular free checking.

reward checking vs free checking

Three things that I found noteworthy from this table include:

  1. Interest Income is shown as the primary source of profit. I have a feeling in today's environment with low loan demand and high deposit growth, this source of profit is much lower.
  2. NSF Revenue is the second largest source of profit. The new overdraft regulation that just recently took effect will likely have a large impact on this. However, it might not be as bad as you might think since it has been reported that many bank customers have opted into overdraft protection.
  3. Debit Card Revenue is third as a profit generator. As you would expect it's much higher for reward checking as compared to free checking. However, it's surprising to see that it's much less than NSF revenues. New regulation that allows the Federal Reserve to regulate debit card fees paid by retailers may lower this profit source.

Banks often emphasize the savings they get from reward checking due to e-statements and online bill pay. However, this doesn't give them an edge over online savings and checking accounts. Two features that do help them offer higher interest rates include the balance cap and the fact that not all customers qualify for the top rate. Perhaps with these features and with some extra revenue from debit card purchases, reward checking will be able to continue to provide significantly higher yields than internet savings accounts. The question is how much higher?

When reward checking first started to take off in 2006 and 2007, most were offering yields around 6% which was about one percent above the best internet savings account yields. If that same spread existed today, most reward checking account yields would be under 2.50%. Fortunately, many reward checking accounts are paying over 3.00%, and some of the best are paying 4.00% and above. I hope this continues, but I have a feeling there will continue to be downward pressure on the rates.

Poll Question

That leads me to this poll question: What's the minimum yield a reward checking has to offer to be worthwhile? Assume that the reward checking account has a balance cap of $25,000. And assume you're comparing against internet savings accounts with today's rates. I was going to ask how much higher does a reward checking rate have to be compared to an internet savings account to make it worthwhile. But that question was a bit long.

  Tags: checking account

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Comments
13 comments.
Comment #1 by Hotace (anonymous) posted on
Hotace
I don't bother with any kind of interest rate below 3%.  It's not worth it at 1040 tax time.  Rates longer than12 month periods are not worth it at my time of life.

 

Horace

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Comment #2 by chip (anonymous) posted on
chip
3% is it for me. Its too much work if it get lower. I will just close account and move on like always.

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Comment #4 by TJ (anonymous) posted on
TJ
3% is my limit. I have closed one account that dropped to that rate.  I figure I can get a 3% 36 mon CD rate from University of Iowa Credit Union so why bother with the 12 - 15 transactions per month if you make 3% or less.

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Comment #5 by BancVue Ltd. (anonymous) posted on
BancVue Ltd.
Ken,

Good analysis.  A couple of additional points for your consideration.  While it is true that rates have fallen on reward checking accounts, they are still advantaged for both account holders and financial institutions vs. free checking.  Account holders are receiving interest for their everyday behaviors which typically include debit card usage and direct deposit, something free checking does not offer.  The institution has a higher profitability on reward checking accounts because more value creating behaviors occur.  In addition, reward checking accounts offer the flexibility to adapt to market conditions through the ability to alter product design via several different levers on the revenue and expense side.  So while legislation is affecting all checking accounts, reward accounts are advantageous to free checking for the institution and the account holder.

Regards
BancVue



 

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Comment #6 by rjm (anonymous) posted on
rjm
Bankvue bunches together groups that might otherwise not be together for its figures and its biggest selling point is "interest income", yet EVERY reward checking account has a limit for the high interest which shows they are toying with the figures.

I have 2 RCAs and I do my darndest to never charge more than a $3 purchase for either.

One month, I missed because a different bank refused a transfer for whatever reason which means i didnt qualify.

I should have COMPLAINED but I didnt. Will just make sure it doesnt happen again.

My biggest surprise over the last 2 years that Ive been doing them is Samsclub hasnt rejected my card despite at least a dozen very small transactions per month. (I need 24 total, sams is usually 15 of them simply because everyone else cuts me off after 2-3 small transactions)

i refuse to give up my 1.5-5% rewards on other cards just for a lousy $55k.

But, I have never used an ATM since getting a RCA so the bank save there.

In the long run, we are toast. In the meantime, make hay while the sun shines. I only wish I had the determination & such to juggle a dozen RCAs.

 

 

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Comment #7 by Karl (anonymous) posted on
Karl
I would go down to about 2.5% before I would consider looking elsewhere. I have been keeping an eye out on the rates of online savings and CDs and they really aren't that competitive compared to reward checking accounts, even as the rates have been falling.

@rjm You might be interested in a service called MicroMaximus which is designed specifically to help solve the problems you are having with reward checking accounts. The service allows you to schedule very small transactions, so you can get the most out of your current interest rate.

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Comment #8 by 51hh posted on
51hh
My bottom line is 4%. 

Reasons: (1) Part of the fund comes from HELOC at 2.24%.  I need at least a profit margin of 2% to cover the HELOC and my "labor."  (2) There are still many 4% deals on the nationwide and local list. 

I may need to downgrade my expectation as the time comes.  Back in the early (RCA) days, 5% is unsatisfactory.  Thus 3% RCA may be a gem in future days, especially in view of the current interest climate :-)

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Comment #9 by Anonymous posted on
Anonymous
Not worth the time and trouble to meet the high number of debit card transactions, IMO.  This is especially true if you find yourself using the card to make unnecesary impulse items to meet your quota.  I prefer the reward credit cards that offer 2-5% cash back at the end of each month and feel I'd lose most of this if I had to do the monthly "debit dance".

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Comment #10 by John C (anonymous) posted on
John C
I'm with 51hh... I'm doing my darndest to keep my RCA minimums threshhold at 4% or better. As time has passed, that's meant shifting from easy to find national accounts to mostly state or local based ones, as the roster of 4% national accounts has shrunk to almost none...

If my RCA rates get any less than 4%, then it would spur me to keep a smaller emergency funds account and then dump everything else into multi year CDs.... I'm not going to fiddle with debit card use and record keeping for multiple RCA accounts for 3% or below.

 

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Comment #11 by Jo (anonymous) posted on
Jo
Glad to see BancVue chime in on the latest climate of the RCAs. With a 5.12% at a nearby credit union, I do indeed have to brace myself for that to drop. A rate like this, however, definitely makes it worth the necessary transactions to qualify. And no, I am not one of those who will make a maximum amount of $3.00 or so. I don't like to abuse the system. But since I've got direct deposit going there anyways and have made it my main bill pay account, that compounding interest over time will be one in my favor.

I can then take that and invest in a CD if I come across one that is as competitive as the checking account.....

Great post, Ken. Thanks, yet, once again!

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Comment #12 by Anonymous posted on
Anonymous
hmmm...  based on the BankVue interst spreadsheet, they're implying the Bank makes 2.76x the interest paid out.  On a 4% APY account, that suggests the bank is making 11%!!!

as for the $ difference between the free checking and reward, I'm guessing that the implication is that a Reward banking customer will have a daily balance about 10x what they'd have in a similar free checking.

is there a hole in my assumptions?  it does seem like they are cooking the numbers a bit.

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Comment #13 by Tom (anonymous) posted on
Tom
30% of Rewards Checking accounts fail to qualify each month, earning approximately 0% interest.  They're then assuming that they loan out 100% of the balance.  So the interest spread is not 2.76x, but somewhere around 2x.

But the idea of RCA makes very little sense for a bank, since the alternative is not a regular checking account, but a brokered CD sold to an institutional investor.  The bank only has to pay out an extra 30-50 basis points of interest on a brokered CD.  Whereas an RCA could cost them an extra 200 basis points.

It's essentially an accounting shell game.  The banks are counting RCAs as core deposits.  This reduces their loans/core-deposits ratio, traditionally considered as an indicator of the bank's health.  Offering RCAs makes the bank look better on paper -- even though it actually makes more sense for them to sell brokered CDs.

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