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.
Three things that I found noteworthy from this table include:
- 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.
- 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.
- 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.
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.