I first started reporting on high-yield reward checking in 2006, and since that time I've reviewed hundreds of these accounts. The high-yield reward checking model was created by BancVue, but in the last few years we have seen banks and credit unions create their own versions of reward checking accounts. The version from BancVue continues to be the most prevalent. We list all versions of reward checking in our reward checking table.
As I described in February, reward checking has been under pressure from not only the ultra-low interest rate environment, but also from new regulations. The new debit card interchange fee regulation which may or may not take effect this year could have a significant impact. Both banks and credit unions have made that claim, but it's possible that even if the regulation takes effect as scheduled, there won't be a significant impact. The reason is that the vast majority of reward checking accounts are offered by small institutions which are exempt from the interchange fee caps that will be set by the new regulations.
So until the new regulation takes effect and its impact to reward checking becomes clear, I'm not going to write off reward checking. As long as their rates are at least one percent above internet savings account rates (for reasonably large balances), I'm going to continue to view reward checking as a good alternative to internet savings accounts.
If you're looking to open a new reward checking account, I thought it would be useful to compile a list of common traits of reward checking. This is intended to help you understand what to expect when you open these accounts and how to get the most out of these accounts.
First, for those who are not familiar with high-yield reward checking, here's a general overview.
Overview of High-Yield Reward Checking
The basic high-yield reward checking account is a free checking account with no monthly service charges. You are rewarded with a high interest rate if you meet monthly requirements. Most also reward you with ATM fee reimbursements if you use ATMs at other banks. Below are the typical rewards:
- Some top rate (2.50% is typical) for balances up to a cap ($25K is typical)
- Much lower rate (i.e. 0.25%) for the portion of the balance over the cap
- Tiny base rate if requirements are not met (i.e. 0.05%)
- ATM fee refunds up to a certain limit per month
The typical monthly requirements include:
- 10 to 15 debit card purchases
- At least one direct deposit or ACH transaction
- Receiving electronic statements
There are sometimes additional requirements such as logging into online banking at least once a month or performing online bill payments.
One nice thing about this debit card requirement is that it's favorable to savers rather than spenders. Rewards from credit and debit cards are often based on the amount of the purchases. An example is 1% cash back on the total amount of your purchases. For the reward checking, someone who makes 10 debit card purchases that total $20 can get the same level of reward as someone who makes 10 debit card purchases that total $2,000 if both maintained the same checking account balance.
It might seem like this model might not be profitable for the bank. I've looked into the math behind reward checking in 2009 and last year. One thing that helps make it profitable is that the average customer won't maintain the maximum balance that qualifies for the top rate. Many customers will maintain much smaller balances. Also, not everyone will meet the monthly requirements. In short, the reward checking customers who are big spenders with small balances help banks pay for those who don't spend much and maintain the maximum balances.
10 Common Traits of Reward Checking
Now that you understand the basics of reward checking, here are some common traits. For each trait, you'll probably find a few exceptions. I included a few of these. If you know of others, please leave a comment.
- Most reward checking accounts are free checking accounts. There is no monthly service charge even if you don't meet the monthly requirements. All BancVue reward checking accounts that I've seen have this trait. However, banks that have made their own version of reward checking sometimes do have potential monthly fees for small balances or if you don't meet the monthly requirements.
- Most reward checking accounts don't require a certain dollar amount for purchases. They just require a certain number of purchases per month. Just like for the free checking trait, this trait is very common for the BancVue reward checking accounts. Banks that have their own version are the ones that often have requirements on the purchase amounts. Requirements can be a certain amount per purchase (like at Randolph Bank) or certain amount for the total of monthly purchases (like at The Berkshire Bank). If your bank doesn't have any requirements for the amount of the purchases, it's important to note the banks expect the customer to use the account as their primary checking account. Too many small purchases can get flagged, and the bank has the right to close accounts for any reason.
- Most reward checking accounts allow either PIN or signature-based (credit) debit card purchases to count toward the monthly requirements. Some require only signature-based. For the bank, signature-based purchases have the benefit of higher interchange fees. For customers, the benefits of signature-based purchases include not having to remember the PIN and extra fraud protection provided by VISA or MasterCard. The downside is that signature-based purchases take longer to post to your account.
- It's common for banks to reduce the availability of their accounts. Many have launched their accounts with nationwide availability. Eventually, most reduce the availability to their state or local market area. This is one reason to get in early. It's rare for banks to close accounts of out-of-state customers. I only know of one example.
- Another benefit of getting in early is that some banks have grandfathered existing customers with the original balance cap. One example is Danversbank which kept the $100K balance cap for existing customers while reducing it to $25K for new customers.
- It's common for banks to waive the requirements for the first month after the account is opened. This is done since it can take a few weeks for the customer to receive the debit card. If it takes longer, ask your bank for another month waiver.
- Banks and credit unions that offer reward checking rarely have good ACH transfer systems. If they do have one, it often has several limitations (like a low transfer limit). However, they shouldn't restrict ACH transfers initiated from another bank. So having an account at an internet bank with a good ACH service (like Ally Bank) can make it easier to use the reward checking account.
- ACH transfers initiated by another bank will most always satisfy the direct deposit requirement even if the bank doesn't list ACH as an alternative to direct deposit. This is another reason to have an internet bank. Does anyone know of a reward checking account where an ACH didn't meet the direct deposit requirement?
- Some banks will allow you to open multiple reward checking accounts. You still have to meet the monthly requirements for each account. This can be useful if your savings exceeds the balance cap. However, more banks have started implementing limits on the number of accounts. This is another benefit of getting in early. Banks will often grandfather existing customers.
- If your bank doesn't allow multiple accounts or if you don't want the hassle of meeting another set of monthly requirements, some banks offer a reward savings account (also called Kasasa Saver). The rate is lower than the reward checking account, but for many cases, it's higher than internet savings account rates. To qualify for this rate, you have to meet the reward checking requirements. Also, most reward savings accounts have balance caps similar to the reward checking caps.