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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Future of Free Checking and Reward Checking Accounts

POSTED ON BY

I recently had a conversation with a manager of a credit union with a reward checking account. Like many institutions with reward checking accounts, they have found it necessary to cut rates. The manager provided many insights into their decision about cutting rates, and I asked him if I could share his insights to my readers. He agreed, but he preferred that I not disclose his name or institution name. Since his insights are still useful even without specifics, I decided to post the general aspects of our conversation. They should give us a better understanding of how institutions view reward checking accounts and how they make decisions about future rates and balance caps.

The first thing I asked is why cut now. It has been over four years since the Fed first cut the Fed funds rate to near zero. Why didn’t your rates bottom out a year or two ago? It appears the rate decisions don’t happen overnight, at least for this institution. They had considered the decision to cut the reward checking rate many months ago. Earnings had been strong enough to allow them to push off the cut, but that wasn’t the only consideration. He described four reasons that caused them to cut their reward checking rate:

First, their deposit growth has been very strong, and their loan growth hasn’t kept up. We have seen this issue hit the entire banking industry as banks have released their quarterly reports. Banks and credit unions have more deposits than they can use. If they can’t make loans, they have to invest the deposits into things like Treasury notes which have very low yields.

Second, they are focused on their local competitors. They view their reward checking account as still being very competitive in their region even after the rate cut.

Third, the credit union has lost revenue due to the Durbin Amendment even though its assets are under $10 billion (only four credit unions have assets greater than $10 billion). The Durbin Amendment is a provision in the 2010 financial reform law that gave the Federal Reserve the power to cap debit card interchange fees and increase competition in payment processing. The interchange fee cap only applies to banks and credit unions with over $10 billion in assets. However, other parts of the provision which cover things like payment processing apply to all institutions, and it appears these are driving down the interchange revenue for even the small institutions.

Finally, many of the free services that customers expect with checking accounts (online/mobile banking, online bill payment, phone teller, etc.) have rising costs. This drives the institution to lower rates to offset the higher costs.

The credit union manager wasn’t too optimistic about the future of free and reward checking. One thing that may add more pressure is more limits on overdrafts. When the Federal Reserve released new rules on overdrafts in 2009, banks and credit unions lost a significant amount of fee revenue. The new rules may have helped the careless who often have overspent with their debit cards, but they have cost the careful savers who have never overdraft since banks and credit unions had to offset the reduced overdraft fee revenue with lower deposit rates or new monthly service charges.

New limits on overdrafts aren’t a certainty, but according to my credit union contact, the Consumer Financial Protection Bureau (CFPB) is floating around a proposal that will limit the amount that a bank can charge for an overdraft or limit the number of overdrafts allowed in a day or month. That could drastically reduce the income to all banks and credit unions.

Reward checking accounts have been offering a good alternative to internet savings accounts for the last five years. They have allowed savers to earn more interest without giving up liquidity. However, they are definitely not as good of a deal as they used to be. At least we’re not locked into reward checking accounts. If rates and balance caps fall and the accounts are no longer worthwhile, savers can easily move their money into internet savings accounts or in CDs.

Searching for Reward Checking Accounts

To find reward checking accounts available in your state, please refer to our reward checking table. You can also use the table to find reward checking accounts available nationwide. Refer to this post to learn how to use the table.

To learn more about reward checking accounts, please refer to my post 10 Common Traits of High-Yield Reward Checking Accounts.


  Tags: checking account

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Comments
20 comments.
Comment #1 by ytytytyt posted on
ytytytyt
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Dear Mr Tumin,

The 4 reasons given above (deposit growth / local competitors / Durbin Amendment / rising costs) do not appear to blame the FOMC for the upcoming future of free checking accounts.  ... How come?  ...... How did the manager with whom you had the conversation not blame the FOMC and/or the Chairman for the bleak future s/he sees here?

 ... Soemthing/anything bleak is about to happen, and there is no scapegoating the FOMC for it?  ... What is the world coming to ...  :-)

Yours Truly,
- Anon

6
Comment #2 by Anonymous posted on
Anonymous
Once you let the Government run businesses by regulations, those industries will fail sooner or later. The Government is the biggest innovation killer and the bureaucrats in Washington have no idea of how a business is run, yet they interfere  into everything, so down goes the economy, it is as simple as that.
They do it in the name of the American consumer protection act, but after few years those rules hinder and cost more than was designed for and the idea to protect the consumers turns into greater cost again and again.

20
Comment #3 by Anonymous posted on
Anonymous
Do banks even need depositors anymore? If they can just lend imaginary money of course they'll want to get rid of customers expecting interest and services. 

7
Comment #4 by Anonymous posted on
Anonymous
FEDs easy money destroyed the savers, what is it there else to know.

19
Comment #5 by ytytytyt posted on
ytytytyt
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Dear #4,

Didn't read the obit ...

... When is the service? :-)

Yours Truly,
- Anon

4
Comment #6 by Anonymous posted on
Anonymous
to #5 ytyt, I thought you are smarter than your comments, I guess we can see know your real weaknesses, no imagination in your mind when reading the info from the other posters.

8
Comment #7 by washerdreyer (anonymous) posted on
washerdreyer
What's happened to the comments at this site lately? The last couple posts I've looked have had their comment threads taken over by people who just want to complain about fiat money and the fact that we don't live in an anarchic state.

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Comment #8 by Anonymous posted on
Anonymous
#7, I agree with #4, there is nothing else to add or comment on. We have been served the exit door by Bernanke.

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Comment #9 by darkdreamer4u posted on
darkdreamer4u
To #2:

You say:

Once you let the Government run businesses by regulations, those industries will fail sooner or later. The Government is the biggest innovation killer and the bureaucrats in Washington have no idea of how a business is run, yet they interfere  into everything, so down goes the economy, it is as simple as that.

 

Well, it's not that simple: why are we in this situation? Because of deregulation of the banking industry in the past, especially under George W. Bush. So, you leave the banking industry free reign and they run the entire country in the ground because they don't know how to run a business in a sustainable fashion.

I'd rather have some tight regulations and oversight by the government that has a moderating effect than wild west capitalistic anarchy that endangers our country.

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Comment #10 by lou posted on
lou
"I'd rather have some tight regulations and oversight by the government that has a moderating effect than wild west capitalistic anarchy that endangers our country."

This is a strawman argument. No one is suggesting allowing a wild west capitalistic anarchy to exist. Contrary to what you may believe, we don't have anything even remotely resembling this wildly hyperbolic description of the type of economic system existing in the US now and/or in the past. Try starting a business in California and then tell me if you think we are not regulated sufficiently.

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Comment #11 by darkdreamer4u posted on
darkdreamer4u
lou, I was talking about the banking industry, which was almost completely deregulated in the 90's and 00's, the resulting miserable economic fallout we're still trying to cope with.

I suggest you distance yourself a bit from your myopic small business perspective and try to see the bigger picture once in a while.

7
Comment #12 by lou posted on
lou
Some parts of the banking system were deregulated, such as repealing parts of the Glass-Steagall, but don't you think it is grossly simplistic to blame the entire crisis on deregulation. The liquidity crisis we experienced in 2008 had many causes and there way many particpants, including homeowners and speculators who lied on their loan applications as well govt agencies who had the werewithal to regulate under current law but failed to do it.

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Comment #13 by Anonymous posted on
Anonymous
darkdreamer4u - #9, wow, I can not believe how uninformed you are.

The banks did not failed because of lack of regulations, they failed because of the democrats who ordered the banks not to turn down anyone who wants a mortgage and make the housing affordable to all.

Also, the democrats  in the name of discrimination laws, ordered banks not to turn down the minority who needed loans too. Hack, even the dead persons qualified for mortgage on stated income without any proof.

All of the above is well documented and debated many times over, when you order an institution to obey congressional order, you just added new regulation on the books.

And the unintentional consequence was the failure of the banking system.

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Comment #14 by darkdreamer4u posted on
darkdreamer4u
Another one who drank the Kool-Aid.

9
Comment #15 by Anonymous posted on
Anonymous
To #9 and #14, your Kool-aid must be mixed with alcohol.

Please read these:

http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=3ca9eb30-9396-42d9-a255-36f7fd681d0b

http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=58a4114b-0e86-4cbf-ad4b-70852d55253d

http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=58a4114b-0e86-4cbf-ad4b-70852d55253d

And there are over 1500 congressional records and findings for the banking failures and none of them talks about lack of oversite or regulations.

3
Comment #16 by washerdreyer (anonymous) posted on
washerdreyer
"[T]hey failed because of the democrats who ordered the banks not to turn down anyone who wants a mortgage and make the housing affordable to all.

Also, the democrats  in the name of discrimination laws, ordered banks not to turn down the minority who needed loans too. Hack, even the dead persons qualified for mortgage on stated income without any proof."

There's literally no evidence (unless you count fake evidence) that either of these factors were substantial causes of the housing crisis.  Peter Wallison has made a nice career out of running around claiming they were, and more power to him, I guess, but I'm sorry to hear people actually believe him.  If you think the government was responsible for stated income loans, or no income verification loans, or any of the low loan standards that were standard practice pre-crisis, you're very confused.  See, e.g. http://www.ritholtz.com/blog/2011/11/hey-bloomberg-the-data-shows-gses-did-not-cause-financial-meltdown/.  Or this http://www.calculatedriskblog.com/2008/07/krugman-on-gses.html.  Or this http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money.

 

Also these issues aren't really related to what I was objecting to above, which is the anti-fiat money crowd invading the blog comments here. 

 

4
Comment #17 by lou posted on
lou
"Also these issues aren't really related to what I was objecting to above, which is the anti-fiat money crowd invading the blog comments here." 

But I guess it is okay for the pro-fiat money crowd to invade the blog comments. Are you suggesting that anyone who is critical of Bernanke and current monetary policy, is part of the ant-fiat money crowd?

BTW, you think quoting Krugman makes you more objective than people with different views than you?

5
Comment #18 by Anonymous posted on
Anonymous
i agree lou but i thought it was klugman

1
Comment #19 by ytytytyt posted on
ytytytyt
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Dear darkdreamer4u,

>> Well, it's not that simple: why are we in this situation? Because of deregulation of the
>> banking industry in the past, especially under George W. Bush. So, you leave the
>> banking industry free reign and they run the entire country in the ground because
>> they don't know how to run a business in a sustainable fashion.

Whether it is tight Regulation / no Regulation or soemthing in between, the banking industry cannot run the entire country in the ground. 

Why?  That's because the banking industry does not operate in vacuum.  For every transaction banking industry does that is outside of itself, it needs a willing counter-party that lies outside of it! 

To put it simply, it is not sufficient to have a proverbial greedy banker to create a sub-prome loan, but it is necessary to have willing irresponsible American who is taking-up a loan that s/he most likely cannot pay and/or cannot understand.  :-)  ... Takes two to tango ...

BTW, I do not for even a second believe that USA was run into ground, but if I were to assume that, that running US to ground must have taken efforts not merely from the banking industry, but also from other industries and with healthy effort from all Americans to run the US to ground.

Yours Truly,
- Anon

2
Comment #20 by washerdreyer (anonymous) posted on
washerdreyer
I didn't link to Paul Krugman (from whom I've learned a ton and agree with on 90% of political issues), I linked to someone explaining why he was wrong.  Easy mistake to make if you just read the url and not what was linked to.  I also didn't claim to be "more objective," I claimed to be right about the causes of the housing market collapse.  Finally, of course it's fine to criticize Fed policy, or Ben Bernanke, or anyone else, but that's not the same as talking about "fake money" and claiming that the Fed is out to "destroy savers" (as opposed to trying to at least partially fulfill it's dual mandate).

 

4
Comment #21 by ytyt posted on
ytyt
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Dear washerdreyer,

Indeed ... this guy lou keeps ranting about FOMC, and quite a few here keep crowing about the how the FOMC is out to destory (so called) savers.  (FOMC has better tasks to perform than going after insignificant minority savers with fringe opinions that are way too away from mainstream.)


I do not take these sore losers savers seriously at all.  In fact, I consider them as jokers with web-access who've made an on-line career of FOMC bashing. :-)

Yours Truly,
- Anon

3