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How to Write a Check: Your Step-by-Step GuideHigh Yield Reward Checking Account News and Reviews - Future of High Yield Accounts?
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ON BY Ken Tumin
High Yield Reward Checking is starting to receive more exposure. This Bankrate article reports on this new product with interviews from executives of two banks that offer nationally-available reward checking accounts, State Bank of Toledo and EVB.
High yield reward checking accounts offer very high yields (some currently as high as 6.25% APY) as long as the customer meets 3 typical monthly requirements:
If the customer doesn't meet these requirements during the month, the rate falls to some low yield for that month. Typically, this base yield is under 1%. The high yield will return for the month that the customer meets these requirements. Even though the customer may not receive the high yield when requirements are not met, there's never any monthly service charge regardless of balance.
In addition to very high yields, the reward checking account typically offers refunds of ATM fees charged by other banks.
One other catch regarding these reward checking accounts that wasn't mentioned in the Bankrate article is that these accounts usually cap the balance that will earn the high yield. The cap is typically $25,000. There are a few banks (State Bank of Toledo is one) that don't have this cap. Some have caps that are $50K or $100K.
Does It Have a Future?
The interesting question that was discussed in the Bankrate article is the question of whether these high yield reward checking accounts will last. As you would suspect the CEO of Bancvue, one of the main suppliers of reward checking to financial institutions, is optimistic. He mentioned that reward checking accounts are twice as profitable to banks as free checking and the attrition rates are 70% lower. This is done by reducing costs with technology (electronic statements) and from revenue from check card usage (most people will use it way more than what's required). However, as one industry analyst mentioned in the article, you have to wonder of how much impact can e-statements have. The e-statement might save the bank around $2 per month, but that doesn't pay for an extra 4% interest on a balance of $10K or more.
Some other supposed advantages that the article didn't mention, are described by Strunk & Associates, another provider of reward checking accounts to financial institutions. These include:
I've mentioned this issue of increased overdraft revenue in a previous post. There were many commenters who had doubts that banks would actually see more profits from this in their reward checking accounts since people should be keeping larger balances in these checking accounts to benefit from the higher yield. That should reduce the overdrafts. However, you have to remember that the average person doesn't have much savings. He or she may have good intentions of building a savings in one of these reward checking accounts, but will often end up with a smaller balance than planned. Being forced in the habit of using this debit card rather than a credit card, a few large unexpected expenses could quickly cause overdrafts.
Reward Checking Downsides?
In addition to the obvious downsides like debit card usage requirements, there's another potential downside related to customer service. Small banks that offer these may not have the resources to offer the customer service that you expect. A reader just told me of the problems he had when he was outside the US and lost his ATM card at a bad ATM machine. State Bank of Toledo was unwilling to waive a $10 fee for the ATM card replacement and offered no assistance in sending emergency cash or helping him get his card back from the bank that owned that ATM. So the small banks offering these reward checking accounts may not have the resources to offer the customer service and fee waivers that you might expect.
From the Bankrate interview of the State Bank of Toledo executive, it seems State Bank of Toledo is very happy with the number of out-of-state accounts they've opened. As I mentioned in my first post on this bank, it's a very small bank with only 21 employees and total assets of $85 million as of 6/30/07. So you have to wonder with all this new publicity, will they need or be able to keep the rate so high (currently 6.01% APY)? And with all these new customers, will the customer service suffer?
Finding a High Yield Reward Checking Account
During this year I've posted on dozens of reward checking accounts around the country. Most have been offered by small banks and credit unions and require customers to visit a branch to open the account. However, a few like State Bank of Toledo allow customers from any state to open an account. Here's a list of banks and credit unions that I've found that don't have local restrictions:
For other reward checking accounts in other parts of the country, please see my reward checking account page and my best checking account post.
Update 12/14/07: State Bank of Toledo is now listing a new rate of 5.01% APY for balances up to $70,000. Please see this post for more details.
Update 3/13/07: For more history of reward checking accounts, please refer to this post.
High yield reward checking accounts offer very high yields (some currently as high as 6.25% APY) as long as the customer meets 3 typical monthly requirements:
- around 10 debit card transactions (non ATM)
- direct deposit or auto debit
- electronic statements
If the customer doesn't meet these requirements during the month, the rate falls to some low yield for that month. Typically, this base yield is under 1%. The high yield will return for the month that the customer meets these requirements. Even though the customer may not receive the high yield when requirements are not met, there's never any monthly service charge regardless of balance.
In addition to very high yields, the reward checking account typically offers refunds of ATM fees charged by other banks.
One other catch regarding these reward checking accounts that wasn't mentioned in the Bankrate article is that these accounts usually cap the balance that will earn the high yield. The cap is typically $25,000. There are a few banks (State Bank of Toledo is one) that don't have this cap. Some have caps that are $50K or $100K.
Does It Have a Future?
The interesting question that was discussed in the Bankrate article is the question of whether these high yield reward checking accounts will last. As you would suspect the CEO of Bancvue, one of the main suppliers of reward checking to financial institutions, is optimistic. He mentioned that reward checking accounts are twice as profitable to banks as free checking and the attrition rates are 70% lower. This is done by reducing costs with technology (electronic statements) and from revenue from check card usage (most people will use it way more than what's required). However, as one industry analyst mentioned in the article, you have to wonder of how much impact can e-statements have. The e-statement might save the bank around $2 per month, but that doesn't pay for an extra 4% interest on a balance of $10K or more.
Some other supposed advantages that the article didn't mention, are described by Strunk & Associates, another provider of reward checking accounts to financial institutions. These include:
- Increases online banking (less in-branch services)
- Direct deposit and other ACH transactions increase dramatically (lowers processing costs)
- Increase overdraft revenue (every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue)
- Increase customer retention
I've mentioned this issue of increased overdraft revenue in a previous post. There were many commenters who had doubts that banks would actually see more profits from this in their reward checking accounts since people should be keeping larger balances in these checking accounts to benefit from the higher yield. That should reduce the overdrafts. However, you have to remember that the average person doesn't have much savings. He or she may have good intentions of building a savings in one of these reward checking accounts, but will often end up with a smaller balance than planned. Being forced in the habit of using this debit card rather than a credit card, a few large unexpected expenses could quickly cause overdrafts.
Reward Checking Downsides?
In addition to the obvious downsides like debit card usage requirements, there's another potential downside related to customer service. Small banks that offer these may not have the resources to offer the customer service that you expect. A reader just told me of the problems he had when he was outside the US and lost his ATM card at a bad ATM machine. State Bank of Toledo was unwilling to waive a $10 fee for the ATM card replacement and offered no assistance in sending emergency cash or helping him get his card back from the bank that owned that ATM. So the small banks offering these reward checking accounts may not have the resources to offer the customer service and fee waivers that you might expect.
From the Bankrate interview of the State Bank of Toledo executive, it seems State Bank of Toledo is very happy with the number of out-of-state accounts they've opened. As I mentioned in my first post on this bank, it's a very small bank with only 21 employees and total assets of $85 million as of 6/30/07. So you have to wonder with all this new publicity, will they need or be able to keep the rate so high (currently 6.01% APY)? And with all these new customers, will the customer service suffer?
Finding a High Yield Reward Checking Account
During this year I've posted on dozens of reward checking accounts around the country. Most have been offered by small banks and credit unions and require customers to visit a branch to open the account. However, a few like State Bank of Toledo allow customers from any state to open an account. Here's a list of banks and credit unions that I've found that don't have local restrictions:
- Update 7/15/08: Website with over 200 reward checking accounts
- 5.01% at State Bank of Toledo, applies to first $70K
- 6.01% at Provident Credit Union, applies to first $25K balance
- 6.01% at Consumers Credit Union, applies to first $25K balance (not NCUA insured, only ASI)
- 6.01% at M/A-COM Federal Credit Union, applies to first $100K balance
- 6.01% at Connexus Credit Union, applies to first $25K balance
- 6.01% at Air Academy Federal Credit Union, applies to first $50K balance
- 5.25% at First National Bank, applies to first $25K balance
For other reward checking accounts in other parts of the country, please see my reward checking account page and my best checking account post.
Update 12/14/07: State Bank of Toledo is now listing a new rate of 5.01% APY for balances up to $70,000. Please see this post for more details.
Update 3/13/07: For more history of reward checking accounts, please refer to this post.
I haven't jumped in on one yet because I would have a very hard time meeting the 10 to 15 debit card transactions a month. I guess I am old fashioned, but I still like the choice of writing a paper check at the grocery store or, heaven forbid, paying cash.
I can see these being popular with the younger generation savers who seem to dispise carrying money or a wallet.
My reason for not using a DC is because I can get free ride for a month and get rebates too.
It more than compensates a little extra interest that I may get.
If consumers don't fail, don't rack up NSF fees and the bank/credit union most likely has to pay Bankvue a hefty fee on top of that, there is no way this can be profitable.
It will be interesting to see what happens in a year to see if these accounts did make sense for both consumers and financial institutions.
If you look at it in more detail, every dollar of additional deposit creates a revenue stream (from loans, which are higher interest than they pay us on reward checking) and a cost (administration + interest expense). The pennies on the dollar for interest will be constant, but the administration expense goes down with higher deposit. They explained in the article that reward checking tends to attract larger deposit, therefore reducing administrative expense. (Maybe for regular free checking accounts with small balances, administrative costs are higher than interest expense?)
Now, if someone doesn't have the high balance they hoped for, the person would become more likely to be hit by overdraft fees.
So the only way that this model doesn't work is if the balance is somewhere in the middle, where it neither reduces administrative expense nor generates overdraft fees.
Just my analysis, feel free to comment!
Banking Guy,
I too wonder how long these 'Reward Checking' will keep offering such high yields.
Readers,
I'm definitely not a part of 'young generation', but I like these types of checking accounts and I'm using these. I don't find making 10/15 check-card transactions an issue at all. Often times at the cash register, I simply ask the cashier to make two separate bills for the items I'm buying to help me reach the requirement of lots of check-card transactions.
- SVG
That is why I complain and say stores should have check-out registers for "cash only" customers like myself! Get in and get out without annoying delays.
To meet my DC transactions I visit Dunkin Donuts or Mcdonals and buy a coffee. I buy coffee everyday anyway so why not profit from it?
It is doubtful if the high yield checking accounts will live forever, but if you have to means to take advantage of it...enjoy it while it lasts.
***Thanks bank guy. Have learned so much from this site.**
Anon,
>>Two separate bills for items being purchased at the same time?
Indeed !
>>That is why I complain and say stores should have check-out registers for "cash only" customers like myself! Get in and get out without annoying delays.
Absolutely. I guess you are completely justified in making this complaint.
Retailers do need to service many different types of clients. A few enjoy quick in-out. A few enjoy chatting about weather/products/deals with the cashier holding-up everyone else in the line. A few (yours truly included) may request the cashier to make two bills for items being purchased at the same time !
... Well ... retailing is not an easy business. *smile*
- SVG
I like to think of myself as still part of the young(er) generation and I like CDs, so the bankrate article is not exactly correct.
If you're too shy to do this, there are other ways: the McDonalds dollar menu; the self-service kiosk at the post office; automated $1 charitable donations (see Fat Wallet thread on this).
While I can't speak to the also mentioned Charles Schwab account (4%???), the E-One checking is simple and great, and so have been the bank staff at Salem 5 Direct. No fees, no minimums, up to $15 in other bank ATM fee reimbursements per month, and consistently good interest rates.
In addition, another Salem 5 benefit that I discovered through a recent move: Those of us who live or travel abroad will benefit from $0 fee and 0% (no) foreign currency transaction charge when using other banks ATMs abroad to access your funds.
The "bandits" at Bank of America (my original bank) charge a couple bucks transaction fee and also a 3% foreign currency exchange fee for every international ATM transaction. HSBC used to charge 1%, but recently went to 3% also. I'd call that close to highway robbery, and won't put up with it. Bye-bye business, guys.
--John, formerly from Los Angeles
Apparently, they have seen increase in some kind of revenue, or else they would shut those down immediately.
These banks have several levers for controlling the "cost" side of the accounts:
- reduce the rate on deposits (SBoT did just that),
- impose a threshold amount on which a high rate of interest is earned (almost all the banks have reduced that level to to 25K),
- introduce more rules in the hopes of reducing the number of accounts that earn the high rate.
It appears that the banks earn good fees on some segment of the population unable to take advantage of the benefits.
Just like anything in life, this is a case in which a careful consumer can greatly leverage the benefits without falling into the rule traps.
So I am hopeful that many consumers who are unable to use the rules to their advantage will end up effectively carrying the cost of paying higher interest to the rest of us. Let's not forget that the bank is able to fund their overdrawn checks, etc because other customers keep their accounts funded at $25K.
Long live the 6% reward checking and the financial consultants who convince the bank executives that this is a good deal for the banks.
I'm closer to older than younger, but money is still money, and if someone is offering you more of it if you jump through a simple hoop, I say jump
--G
Forget all these $1 and less transactions you keep talking about in order to **** your rewards checking bank. Use your check (debit) card to buy normal stuff- a whole tank of gas, a week's groceries- money you'd spend anyway. These little community banks deserve to make a little something on the transactions. They are NOT the enemy. And neither are the rest of us who have those accounts. If enough people abuse the system, those of us who use it responsibly will get hit with more transactions required, lower interest rates, or worse- discontinued rewards checking accounts. Don't be greedy- the big banks are greedy enough for everyone.