Over the last few years we've seen many rate cuts on reward checking accounts, and sometimes those cuts can be big. That was the case on Friday at Coppermark Bank. Its reward checking account has long been a rate leader with a 4.00% APY for up to $25K since I reviewed this account in 2009. That ended last Friday when the rate plummeted from 4% to 1.25% APY. The balance cap of $25K remains the same. Thanks to DA reader Pearlbrown who posted on this news in this forum thread. There had been speculation that this rate cut was due to Coppermark's upcoming merger with Properity Bank. However, Pearlbrown has learned from the bank's CSRs that the timing of the rate drop is not related to the merger.
This shows a downside with reward checking accounts. High rates often don't last, and when they fall, they can fall fast. Also, it shows that a long history of top rates is no guarantee that the rates will remain competitive.
Every time we see another rate cut, I wonder what rate is sustainable for reward checking accounts. I reviewed the math behind reward checking in 2010. I used data that I had received from a credit union which showed the average reward checking balance to be $7,700 and the average monthly debit card purchases to be $900. Based on $900 monthly purchases and a 1% interchange fee, the average monthly revenue banks would receive is $9. If the $9 is returned to the account holders as interest and if the average balance is $7,700, that would provide account holders with an interest rate for that month of 1.40% ($9*12/$7,700).
Not all customers meet the monthly requirements, so that can allow the bank to offer higher interest rates. Also, the above stats were based on a reward checking account with a $25K balance cap. Lower balance caps will likely result in lower average balances which will also allow the bank to offer higher rates.
Based on the above math, it seems like banks will have a difficult time to keep their reward checking accounts at 2.00% or above unless they have small balance caps. The only nationally available reward checking accounts that have 3% rates have balance caps of $5K to $15K. There are still several local deals with rates between 3% and 4% for balances up to $25K. The best deal continues to be at Southwest Airlines Federal Credit Union which still offers 4.00% APY for balances up to $25K. This credit union isn't really a local deal. Its field of membership is narrow since it's primarily based on a few employee groups.
To find reward checking accounts in other areas of the nation, please refer to the reward checking section of DepositAccounts.com. To learn more about reward checking, please refer to this reward checking overview.