- Top rate reduces from 4.44% APY to 3.50% APY effective 11/3/2009
- The balance that qualifies for the top rate reduces from $50,000 to $35,000 effective 12/2/2009
- Customers will be permitted to have only one reward checking account (Kasasa Cash)
FAB&T had been offering 4.44% APY on balances up to $50K since February 2008. It also used to allow anyone in the nation to open an account. They restricted new accounts to Arkansas residents in August 2009 (see account review and history).
It appears banks offering reward checking accounts are taking in too many deposits, and they can't make enough loans. I showed how this is happening at City National Bank in this Wednesday post. Not only did City National Bank cut its reward checking rate, it's pushing its customers to increase their debit card purchases. City National Bank is one of the few to have no balance cap. All balances can qualify for the top rate. I think they're going to have trouble maintaining this. FAB&T isn't the only one to reduce their balance cap. West Bank in Iowa just reduced its cap from $50K to $30K.
The debit card usage requirements can help pay for some of the high interest, but it may not be enough especially for banks with above-average balance caps like City National Bank and FAB&T.
As I described in my post on the math behind reward checking, banks make money from the debit card usage. This can be paid back to customers in the form of high deposit rates. However, the higher the balance of the reward checking accounts and the lower the debit card purchases, the lower the impact that debit cards have.
In 2007 I reported on 83 reward checking accounts, so they've been around for a while. I think they'll continue, but I think we'll see many more rate cuts in the future. I still think they can offer higher rates than online savings accounts.
There's also a question about reward checking's appeal to the banks. I'm seeing more and more banks that have stopped promoting their reward checking accounts. Libertad Bank is the latest bank to strip all description of their reward checking account from their website. The Finance Buff has a good review of how reward checking compares with free checking in the eyes of banks.
To appeal to savers, banks will need to offer reward checking rates significantly higher than what online savings accounts offer. If you compare reward checking accounts with online savings accounts, there are only a few reward checking features that allow these accounts to offer higher rates than online savings accounts:
- Debit card usage requirements result in more interchange fee revenue for the banks
- Increased debit card usage increases NSF fees (but high rates encourage larger balances which should reduce odds of NSF fees)
- Balance cap for the top rate
- Not everyone meets the monthly requirements (little or no interest paid out for those who don't meet requirements)
- ATM fee refund policies are typically not as generous at internet banks
- Less cost for maintaing brick-and-mortar branches
As you can see on my savings account rates list, the vast majority of internet banks are offering under 2% APY, and several of the big ones like ING Direct and HSBC Direct are under 1.50% APY. To be fair, we should probably be comparing reward checking to internet checking accounts instead of savings accounts. Internet checking account rates are much lower. Some examples include 0.75% at Charles Schwab and at Salem Five Direct (0.85% for large balances). So a 3.50% APY with a $35K balance cap is still a good deal compared with online savings and checking accounts. However, it's not a good deal compared with what we had in 2007.
Thanks to the readers who commented and emailed me news of this change at FAB&T.
More About Reward Checking Accounts
To find reward checking accounts around the nation or to learn more about these accounts, please refer to my High Yield Checking website. To review my latest news and issues on reward checking accounts, refer to my reward checking news page.