Is This How Banks Will Make Money from the Reward Checking Accounts?
POSTED
ON BY Ken Tumin
This report from the Center for Responsible Lending is receiving a lot of coverage by news organizations like USA Today. The report shows how much money banks are making from overdraft fees:
A common example of an overdraft is when there isn't enough in a checking account to cover a debit card purchase or a check. Banks typically cover this overdrawn transaction even if you didn't sign up for this. In addition to the cost of the loan, a fee is charged which averages $34.
Perhaps this is the reason many small banks are starting these reward checking accounts which require the customer to make around 10 debit card purchases a month. Many customers will hope to make money from the 6% yield, but if they don't watch their balances, the overdraft fees will easily do away with high yield benefit.
Not all banks charge overdraft fees. ING Direct is one which only charges interest on the overdraft. Please see this post for more info on ING's Electric Orange Checking Account.
WaMu still charges fees, but it offers one free overdraft waiver per year on its Free Checking Account (see post).
For other checking account alternatives, please see my summary of the best checking accounts.
fees for abusive overdraft loans have reach $17.5 billion per year, more than the loans themselves, which now amount to $15.8 billion per year.
A common example of an overdraft is when there isn't enough in a checking account to cover a debit card purchase or a check. Banks typically cover this overdrawn transaction even if you didn't sign up for this. In addition to the cost of the loan, a fee is charged which averages $34.
Perhaps this is the reason many small banks are starting these reward checking accounts which require the customer to make around 10 debit card purchases a month. Many customers will hope to make money from the 6% yield, but if they don't watch their balances, the overdraft fees will easily do away with high yield benefit.
Not all banks charge overdraft fees. ING Direct is one which only charges interest on the overdraft. Please see this post for more info on ING's Electric Orange Checking Account.
WaMu still charges fees, but it offers one free overdraft waiver per year on its Free Checking Account (see post).
For other checking account alternatives, please see my summary of the best checking accounts.
If your checking account balance is so low that a debit card transaction will put it into overdraft, then interest is irrelevant!
6% interest on a balance of 150 dollars is useless to most people.
I thought these rewards checking accounts are aimed at people who carry a high checking balance.
The problem is that there are a significant number of customers that have substantial amount of cash and keep careful track of their finances so I wonder whether either processing or overdraft fees will offset the interests that will need to be paid out with these accounts ie. how profitable is this scheme in the end?
"Increases Debit Card Transactions. The average free checking customer uses a debit card only 6 to 8 times a month. More than 80% of Reward Checking customers are active debit card users; averaging 20 to 25 uses per month, which boosts fee income per account."
"Increases Overdraft Revenue. Without exception, every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue."
"Improves Customer Profile. Reward Checking customers keep higher balances, generate greater fee income and use more electronic services than the average checking account client."
While the banks certainly profit from consumers using more electronic services and keeping higher balances in their accounts, it is telling that the companies selling these accounts convince banks to buy them by highlighting fee revenue.
I'm ready to take advantage of this trend but I still want more proof of whether people are that stupid and banks are that astute to take advantage of them.
This is just speculation on my part. It would be interesting to see the stats behind what Virgquest posted: "Without exception, every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue."
I guess I can understand the increased fee incomes from debit transactions' processing fee but if your customers have higher balances how would you increase revenue from overdraft fee? I mean for typical household spendings which I assume that an average person would use the check card transactions for, how would you easily exceed $8000 a month? Something doesn't add up or I'm just totally confused by all these stats.
I think it's simple for people to overdraw their accounts -- there is no feedback on how much is in the account, so it's easy to go under.
A second technique - you deposit a check, you think it will cover your purchase 3 days later, but on your statement the bank says it wasn't posted until 4 days later. With no account balance available at purchase time, you have no way to know.