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Is This How Banks Will Make Money from the Reward Checking Accounts?


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:
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.
Damien Biggs
  |     |   Comment #1
I don't get how you say these rewards account will "catch" people.
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.
  |     |   Comment #2
The new Provident Credit Union Super Reward Checking that pays 6.01% APY advertises free overdraft protection.
  |     |   Comment #3
I somewhat agree w/ the first comment regarding high interest on low balance is not worth the trouble of keeping track of check card transactions. But maybe these people don't calculate everything thru and banks are hoping for that. I thought that the comments that the last poster on the "Toledo Bank Reward Checking' post make sense. He/She mentioned that possibly the reason for the check card requirement is that merchants pay bank a processing fee + % of the charge.
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?
  |     |   Comment #4
Guess the question on profitability is perhaps the reason why most banks/CUs limit it to their local customer and put a cap on the deposits. Only Toledo and one CU I think open it to all and Toledo did not even put a cap on deposit. I think it highly likely that Toledo probably scrap this deal a few months from now. Either that or there are so many careless spenders out there that they will be rolling in money.
  |     |   Comment #5
I am all for banks charging those high fees for **** ups, I mean come on.. keeping a balanced checking account is not rocket science. So if those fees get me better rates I am ok with it. Also since these accounts require some work to do all those transactions I think most put the max in, So will never overdraft. This is why I like the Danvers bank deal, Has $100k max instead of the $25k that most seem to have
  |     |   Comment #6
Which Danvers bank deal? Is this the same one as the Salem Five deal? I know there's a Salem Five in Danvers, but not sure if that's the one you're referring to.
  |     |   Comment #7
It's one of those local deals. MA. Banking Guy did a post on it months ago I think. Do a search or look at the best checking deals post for MA.
  |     |   Comment #8
Of course this is how banks will make money on Reward Checking, including direct deposits, no statements to mail out, fewer branch visits fewer employees more use of their servers and computer investment. See the bank guys links to vendors of the Reward Checking Account software, which puts you in the Banks point of increasing profits by leveraging their technology and attracting more deposits and profitability. The rewards checking accounts are growing in popularity with banks because the banks make more money and cut down expenses.
  |     |   Comment #9
I would SERIOUSLY question the $17.5 Billion figure presented. Most newspaper article writers pull numbers from their a$$e$ most of the time just to make a point with no facts to substanitate them.
  |     |   Comment #10
Here are a couple excerpts from the Strunk and Assoc. website that was mentioned last weekend. S&A is a vendor that sells these high interest accounts to banks. These are some of their bullet points pushing the reward checking model. Notice the emphasis on earning money through debit card transaction fees and overdraft fees.

"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.
  |     |   Comment #11
That bit about increased overdraft fee revenue related to banks that introduced Reward Checking boggles the mind. How idiotic can people get to commit to these requirements with a low balance account and then not even managing it?????
Banking Guy
  |     |   Comment #12
I guess we have to remember that most people are not savers and often go into debt. Many people may sign up for these reward checking accounts hoping that they'll become savers. But when unexpected expenses come up, those overdrafts may start poping up. It would be interesting to see the stats on overdrafts.
  |     |   Comment #13
banking guy, I'm a fan and have always appreciate your financial savvy but really do you mean what you just wrote? Assumming an 'average' person planning to meet these debit card transactions by grocery shopping ($50 each occasion x 12 = $600). So in order to incur an overdraft fee, let's say this person have approximately $500 or less in his/her account depending on when in the monthly cycle because let's not forget that debit transactions will decimate the balance. So it's not 'unexpected expenses' we're talking about. For these people, the difference between a 6% Reward Checking account with all of these obligations and a 2.5% HSBC checking account w/ no requirement is less than $17 annually because the poor fool won't even have $500 in the account with the on-going debits.
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.
Banking Guy
  |     |   Comment #14
I was thinking of the case in which a person may splurge at the mall and make $700 in purchases in one weekend and forget about a $800 car bill that was just paid. There may be many people who have good intentions to build an emergency fund into this type of account, but end up with a balance that's much smaller than they had anticipated. With them now being in the habit of making debit card purchases instead of credit card purchases, I can see overdrafts being more common.

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."
  |     |   Comment #15
Overdrafts can also be created when a merchant (such as a hotel) requests authorization for an amount higher than the actual cost, but does not present the charge until a later date. Because a portion of the available balance is reduced in anticipation of the charge being presented, overdrafts are created from checks, ATM withdrawals, and other debit transactions which post prior to the presentation of the actual charge. While the account holder does have money in the account, the available balance is reduced which then causes overdrafts.
  |     |   Comment #16
I think another way the bank will make money on these accounts is knowing that people will **** up making the 10 or 12 debt card transactions. Most of these accounts pay .5% or less if the transaction requirements are not met
  |     |   Comment #17
I went to the Strunk website and read the report. It was interesting "Reward Checking customers keep higher balance, generate greater fee income and use more electronic services than the average checking account client". It also stated that the typical RC account average $8000 to $13000 in balance.
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.
  |     |   Comment #18
How do people get caught driving this kind of checking account to negative territory? I never use my debit card for purchases, I always use cash which I know has a finite amount in my pocket. I often see the person in line before me using their debit card. Not for big purchases - usually under $10. The stinker is that that there is no notification of how much is in the account, nor remaining after the purchase. Add to that the option to withdraw money at the same time.
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.
  |     |   Comment #19
is it true that if a store processes a debit card as a credit card transaction instead of processing it as a debit card transaction as it should be, that it costs the business more in processing fees?

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