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.