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POSTED ON BY Ken Tumin
Many reward checking accounts continue to offer yields of 5% APY, and several still offer 6% APY. The best reward checking yield in the nation is 7.01% APY that has been offered by MidWest America Credit Union since at least February of 2008. The average yield of about 250 of these of accounts is 5% APY. As a comparison, most online savings accounts have non-promo yields under 4%.
These reward checking yields have proven to be more than just teaser rates, but the question remains if these reward checking accounts can keep the high yields and be profitable for the banks for the long term. When people hear about these reward checking accounts, they're very skeptical about how banks could offer such high rates. It's important to note the two most important features of these accounts:
These reward checking accounts also require electronic statements and a monthly direct deposit or ACH transaction. These can reduce the cost a little for the banks and make the accounts more sticky, but I don't consider these to be the main reasons why the yields can be so much higher than the online bank yields.
New Reward Checking Stats
I've come across some new metrics regarding reward checking accounts. First, this NetBanker post reports on data that BancVue provided. BancVue is the main company behind these accounts. Some of the interesting statistics include:
I've also found more stats in this Credit Union Times article. The article includes interviews with Ritch Van Duzer, the CEO of Clearstar Financial, and Brian Caird, the marketing VP of Northern FCU. Here's an interesting quote from Duzer:
I assume that the interchange fees average around 1.75%. That would mean the average Clearstar Financial reward checking customer makes $429 in debit card purchases per month. One thing that's not mentioned is the average balance. If it's $9,000, the $7.5 would only cover about 100 basis points of the interest.
One thing that should be noted about Clearstar Financial is that the yield on its reward checking account has gone way down in the last year. When I first reported on it in February 2007, it was paying 6.10% APY on balances up to $25K. Now it's paying only 3.04% APY. However, the balance cap did go up to $50K. So if the interchange fees cover 100 basis points of this and the members who don't meet the requirements covering another 100 basis points, that means the credit union is paying only about 1% interest which seems reasonable.
But a 3.04% APY is no better than most online savings accounts. In my opinion, reward checking has to pay at least 100 basis points above an online savings account to make the extra work worthwhile. In the current rate environment with many online savings accounts paying 3.75% APY, that means reward checking has to maintain a yield of at least 4.75% APY.
Northern FCU's reward checking yield has also gone down, but not by as much. In March 2007 it was paying 6.01% APY on balances up to $25K. It's now at 5.01% APY for the same cap. Perhaps Northern FCU is making more interchange income.
The debit card purchase requirement is probably the most important element of the reward checking accounts that allow the banks to pay a high yield. If the average balance is $9,000 and the average debit card purchases are around $500 per month, perhaps the banks can continue to afford 5% yields. However, if the average debit card purchases are only $50 per month, then 5% yields are going to be hard to maintain.
Reward Checking Poll
So how much do you spend per month on average with your reward checking debit card? I've created a poll on the sidebar of my high yield checking website. Base your amount on only one account. I would suspect that readers of this blog probably spend less on their debit cards than the average reward checking customer.
These reward checking yields have proven to be more than just teaser rates, but the question remains if these reward checking accounts can keep the high yields and be profitable for the banks for the long term. When people hear about these reward checking accounts, they're very skeptical about how banks could offer such high rates. It's important to note the two most important features of these accounts:
- Monthly debit card usage requirements (typically 10 purchases per month)
- Balance cap that limits the amount eligible for the high yield. Balances over this cap earn much lower yields (median cap is $25,000)
These reward checking accounts also require electronic statements and a monthly direct deposit or ACH transaction. These can reduce the cost a little for the banks and make the accounts more sticky, but I don't consider these to be the main reasons why the yields can be so much higher than the online bank yields.
New Reward Checking Stats
I've come across some new metrics regarding reward checking accounts. First, this NetBanker post reports on data that BancVue provided. BancVue is the main company behind these accounts. Some of the interesting statistics include:
- 381 financial institutions offering reward checking
- $5.5 billion in deposits in the accounts
- $9,000 average balance
I've also found more stats in this Credit Union Times article. The article includes interviews with Ritch Van Duzer, the CEO of Clearstar Financial, and Brian Caird, the marketing VP of Northern FCU. Here's an interesting quote from Duzer:
"We've been pulling in $17,000 to $18,000 per month in interchange income, which goes a long way toward mitigating the dividend payout," Van Duzer said. "We're averaging $7.50 in debit card revenue off each reward checking account per month, compared to our standard free checking account, which averages $3.50 in interchange revenue per month. That's a big difference."
And, Van Duzer added, only 70% of his members meet reward qualifications in any given month, so before even figuring in fee revenue, the true cost of funds is about 100 basis points less than the advertised rate, which puts it in line with CDs.
I assume that the interchange fees average around 1.75%. That would mean the average Clearstar Financial reward checking customer makes $429 in debit card purchases per month. One thing that's not mentioned is the average balance. If it's $9,000, the $7.5 would only cover about 100 basis points of the interest.
One thing that should be noted about Clearstar Financial is that the yield on its reward checking account has gone way down in the last year. When I first reported on it in February 2007, it was paying 6.10% APY on balances up to $25K. Now it's paying only 3.04% APY. However, the balance cap did go up to $50K. So if the interchange fees cover 100 basis points of this and the members who don't meet the requirements covering another 100 basis points, that means the credit union is paying only about 1% interest which seems reasonable.
But a 3.04% APY is no better than most online savings accounts. In my opinion, reward checking has to pay at least 100 basis points above an online savings account to make the extra work worthwhile. In the current rate environment with many online savings accounts paying 3.75% APY, that means reward checking has to maintain a yield of at least 4.75% APY.
Northern FCU's reward checking yield has also gone down, but not by as much. In March 2007 it was paying 6.01% APY on balances up to $25K. It's now at 5.01% APY for the same cap. Perhaps Northern FCU is making more interchange income.
The debit card purchase requirement is probably the most important element of the reward checking accounts that allow the banks to pay a high yield. If the average balance is $9,000 and the average debit card purchases are around $500 per month, perhaps the banks can continue to afford 5% yields. However, if the average debit card purchases are only $50 per month, then 5% yields are going to be hard to maintain.
Reward Checking Poll
So how much do you spend per month on average with your reward checking debit card? I've created a poll on the sidebar of my high yield checking website. Base your amount on only one account. I would suspect that readers of this blog probably spend less on their debit cards than the average reward checking customer.
The specification of non-PIN debit transaction is a big deal for these RC accounts because of the fact that revenue for these transaction go over a different network at a substantially lower interchange rate. (I'm still confused as to why) Many stores that allow for cash back with debit cards (drug stores and supermarkets mostly) automatically steer the customer to enter a PIN and you have to hit cancel or credit (not intuitive) to get it to process through the "credit card" network (and hence count as one of the qualifying transactions). See page 57-69 of this link:
http://www.mastercard.com/us/wce/PDF/MasterCard%20Interchange%20Rates%20and%20Criteria%20-%20April%202008.pdf
One thing merchants have in their favor is the cash-back ability when you use PIN (and the merchant pays no fee on this portion), but so long as the Reward Checking account has surcharge refunds, we don't need that feature.
Having started up an account at West Bank a few months ago, I find that the requirements aren't too bad. More than 12 would force me to worry a little more, but 12 or less is easy. You just use the card for small transactions and then put it away after you got them. I just don't like that I normally would use cash for these small transactions like work lunches, but with many places not requiring a signature, the speed of the debit transaction is actually faster than cash. The ACH /Dir Dep requirement isn't too much of a pain if your bank recognizes Countrywide or similar transfer as counting.
I agree with BG, though, that these accounts need to pay at least 1% higher for the trouble, especially given that for many the account is not at a local bank making deposits and withdrawals sometimes cumbersome.
MasterCard Interchange Rates and Criteria - April 2008.pdf
I doubt they make money off of me.
Given that these cards can be used like credit cards (hit the credit button) without a need to enter your PIN, it's extremely dangerous if one of these cards are stolen. One does NOT receive the same kind of federal law protection with debit/check cards as one does with credit cards.
It doesn't matter if MasterCard or Visa has policies in place which says such and such. It's NOT protected by federal law. MC and Visa can change policy at time.
Money is directly taken out of these checking accounts when an unauthorized transaction transpires, unlike a credit card, where one won't have to pay the disputed charges.
For this huge security risk reason, I just cannot risk opening any of these kinds of 'rewards checking' accounts. Although I'm very tempted with these high rates that's been offered.
I should have provided a link to this previous post comparing protections of credit cards with debit cards.
I also use the debit card for small transactions, usually in the beginning of the month, intermittently using my rewards AmEx for bigger purchases, and as soon as have 10 transactions down, I use my AmEx exclusively for everything else for the rest of the month. I don't think that the total exceeds $100 bucks a month for the debit card transactions.
People that prefer cash over credit cards lose either way you look at it. Credit cards boost your credit score if you use them right, plus give you all kinds of benefits and rewards. It's a win win situation if you live within your means and never carry a balance. Besides, its flexibility and security won't ever be able to match those of cash.
I have stopped using any CDs at all since RCs pay so much more and money is not locked.
I use Alliant for my ACH requirements which still pays 3.75%.
I use rebate credit cards for all my purchases even if it is just $1.
Only DC that sees light of the day is from Alliant which is used for depositing checks only and never for withdrawals.
I am surprised someone like BofA hasn't come out with something similar (paying something like 2%) but perhaps the average customer is already a heavy debit user.
Actually, BofA does indeed have something similar, but with even less cost to them/benefit to you. Anytime you make a debit card purchase as "credit" they round it up to the next dollar, and put the additional change in your savings account. You think you're earning rewards but you're really not.
I've found a few www.topcheckingaccounts.com and at www.bankrate.com but that Bankrate has become a bit of mess.
The only downside to these accounts, is that none of these banks/brokerages have local or nationwide branches. So you'll probably have to have one of these online checking accounts in conjuntion with a local/nationwide bank. Once it's open though you can setup direct deposit and start earning interest and have cash readily available.
-Sam