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.