According to the credit union, the average reward checking account holder has an average balance of $7,700 and makes debit card purchases totaling about $900 a month.
Banks and credit unions earn fees for each debit card purchase you make. This is called interchange fees, and a fee of 1.75% appears to be a good assumption (I wasn't able to get this number from the credit union).
Assuming the credit union receives 1.75% from each debit card purchase, the average monthly revenue per account holder would be $15.75 (1.75% of $900).
An average account holder with a $7,700 balance in the 5% checking account would receive about $31 in interest per month. The debit card purchases should offset the cost of this to the bank by about $15.75. So the cost to the credit union after the debit card fees is $15.25. This is equivalent to an interest rate of 2.40%.
Comparisons to Internet Checking Accounts
So thanks to the debit card usage requirements and to the average account holder, the account only costs the credit union 2.40% in interest rather than 5%. Unfortunately, in this current rate environment, 2.40% is a little high for a checking account. Electronic statements help reduce the cost a little bit for the banks, but that doesn't give them an advantage over online banks. Some current rates from non-reward online checking accounts include:
- 2.80% APY at Bank of Internet
- 2.00% to 2.50% APY at SalemFiveDirect
- 1.00% APY at Charles Schwab
- 0.50% to 2.80% APY at ING Direct
How Customers Influence Reward Checking Accounts
If account holders maintain larger balances and make smaller debit card purchases, banks will have to pay lower rates. So it's important for banks to attract the Average Joes and not just rate chasers looking for online savings account alternatives. This is one good reason for banks to also provide ATM fee refunds when requirements are met. This feature may be more attractive to the Average Joe than the high interest rate.
You can tell the Average Joes are not typical readers of this blog. In my survey at my reward checking website, 56% reported making under $100 of monthly debit card purchases, and 79% reported making under $500 of monthly debit card purchases.
If you're looking for a reward checking account for the high interest rate, you may be better off with one that isn't nationally available. I would think banks that only allow locals to join would more likely have a higher percentage of Average Joes.
Restricting Accounts to Local Residents
It appears banks and credit unions have noticed this issue and have made changes to their accounts. One example is MidWest America Credit Union which had been offering 7% APY for balances up to $25K. For a while anyone could join via an association membership. However, the credit union changed their eligibility requirements. Members of that association must now also live within 100 miles of one of the credit union branches to be eligible to join (see post). Similar changes have occurred at Golden Plains Credit Union in Kansas (see post), Southern Missouri Bank (see post) and Citizens Bank Minnesota (see post).
Forcing Larger Debit Card Purchases
In addition to restricting accounts to local residents, banks have done something more drastic (and disturbing). Some have closed accounts of customers who met the debit card requirements with too many small purchases. This happened at both Citizens Bank Minnesota and Southern Missouri Bank. Here's what Southern Missouri Bank now states in its small print:
This account is intended to function as a primary checking account. MasterCard check card transactions should be for ordinary and customary expenditures, not simply 12 de minimis transactions designed to qualify for rewards requirements.
The problem with this is how do you define de minimis transactions?
The other alternative for banks that have too many account holders with large balances and small debit card purchases is to just lower the interest rate. It appears this is what may have happened at West Texas National Bank (see post). In late 2007 it was offering its reward checking account nationwide with an APY of 6.01% on balances up to $25,000. The rate fell to 5.01% in April, to 4.01% APY in November and to 2.01% this month. You can still get higher rates at many online savings accounts with no debit card hassles (even at ING Direct), so there's no longer a reason to have this account if you just care about high interest rates.
Past and Future Reward Checking Account Rates
I now have 312 financial institutions offering reward checking accounts listed in my High Yield Checking Website. The average top APY is now 4.45%. I have 36 institutions in my table of nationally available reward checking accounts with an average APY of 4.46%.
On August 2008, my full list had 245 institutions with an average APY of 5.00%, and my nationwide list had 29 institutions with an average APY of 5.15%.
So you can see rates are falling, but 4.45% is still much higher than any online savings account rate. Most online savings accounts now have rates under 3%. There are still two with an APY of around 4%. The highest reward checking rate is 6.31% APY at MidWest Credit Union, and there are still several with 6% APY.
Last year when I mentioned these reward checking accounts to my local credit union, a credit union manager said they felt that these accounts would be short lived gimmicks to attract new members. After reporting on these accounts for more than two years, it's clear these are not just short lived gimmicks. However, it's not clear if these can maintain rates higher than online savings account rates over the long-term. If they can at least maintain rates 1% higher, I'll keep using them.
New Reward Checking Account Survey
How much do you keep in your reward checking accounts? Is your balance like the average of that credit union with a balance of $7,700? Or do you keep a balance near the maximum amount that can earn the top rate? Since reward checking accounts have different balance caps, the survey is only for those with reward checking accounts that have a $25,000 max (the most common cap).
This survey and the previous survey on monthly debit card purchases are on the left side of my High Yield Checking Website.