Another interesting topic mentioned by the BancVue's CEO is how banks decide on availability:
Some banks and credit unions choose to offer the product only in their local area, others allow consumers nationwide to sign up. "Some (institutions) will go national for a while and get a good number of new accounts, then change to only go local for a while," Krajicek says. "Others will stop being strictly local and go national. The reason is that sometimes the institutions will be so successful when they go national that they achieve their goals pretty quickly and can back off. But from a bird's-eye view there are always quite a few national offerings on site."
We've seen this happen to several banks in the last year in which a bank starts offering the account nationwide and then limits it to local residents.
Larry Daniel, direct of retail banking at First Arkansas Bank & Trust was interviewed in the article. I first posted on this bank's nationwide reward checking account in December 2007 when it was offering 6.06% APY with no balance cap. By February of 2008, it cut the rate to 4.44% APY with a $50K cap. However, after that rate cut, the bank has held steady. It has been over a year, and the bank continues to offer this same rate with the same balance cap.
Daniel provides some insights into how they can maintain the high rates. According to Daniel:
the structure of the accounts is what allows the bank to maintain the yield.
"These are electronic-driven, behavioral accounts. The customers aren't as demanding, we don't have to provide people face-to-face, we don't have to have bricks and mortar, and because of the electronic nature, we've either decreased expenses or increased revenue, and we're able to share a piece of that savings or that increased revenue with the customer."
Daniel doesn't directly mention the debit card usage requirement. It seems that banks downplay the revenue from debit cards. I still maintain that the debit card usage requirement is a major reason why they can offer rates higher than internet savings account rates (see my post on the math behind reward checking).
Perhaps the banks don't want to reveal how much profit they make on the debit cards. The consumer advocate Clark Howard has often made this claim. Here's an excerpt from his show notes from 2007:
The banks love debit cards because they make huge profits on them. Most of us have had the experience of making a purchase with a debit card and being asked if we want to do it as debit or credit. If you go for credit, the merchant will pay $1.50 in processing fees.
In that post, Clark also discusses the added risks of using a debit card vs. a credit card and the issue of holds being placed on part of your checking account balance when you use debit cards at gas stations and hotels. Even though Clark Howard still dislikes debit cards, he does see the advantage of reward checking accounts for savers. Here's an excerpt from his March 25th show notes:
some checking accounts come with very high interest rates because they're essentially funded by retailers! Merchants pay exorbitant fees whenever you run a debit transaction as a credit card and sign for it. So the bank, in essence, rips off the merchant and then passes along a part of the bounty to you.
This is similar to a checking account equivalent of a credit card company offering big cash back rewards funded by heavy merchant fees, according to Clark.
As Clark mentions, the rewards that we get from these checking accounts are like the rewards that we get from cash back credit cards. However, most of the rewards go to savers rather than spenders.
Reward Checking Account References: