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How Careless Customers Help the Careful Customers Save More on Checking Accounts


I came across two interesting articles today on checking accounts. They provide some insights about how banks make money from free checking accounts and reward checking accounts. Most all reward checking accounts are also free checking accounts. They have an added advantage of offering very high interest rates and ATM fee refunds when the customer meets certain monthly requirements.

The first article is from the American Banker, Free Checking: A Customer Favorite is Re-Examined. There are increasing demands from consumers and regulators for banks to reform their policies on overdrafts and nonsufficient funds. The following excerpt shows how important these fees are for banks' profits:
Today the biggest source of revenue in the retail deposit business is fees imposed on customers who are careless with their checking accounts. These so-called incident fees now produce 74% of all deposit fees, according to a report released in May by Oliver Wyman, the New York consulting firm. Without those fees, which run $35 to $40 per incident, the industry would not be able to cover the costs of offering no-monthly-fee, low-balance checking accounts to all customers.

The second article is from SmartMoney, How to Shop Banks to Get Better Yields. After a discussion on bank bonuses, the article discusses reward checking accounts from Redneck Bank and Southern Bank in Missouri. There are a few interesting insights about how banks can afforrd the high interest rates. In addition to capping the amount that qualifies for the high yield, the banks are helped by those who don't meet the monthly requirements:
Bankers also count on customers who flub up - not making enough debit charges to qualify for the bonus rate. At Southern Bank in Missouri, about 80 percent of account holders make their quotas to qualify for the high yield (currently 5 percent), says Matt Funke, chief financial officer. The rest earn 0.10 percent no matter how much they have on deposit, helping to make the accounts overall "quite profitable" for the bank, Funke says.

I was happy to see that the article mentioned my website,, as a tip for finding top rates nationwide.

There were also some interesting insights on reward checking in these public comments from a bank CEO (pdf). Those public comments were directed to the FDIC regarding their regulations for interest rate restrictions. I mentioned these comments when I discussed these new FDIC regulations. The comments are long and cover many deposit products and issues. He specifically mentioned reward checking accounts on page 10. His purpose of discussing reward checking accounts was to make sure the FDIC understands that reward checking accounts need to be treated differently than conventional deposit products. A reward checking account with a 3.50% APY is much different than a 3.50% APY CD. As he described, reward checking will cost the bank much less:
While the top tier of interest rate earned on such an account might be 3.50% on a portion of a bank’s deposits, the average interest rate paid on an institutions total portfolio of Rewards Checking accounts would typically be closer to 1.0% to 1.5% in this scenario based on the ratio of qualifying accounts to non-qualifying accounts and average balances held in accounts each statement cycle. These accounts are mutually beneficial to both the depositor and the bank as they provide the depositor with a favorable interest rate and additional benefits in statement cycles they qualify and beneficial to banks in that they provide stable, low-cost, relationship based deposits, reduce expenses (e.g. E-Statements) and increase revenues (e.g. interchange revenues).

Here's a summary of the methods mentioned in the articles about how banks can profit from reward checking accounts:
  • Account holders who don't meet the monthly requirements
  • Overdrafts and nonsufficient fees (which go up with higher debit card usage)
  • Interchange fees (fees of 1%-2% that merchants pay when you pay with a debit/credit card)
  • Low average balances (far under the caps that qualify for the top rate)
To keep reward checking rates high, banks need to attract more of the careless customers who'll keep smaller balances, forget to meet all monthly requirements, spend more with their debit cards and have more overdrafts. That's one reason I think banks who restrict their accounts locally will have an easier time. Those who search for the best reward checking accounts on the web are probably not the careless type.

Reward Checking Account Resources:

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Anonymous   |     |   Comment #1
Just wait until the careless people get the government to do their bidding with bank accounts as they did with credit cards. We are entering a world in which personal responsibility is no longer a virtue, at least not in the eyes of this government.
Rick   |     |   Comment #2
Thank you for this very interesting information. I am solidly in the 80% that collect all my interest due every month. It can be an expensive mistake to not meet the requirements.
Anonymous   |     |   Comment #3
What this means is that there is no "free ride" with these programs. Somebody is subsidizing the higher rates offered to others. When the number of careless customers start to shrink, then these high interest rate accounts become restricted or their rates lowered. I don't pay these fees, so in the bank's views, I am not a beneficial customer. Same thing with my credit card accounts. I avoid paying any interest and fees to the banks that I do business with.
Anonymous   |     |   Comment #4
In my case they do not even make much interchange fee as well, thanks to utility co which accept multiple $1 payments online. Utility bills are large enough to fulfill requirements all of my rewards checking accounts.
Anonymous   |     |   Comment #5
If 80% of savers, depend on 20% of stupid savers, then the system will collapse sooner or later on its own.
Anonymous   |     |   Comment #6
I'm still confused on how they make money. How much do banks really pay for processing a check that I draw against to pay my doctor? 2 cents? 5 cents? For non-reward, no-maintenance fee checking accounts that give bonus, how does the bank make money? They gave me $50. At first I deposited the minimum of $100. I took $95+50bonus out. The bank sends me monthly statement; 1 stationary statement, 1 stationary envelope, with pre-sorted bulk mail postage at $0.334. They've been doing this for several months now. How much are they making money on my account with $5 balance? How much are they paying for their stationary statements and ink?
For reward-checking accounts, where most now give ~4.01% for first $25k, how do they make money off of me when I use their debit for credit purchases at no more than $5.30 each (lunch or small items)? To get my cash, I use BankofAmerica ATMs and pay $2 ATM fee to get $20 a time. I repeat as often as I need cash. I went on vacation and an ATM machine fee was $5. The reward-checking refunded me all of these ATM fees. If I went to that ATM machine fee within the last 3 days of my qualifying month cycle and withdrew the minimum $20 for 25 times to reach my daily maximum ATM cash withdrawal, then how does the bank make money if they're refunding me $125 in ATM fee refunds (they dont have a monthly limit, yet)???
Banking Guy
Banking Guy   |     |   Comment #7
I have more discussion on this issue in my post on the math behind reward checking. Reward checking depends on an average customer who spends a lot with his/her debit card and who maintains balances well below the caps. Also, it depends on the average customer not incurring too many fees at ATMs. It can handle a few costly customers, but the average is what's important.

Several banks have put in place monthly limits to the ATM fee refunds. Since no one but the ATM owners profit from ATM fees, it makes sense to use ATMs carefully to help your bank keep costs down which should help them keep the rates high.
Anonymous   |     |   Comment #8
Anonymous 11.43a doesn't make sense: True, most reward checking ATM daily limits are $500; BUT, that means you can't go over! Even $1 over, the transaction will not be allowed for that day!! So, s/he only allowed 20 ATM transactions for $20 each per day. BUT, if s/he is so loyal to a ridiculous ATM that charges $5, then why not just open an account with the owners of that ATM as a secondary account?!? (unless it's those casino atms?) Don't ruin overabuse the unlimimted nationwide ATM refunds for the rest of us!

Regarding s/he free checking account, while you have $5 in your account, the bank is making ~5.5% on roughly 10x that amount in "float" by lending. They spent $50 bonus for your business. When you had $100 in the account, they were earning more. Even if it was just for 7 days. They spent $2-4 for your 1st 100-200 free checks (if it applies). They spend $0.04 for their stationary monthly statements, inserts, and laser printer ink. You say it costs $0.334 per month for mailing statements. That's $4.488 per year, not including the $50 bonus and free 1st checks or others, if applies. If you keep the account open long enough, then they will make money off of your account. Yes, even if you just keep $1. Others may explain. But, be diligent if your bank suddenly decides to have extra fees added.

Lastly, it's the "careless customers", ones who forgot that their credit purchase with debit card will post on the day of the transaction and forgot that their auto-payment was made the same day to cause overdraft fees. The list of carelessness by anyone can be numerous mishaps.
Anonymous   |     |   Comment #9
It also dont make sense for YOU to lend money to the ATM owner for their ATM fees just to get it back from your bank account. YOU'RE losing interest on your money. I dont care if you did it "within the last 3 days of my qualifying month cycle".

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