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POSTED ON BY Ken Tumin
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:
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:
I was happy to see that the article mentioned my website, HighYieldCheckingDeals.com, 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:
Here's a summary of the methods mentioned in the articles about how banks can profit from reward checking accounts:
Reward Checking Account Resources:
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, HighYieldCheckingDeals.com, 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)
Reward Checking Account Resources:
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)???
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.
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.