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Another Case of a Bank Discouraging Small Debit Card Purchases in its Reward Checking Account


A reader forwarded me an email she received from City National Bank. The bank appears to be pushing for larger debit card purchases. Here's an excerpt of the email:
We are committed to offering innovative and rewarding products like our Free Reward Checking Account. We are only able to offer this account with such an extremely attractive rate of interest and its additional benefits if our customers use their City National Bank debit card for their typical daily expenditures. Appropriate utilization of the debit card benefits all account holders, as well as the bank; therefore, it plays an essential part in our ability to maintain all of the attractive benefits and features of this account.

In reviewing your Reward account transaction history, we have noticed you are using your debit card in what appears to be a calculated and limited fashion. In the true spirit of our program we would like to encourage you to utilize your Reward account as your "primary" checking account. If your current City National Bank Reward account is not your primary checking account we would ask you to review your monthly statement, and let us know how we can assist you in the transition.

As with all of our Reward account customers, we will continue to monitor the debit card transaction activity on your account. Please be aware we reserve the right to close any account at any time if we feel the account is not being used in the "spirit" intended.

City National Bank isn't the first bank that has done this. Over a year ago, Citizens Bank Minnesota warned customers that it may close accounts if they see too many small debit card purchases (see post). Has your bank sent you such a warning? If it has, please leave a comment.

The reader mentioned that she had around $30 of total debit card purchases for the previous month. City National Bank is one of the few banks in my nationwide list that has no balance cap. All balances qualify for the top rate if the monthly requirements are met (see account review). So it has probably attracted many people who are keeping large balances. Just two weeks ago, City National Bank reduced its top rate from 3.28% APY to 2.65% APY. The bank had kept the 3.28% APY since January 2008.

Based on the bank's FDIC data, the deposits have shown a lot of growth over the last year: from $119 million to $155 million (+30%). However, loans have only grown from $60 million to $62 million (+3%). Debit card usage can help banks maintain the high reward checking rates, but the impact is less for larger deposit balances. For these cases, loans become more important, and it's clear City National Bank's loans haven't kept up with its deposits. I described how debit card usage can help pay for the high interest in this post on the math behind reward checking.

In an old poll that I included on the left side of my reward checking website I asked readers how much you spend each month with your reward checking debit card. Out of 342 votes, 46% spend under $100 on average. It should be noted that readers of this site are probably not the "Average Joes". In my math behind reward checking post, I described data that I received from a credit union that showed the average monthly debit card usage to be around $900. Banks definitely need more of the Average Joes who maintain low balances and make a lot of purchases. If banks have enough Average Joes, they should be able to pay top rates 1% or more above online savings account rates.
Related Pages: City National Bank, Austin
Previous Comments
  |     |   Comment #1
Many people tend to put larger purchases on credit cards because they often have better rewards and consumer protection rules than debit cards - Rewards Checking debit cards or others. One useful technique that I saw mentioned either here or on FatWallet to “painlessly” increase the average Rewards debit card amount, was where possibly (and where free), get $10 - $30 cash back with your debit card transaction. I believe in those situations the bank offering the debit card does make as much on the transaction as if the entire debit (purchase plus cash back) were a purchase. And, nearly everyone needs at least a little cash!
  |     |   Comment #2
I thought that a bank will sooner or later start to notice purchase patterns of customers and "clamp down" on these practices. Anyhow, the balance limitations are what really put me off on these type of accounts.
w/ interest
  |     |   Comment #3
the questions is: are banks going to drop individual customers or drop rates??? or both?

i have 2 reward checking accounts and debit about $150 a month from each account. basically i use it for all super market purchases.
  |     |   Comment #4
I try for a mixture of purchases on my Rewards cards: supermarkets, drugstores, etc. and I don't do that tacky $1.00 x 10 at gas stations. I also have one of my Rewards cards auto-pay a credit card from the same bank. I do not and will not pay utilities bills from these cards because my roommate pays them (and they carge for online paymenbts). I suppose, however, that I could set up a link to other credit cards and pay them from these Rewards accounts, although I'd certainly rather pay credit cards from an account that pays low or no interest.
  |     |   Comment #5
I currently get 2% cash back at supermarkets using my credit card, so that is in essence my reward checking account bonus, so I don't bother with debit cards.
  |     |   Comment #6
Banks should clamp down on customers who are clearly abusing the sprit of reward checking accounts. If not, then all of us will likely pay the penalty of lower interest rates on our reward checking accounts, as they are not offering high rates out of the goodness of their hearts. So come on you $1x10 transaction abusers - put a few extra dollars on your transactions. And try not to use the excuse that you want to use your reward credit card instead. To put it in perspective, if you do $100/month in debit card transactions that you would instead normally do on your credit card, you will lose $1-$2 per month in rewards (assuming the typical 1-2% reward), but you will keep a high interest rate on your full reward checking balance and not risk getting your account closed. Seems like an easy call.
  |     |   Comment #7
People who use reward checking accounts in accordance with the TOS are not abusing the accounts. Ten transactions is ten transactions. One dollar each? That's all within thier TOS. I would respond to this letter stating that I'm using the account in good faith and spirit in accordance with the TOS stated. You can't offer something to a customer, and then when they take the offer to say it's not good enough. It's sort of like a bait and switch. On the other hand, the bank is free to close the account whenever they want, and we know that when we sign up. I can't wait for interest rates to rise so we don't have to deal with these accounts any more.
  |     |   Comment #8
You are right that technically you can do 10 $1 transactions and meet the TOS requirements. However, I never quite understand why people want to get something for nothing. Clearly the only way banks can offer higher rates on these accounts is if they get fees on transactions. So while you may feel good about "beating" the system by doing 10 $1 transactions, you are basically telling the banks to quit offering these types of accounts. So that is back to my original point - since banks always include language in their TOS to close accounts at their discretion, I hope they do so for people that do this, rather than discontinuing or lowering rates for everyone.
  |     |   Comment #9
The following was sent out by my bank in May. The full story is at http://www.rickety.us/2009/05/rewards-checking-first-state-bank/

The First Choice Checking account is designed to be a primary household checking account for conducting everyday transactions which is defined as:

* ACH – Automated Clearing House transactions:
o Debits-Payments
+ Utility bills (power, water, trash, telephone, gas, cable TV, Internet access)
+ Religious or Charitable periodic donations
+ Insurance payments (Auto, Home, Life, Health, other)
+ Dues and subscriptions
o Credits-Deposits
+ Payroll Direct Deposit
+ Government payments (Social Security, Railroad Retirement, VA, Military, Child Support)
+ Private pension or retirement payments

* MasterMoney Debit Cards Purchases:
o Weekly grocery expenses
o Car fill-ups
o Home Maintenance and repair purchases
o Entertainment purchases
o Restaurant, fast-food, and fine dining purchases
o Automotive maintenance and repair purchases
o Clothing and school supplies
o On-Line purchases
o All other kinds of routine retail purchases

For the benefit of yourself and all First Choice Checking account holders, including especially the continuation of the premium interest rate, we encourage you to make the fullest possible use of ACH and MasterMoney debit card services, including those listed above.
  |     |   Comment #10
Sorry, this post cracked me up. As the banks get more devious in setting the requirements to get a decent rate (and hoping to trip people up), their customers get more devious at circumventing those requirements. What were the banks expecting?

I've never opened a reward checking account primarily because it would be too much aggravation to ensure I met the requirements, month after month after month. The security issues with a debit card also strike me as problematic. So I'll just stick to my rewards credit card and CDs and such, thank you. Glad these accounts work well for at least some people though.
  |     |   Comment #11
10 X $1 ? I use my card at the Staples self-service photocopy ... 10 X 8 cents !
  |     |   Comment #12
I find this utterly aggravating, and I am not even a customer of City National Bank. I was wondering what they meant by the "spirit" of the account. I found no mention of this at all in the information and application process online. The only place there was scant mention of it was in a FAQ where it says "Is there a minimum amount on the debit card transactions? No, we just ask our customers to use the card for their normal daily purchases." How can they now come back and tell their costomers that they are not using their card enough for large purchases, when the explicitly say there is no minimum. Isn't this illegal?
  |     |   Comment #13
Banks have different styles, some are generous and some are not-so-generous. I like FAB&T, including customers as help them to keep the high interest rate. I hate banks that threaten with account closure; that's simply rude. I like a few banks the most, which do not care about small debit transactions and still manage to keep the high rate!!

It is customers' right to do within the rules and regulations. We have 5% EDP cards and 2%-for-all cards, thus careful trade is made for meeting debit card requirements, especially when we have 13 RCAs.
  |     |   Comment #14
IMO, the "spirit" of the account is that it is meant to be profitable for both the bank and the customer. The bank is not a charity and is in business to make a profit. If you make 10 $1.00 charges a month and keep $24,999 in your reward checking account, your account clearly isn't profitable for the bank, and if a bank has enough customers like this, one of the following will inveitably result from the bank's need to make a profit:
1. The bank will lower the interest rate, hurting ALL the reward checking customers including those that use the account more than the bare minimum required under the account terms.
2. The bank will simply close some reward checking accounts or quit offering reward checking altogether.
3. The bank will begin to impose specific requirements as to the dollar volume and type of transactions, which people on this blog will of course decry as "onerous", forgetting why the bank needed to implement the requirements in the first place.

I have several RCA's and have been very pleased with them. My typical usage pattern is to make 20-25 debit charges on each account monthly (minimum is 10-12 so I am WELL over the minimum) but generally not in huge amounts. I will use the RCA debit card for things like my $6 Burger King burger, my $2.29 cup of coffee, $10 subway pass, etc. I will not use it for my $200 plane ticket or $350 hotel bill - those go on the rewards card. So far I have had *no* flak from any of the banks where I have my RCAs, all of which are still paying over 5%. My point is that it really isn't THAT hard to use the debit card in a manner that doesn't look like you're gaming the system, yet gets maximum benefit at minimal cost. Y'all need to think outside the box a little more on this. (Those of you that can't come up with 10 actual transactions per month - how do you live? No groceries, gas, snacks, etc? C'mon, I'm not wealthy and I am doing 50-60 debit transactions a month, PLUS the stuff that goes on the rewards credit cards.)
  |     |   Comment #15
I agree with those who say it is not account abuse as long as it is within the TOS. Banks should modify their TOS to include minimums on the required transactions if they feel it is necessary to better define what "normal daily use" means to the bank.

That said, I do want to help out my reward checking bank with generating fees from the debit card usage. I'm still confused what their fee revenue mainly depends on ... the number of debit purchases (i.e. fixed fees per transaction) or the total dollar value of debit purchases.

Another thing that should help banks with so-called reward checking customers "abusers" is probably that they tend to keep large balances in the account at all times (using it more like a savings account or even CD), which should make it easier for the bank to loan this money and earn a higher interest rate than what they are paying on the reward checking account. Plus, these same customers probably have minimal interaction with the bank, therefore the bank does not have to spend customer service $$ on them.
  |     |   Comment #16
For those of you with multiple RCAs, how do you swing that given that a typical requirement is at least one direct deposit, and most people have only one option (paycheck or Social Security check)? There must be some I am not thinking of.

Also, is anybody a small business of one who has found a workaround for the direct deposit requirement, given that direct deposit of paycheck is not an option?

Thanks in advance.
  |     |   Comment #17
As to the above post, is an ACH push considered a direct deposit?
  |     |   Comment #18
I have read elsewhere about using adding a cash back amount to a small purchase as a means of increasing the transaction amount. does anyone know if that flows through as fully a POS transaction or if the banks can split that out somehow, maybe as an ATM transaction?
Gerard Sorme
  |     |   Comment #19
Outrageous! If that is what's required - put it upfront on the list of requirements to get the interest rate in a Rewards Checking account! For a bank (of all institutions) to ask you to abide by the "spirit" of a relationship is hysterical. Banks abide by the "letter of the law" (or regulation, contract, etc.) not the "spirit" of their lending rules, payment terms or anything else - it's what is in black & white - "spirit" be ****ed. This is just too funny to be true!
  |     |   Comment #20
I think most people who read this blog use these accounta as savings accounts since the interest rate is higher than real savings account and many CD's !!! I have not opened any yet, since I thought they all had low balance limits (like $25,000) and were not worth the effort. I now see that there are a couple without any balance limit. So one could have $500,000 in a joint account. For that it would be worthwhile. If it was just the one account it would not be hard to meet the debit card requirement. My problem is the direct deposit. I am retired (no paycheck) but not old enough for Social Security yet. I do have automated monthly deposits from certain investment accounts. Would they qualify for the paycheck / social security deposit?
  |     |   Comment #21
However, I never quite understand why people want to get something for nothing.

To the person who made the above comment; I do not believe that I am doing "nothing" by depositing my $25k in a bank. By me putting my $25k in a bank - the bank is then able to earn money off of my money - so my money is definitely not doing "nothing" - it is earning money for the bank that I chose to put it in. The bank should be more thankful to people like me who "loan" them my money so they can make LOTS of money off of "My Money".

  |     |   Comment #22
However, I never quite understand why people want to get something for nothing.

One more thing...

If I keep $25k in a RCA - the bank will pay me approx. $100 a month in interest if I do my part by making the minimum transactions, have the ACH or direct deposit, retrieve online statements, etc.

The bank will then lend my money at upwards of 10% or more.

So, they earn 5% or more by lending my money to someone else - yes, they have overhead but they are earning money for nothing in that percentage...

So, let me ask?

Who is reallying wanting to get something for nothing?

Sounds like the bank to me...

  |     |   Comment #23
My employer allows me to split my direct deposit into up to 3 pieces, and also has online access to change accounts anytime I want to. I get paid twice a month. So in theory I could have one direct deposit per month going into up to 6 accounts.
  |     |   Comment #24
In reference to what is allowed for "direct deposits" my bank will allow an ACH push. They do not require paycheck, Social Security, etc. I push my direct deposit from Alliant CU.
  |     |   Comment #25
http://bankdeals.blogspot.com/2009/06/how-careless-customers-help-careful.html also has info on this topic!
  |     |   Comment #26

Recent article on debit card problems, but probably most already know about them.
  |     |   Comment #27
"One useful technique that I saw mentioned either here or on FatWallet to “painlessly” increase the average Rewards debit card amount, was where possibly (and where free), get $10 - $30 cash back with your debit card transaction. I believe in those situations the bank offering the debit card does make as much on the transaction as if the entire debit (purchase plus cash back) were a purchase."

That is not correct. The debit card issuing bank does not receive any fees for the cash back amount. The fee is only calculated on the purchase amount before cash back. That's how the grocery store can afford to let you have cash back with your purchase in the first place.
  |     |   Comment #28
I got one of those letter from City National as well. I'm glad to hear that I am not alone. I told them that I would be quite happy to use their Visa/Debit card if it has the rebate. They wanted me to use for every day banking; and I told them that is my every day banking: using my reward credit card.
  |     |   Comment #29
I have 6 RCA and pay 10 x $1 utility payments each  in just one sitting. I dont have to keep counting the debits ret of the month.
  |     |   Comment #30
Banks have no shame in telling customers to follow their "spirit" when they are the ones who garner huge bonuses even when bank is running at a loss and being subsidized by government.

They should cut down their perks before poor RCA customers are asked to help them.
  |     |   Comment #31
I received a very similar letter two months ago from County Bank (South Carolina) and threatened to close my account if I didn't change my debit card usage pattern. I then used this card to pay my cable bill which was broken into about $3 each and also some small grocery bill. One week ago I received another letter informing me that my account would be closed by the end of this month because I still haven't followed their intended "spirit".
  |     |   Comment #32
For those RCA banks that wish customers using RCAs as primary accounts, the "spirit" is really in amount and in automation.  Those banks hope that each purchase be typically $5 - $10 each and no automation is conducted (somehow, the system will detect it as possible fraud and then when a clerk examines it, he/she gets real upset with such routine/easy fulfillment of the debit requirements). A third desirable is diversification (utility, restaurant, grocery, coffee, entertainment, etc.).  The bank loves it when the card is sued all over the place.

  |     |   Comment #33
Randolph Bank, North Carolina just recently changed their amount /per purchase to $20.00 and not less than 6 purchases per reward period.  They also dropped their rate of interest from 4.75% in 2010 to 2.50% currently. Guess we just better enjoy while the rates lasts - change is definitely here and more to come.. 

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