It has over four years since I started reporting on high-yield reward checking accounts. Since that time I've reported on hundreds of these accounts which reward customers with very high interest rates if you meet certain monthly requirements (the main requirement being debit card usage). The banking environment has been difficult for banks and depositors. Low interest rates, the low demand for loans and more government regulations have made reward checking less appealing to banks. Some banks have discontinued these accounts, and others have reduced the interest rates and the balance caps (the balance that qualifies for the high yields). Will reward checking accounts last? If they do last, can they continue to be a good alternative to internet savings accounts?
The Market Insights blog picked up on my post about the shrinking list of nationwide reward checking accounts and reviewed the topic of the sustainability of rewards checking. It suggested that "it looks as though the product may have run its course." In my opinion, reward checking is here to stay. Most institutions offering reward checking will continue to offer them, and more institutions will launch new ones, although I think the growth will be less than in the past. It's easy for banks to make changes to reward checking accounts so they stay profitable. Unfortunately, that may also mean less profitable for us savers.
How Reward Checking Accounts are Changing
Here's an example of how a credit union changed its reward checking account. United Heritage Credit Union based in Austin launched its reward checking account, Heritage Checking, in 2007. At that time it was paying 6.01% APY on balances up to $25K. In early 2009 it suspended opening new accounts. While it was suspended, the rate dropped for existing accounts to 3.01% APY for balances up to $25K. In May 2010, they relaunched it for new accounts. The rate was still 3.01% APY. However, this applied to balances of up to $10K instead of $25K. Also, it now required 15 debit card purchases a month instead of 10. United Heritage was nice in that it grandfathered the old accounts to the original terms ($25K balance cap and 10 debit card purchases).
We're seeing lower rates and balance caps for the new reward checking accounts that are being launched. The latest example is the new reward checking account that I reported yesterday from Gulf Winds FCU in Pensacola. Its reward checking account pays 3.01% APY but only for balances up to $15K.
Another example is the bank that I mentioned in my last weekly summary. It's Avidia Bank, and it just launched a new reward checking account called eChecking that's available nationwide. The good news is that it has a balance cap of $25K. The bad news is that the rate is only 2.28% APY.
Updates to the Math Behind Reward Checking
In the post last year in which I looked into the math behind reward checking, I showed how debit card purchases can help banks pay the cost of the high interest. Banks and credit unions earn fees for each debit card purchase you make. This is called interchange fees. In that post I had assumed a fee of 1.75%. Since that time I've learned more about interchange fees. It appears 1.75% is too high. The average is probably closer to 1.00%, and that is from signature-based usage which has higher fees than PIN-based usage. So if you assume banks receive 1% for each debit card purchase you make, here's how the math works out.
In that post, I used data that I had received from a credit union which showed the average balance to be $7,700 and the average monthly debit card purchases to be $900.
Based on $900 monthly purchases and a 1% interchange fee, the average monthly revenue banks would receive is $9.
If the $9 is returned to the account holders as interest and if the average balance is $7,700, that would provide account holders with an interest rate for that month of 1.40% ($9*12/$7,700).
If a reward checking account is paying 3.00% interest, the debit card usage would help pay for almost half of that. The institution would have to find other ways to pay for the 1.60%. In today's interest rate environment, it's going to be difficult for any institution to pay around 1.50% on a liquid account. You can see why banks are reducing rates and balance caps.
Future of Reward Checking?
If the recently passed financial regulation doesn't have too much effect on the debit card interchange fees, I think reward checking can last. However, we have to set realistic expectations. Reward checking rates that are over 2 percentage points above the best internet savings account rates is probably expecting too much over the long term. I've always thought a 1 percentage point spread is about all we can hope for with $25K balance caps. That would mean most reward checking account rates will be between 2.00% and 3.00%.
If your reward checking account is paying you one percentage point more on $25K than your internet savings account, that is a pretty good deal. That comes out to be $250 more per year.
What I like about reward checking accounts is that it helps savers more than it helps spenders. Those who spend more and keep smaller balances help subsidize the savers who spend less and have larger balances. It helps a little bit in making up for the Fed's monetary policy in which the zero rates subsidize borrowers at the expense of savers.
Searching for Reward Checking Accounts
We still have dozens of nationwide reward checking accounts with many paying 3.00% or more on balances up to $25K. We also have hundreds of reward checking accounts that are only local deals. To find these accounts, please refer to the reward checking section of DepositAccounts.com. Remember to select the "Filter Accounts" button to find those available in your state.