About Ken Tumin

Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Bank President Paints Grim Picture of Reward Checking's Future


A few readers forwarded me an email that was sent out today by the president of Royal Banks of Missouri (Thanks!) The intent of the email was to prepare customers for future changes on their reward checking accounts. According to the email, the changes will be required due to the future Federal Reserve regulation that will cap debit card interchange fees. I reviewed this Federal Reserve proposal in this December blog post. Here's an excerpt from this email:

On July 21, 2010, the Congress passed and the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). One of the provisions of Dodd-Frank is that the Federal Deposit Insurance Corporation was required to review debit card transactions and the fees being assessed by banks on the merchants accepting the cards.

Recently, the FDIC released their initial thoughts on reducing debit card fees to 7-12 cents per transaction. While this may seem like a good thing for consumers, it is not a good thing for you as a Majestic Account owner. Royal Banks of Missouri (Bank) used the debit card fee income to help offset the high interest rate we have been able to pay you on your Majestic account. Given that our income will be almost totally eliminated and, it is quite possible that the Bank will lose money on each debit card transaction, a fundamental change to all of our Majestic Accounts will occur when the current proposal becomes law.

Currently, the Bank is studying numerous ways to help offset the elimination of the debit card income. While we have not finalized any plan, I am compelled to inform you that there will be significant changes in the structure and interest rate paid on all existing Majestic Accounts.

I anticipate that we will be finalizing our changes sometime in March/April. The Bank will provide you with at least 30 days notice on any structural changes and one weeks notice on any interest rate change.

One issue that wasn't discussed in the letter is that the debit card fee caps are suppose to only affect banks with at least $10 billion in assets (Royal Banks of Missouri is under $1 billion). Visa has already said it will support a two-tier fee system. Nevertheless, as shown in this letter, there are worries that the new regulations will still affect the small banks.

One reader just emailed me about his correspondence with a small bank which said its processing is done by a large bank (over $10B in assets), and therefore their debit fees will go down 90%. This type of issue is likely part of the reason why the Credit Union National Association (CUNA) has been against this regulation. The president of CUNA expressed concerns about how this regulation might have unintended effects on credit unions:

Since its introduction in the Senate, we have raised grave concerns that the Interchange Amendment lacked any enforcement mechanism for the small issuers’ exemption and that there is no guarantee the payment card networks will operate a two-tiered system the exemption necessitates for small issuers.

I think it's going to be a while before we know the true effects of this regulation. Nevertheless, the worries about its impact are currently another headwind for reward checking.

Related Pages: Royal Banks of Missouri, St. Louis, Quincy

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  |     |   Comment #1
"While this may seem like a good thing for consumers, it is not a good thing for you as a Majestic Account owner."

When do banks ever speak this frankly to their customers except when they're trying to manipulate them them? Did the letter end "We urge you to contact your representative..."?  I wouldn't trust this guy farther than I could throw him.
  |     |   Comment #2
Smoke screen. As I wrote before, debit card fees play a very small role in the reward checking account profit model. It's not a make-or-break factor. The debit card usage requirement is there to make customers use the bank as the main bank. It makes the customers more sticky. It's also used as a breakage tool to disqualify a certain % of customers for the high interest. Earning some fees is only a secondary goal.

A side note. I thought the Federal Reserve issued the proposed rules, not the FDIC. A bank president doesn't know the difference between Federal Reserve and FDIC?
  |     |   Comment #3
My perspective: RCA will get worse or diaappear at its due life-time.  No sense analyzing, worrying, or conjecturing at all.  Enjoy it while it lasts.  When it lasts, I will actually be very thrilled becuase (1) No more rate/bank hopping, (2) No more debit card risks, (3) No more bank account applications, and (4) No more stupid multiple debit card trasactions/ACH transfers.

There are always bank presidents that got bored/moody and wrote love/hate letters to their customers; it means nothing whatsoever to me as to the impact to RCAs in general.     

Hey folks, stop worrying and be happy:D
  |     |   Comment #4
It's nice that the president of Royal Banks is warning us (his customers) about the yet to be determined impact of the federal regulations on his bank's RCA account.

It's too bad he didn't bother to give so much of an explanation including a president's letter, or certainly this much advance notice, when Royal Banks in the past year actually slashed the interest rate on its rewards account from 4.3% to 3.5% and finally down to the current 2.75%, yet kept the required 15 monthly debits unchanged.

I have no doubt Royal Banks will once again later this year cut the rate on their RCA again and blame the federal regulations for doing so. I also have no doubt that the current letter is politically motivated and probably part of some organized campaign among banking interests to try to raise public sentiment against the regulations.

The fact his letter made absolutely no reference to the issue of smaller institutions being exempted from the regs, and that his institution would easily fit into the category of exempted institutions, is a pretty telling indicator of what really was behind the letter.

He's selling it, but I ain't buying it.
  |     |   Comment #5
Please dont bank with hyde park savings bank in hyde park ma they dont know what they are doing miss mcphillips should be fired
  |     |   Comment #6
I aggre with you about hyde park savings the norwood branch is awful
  |     |   Comment #7
Most of the small banks have affiliated contracts for Debit card processing with big or major banks, therefore most of the small banks by association will fall into big banks rules and regulations.
It is too expensive for a small banks to do its own contract with Visa or Master Card processing of the Debits via the ATM networks.
And there you have it, most of the RCAs will dissappear as we know it.
  |     |   Comment #8
If a 2-tiered fee system is implemented, I think that merchants will quickly compile a list of "no card accepted" banks--the small banks still charging the current tranaction fee. So, even if you had an RCA debit card, you would not be able to find a merchant that would accept it.
  |     |   Comment #9
It seems that merchants have forgotten how expensive it is to deal with cash.
  |     |   Comment #10
Mea culpa & so sad. I, like others here, have multiple RCAs & try to keep individual transactions to low $ amount & near minimum # required. I recognize the banks don't usually make a mint on me thru transaction fee %, but I live up to their requirements.

A few months ago one bank raised the debit bar. I forgot. Month before, I earned $90. That month, $4. Maybe the bank didn't make money on my account, but they didn't dish it out, either. This does happen about 4x yearly, I regret to say.

 Were it not for RCAs, I would NEVER use a debit card. If interest rates on these accounts tank, they will lose me. Good thing for them or me?

The caps on transaction fees is a good thing for consumers in general as the projected fees needs to be added to the prices we all pay.  & I will be happy to reduce the cards in my purse & end the game of transaction #s with bubble gum & Top Ramen at the last moment. 

But where to safely boost my interest income?  :-(
  |     |   Comment #11
Finally! Some sense in the reward checking BS. It was a total subsidy. Banks should be prevented from charging any interchange fees period. It's equiviliant to the US government charging any user of cash a certain use fee. It's complete BS. Rewards checking is dying the death that it deserves. High interest rates should be reserved for savings/money market/CD accounts, not a checking account that tries to steal bank fees from merchants and sellers with outrageous bank interchange fees.
  |     |   Comment #12
Couldnt say it any better than  51hh just did !
  |     |   Comment #13
The two tier fee system is going down in federal court.  The Durbin Amendment won't hold.

All this regulation has done is increase compliance and regulatory costs. 
  |     |   Comment #14
"It's equiviliant to the US government charging any user of cash a certain use fee."

The government can print money.  It can explicitly tell you about the fee or it can hide it from you.  But you ARE paying it.  They are charging it.
  |     |   Comment #15
"Stan - #7, Tuesday, January 25, 2011 - 10:43 AM

Most of the small banks have affiliated contracts for Debit card processing with big or major banks, therefore most of the small banks by association will fall into big banks rules and regulations.
It is too expensive for a small banks to do its own contract with Visa or Master Card processing of the Debits via the ATM networks.
And there you have it, most of the RCAs will dissappear as we know it."

It's not clear to me at least that just because the processing bank has $10 billion or more in assets, it means that small, debit-card issuing banks that use these large processing banks would not be excluded from the interchange fee limits of the Durbin Amendment.  If you can point me to language in the Amendment that actually mentions the processing bank, I'd appreciate it.  Thanks!

I believe the intent of the $10 billion clause in the Amendment was to not unduly penalize community banks and relatively small financial institutions, regardless of who actually does debit card transaction processing.  Forgive my skepticism, but I'm not going to take some disgruntled bank executive's word on this, when there are other clear motivations towards lowering interest rates, such as long, extended Federal Funds Rate of 0% - 0.25%.  I think that's the real culprit here.  Royal Banks of Missouri has had sufficient reasons to lower their rates, just as many other RCA institutions have done.  It's *how* this is done that irks many of us, such as no 30-day courtesy e-mails, etc.

While I can't quite duplicate 51hh's admirable attitude, I understand it.  Still RCAs have had a signficant upside for me, despite the extra efforts it takes to meet their requirements.  No, I won't be particularly glad if my RCAs no longer become worthwhile to me because of what I think is an artifically low Federal Funds Rate that isn't accomplishing anything -- except to make it difficult for savers.  I've a lot of compassion for those on fixed incomes who greatly depend on interest income from their FDIC-insured deposit accounts.  This is a serious issue and I wonder if the Federal Reserve has really considered sufficiently the negative impact of an extended, almost 0% Federal Funds Rate.

I suspect you (51hh) meant your statement somewhat ironically; nonetheless I can't be quite as philosophical about the whole thing as you apparently can.  :)  Ultimately, I guess we have to accept the situation, but I still reserve my right to occasionally carp about it.  :)
  |     |   Comment #17
Post #16 above is SPAM !

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