I first started reporting on reward checking in 2006. By 2007, I was posting on a new reward checking account at least once a week, and that has continued into 2011. The high-yield reward checking model was created by BancVue, and in the last several years, hundreds of community banks and credit unions around the nation have launched reward checking accounts. We list most of these in our reward checking table.
Reward Checking's The Perfect Storm?
With this ultra-low interest rate environment and low loan demand in the last two years, all deposit accounts including reward checking have taken a hit. Other factors have also made it more difficult. New regulations have been one factor. Financially weak banks have to deal with FDIC rate caps which unfairly group reward checking with interest checking. Last year's overdraft regulation and this year's debit card interchange fee regulation are also having effects. How much effect this year's debit card regulation will have is still in question.
Banks and credit unions have been making a lot of changes to their reward checking over the last year. Most of these changes have kept the accounts essentially the same. The main changes have been lower rates and balance caps. However, we are starting to see some tweaks to the reward checking model. Can reward checking last? And if it can, will it continue to be a good alternative to internet savings accounts and CDs?
Basics of Reward Checking
The basic high-yield reward checking account is a free checking account with no monthly service charges. You are rewarded with a high interest rate if you meet monthly requirements. Most also reward you with ATM fee reimbursements if you use ATMs at other banks. Below are the typical rewards:
- Some top rate (3% is typical) for balances up to a cap ($25K is typical)
- Much lower rate (i.e. 0.50%) for the portion of the balance over the cap
- Tiny base rate if requirements are not met (i.e. 0.10%)
- ATM fee refunds up to a certain limit per month
The typical monthly requirements include:
- 10 to 15 debit card purchases
- At least one direct deposit or ACH transaction
- Receiving electronic statements
There are sometimes additional requirements such as logging into online banking at least once a month or performing online bill payments. It's important to note that the debit card requirement only includes a certain number of debit card purchases. There is typically no requirement for the amount of the purchases. However, banks expect the customer to use it as their primary checking account. Too many small purchases can get flagged, and the bank has the right to close accounts for any reason.
One nice thing about this debit card requirement is that it's favorable to savers rather than spenders. Rewards from credit and debit cards are often based on the amount of the purchases. An example is 1% cash back on the total amount of your purchases. For the reward checking, someone who makes 10 debit card purchases that total $20 can get the same level of reward as someone who makes 10 debit card purchases that total $2,000 if both maintained the same checking account balance.
It might seem like this model might not be profitable for the bank. I've looked into the math behind reward checking in 2009 and last year. One thing that helps make it profitable is that the average customer won't maintain the maximum balance that qualifies for the top rate. Many customers will maintain much smaller balances. Also, not everyone will meet the monthly requirements. In short, the reward checking customers who are big spenders with small balances help banks pay for those who don't spend much and maintain the maximum balances.
Reward Checking Changes - Rates and Balance Caps
The most common change we have seen with reward checking accounts in the last two years is lower rates. This is no different than what we have seen with all other deposit accounts. However, there has been another common change that is unique to reward checking. That's a reduction in the balance cap.
The balance cap is the maximum balance that qualifies for the reward checking top rate. The portion of the balance above this cap earns a much smaller rate. Instead of reducing interest rates, banks have also lowered this cap. This has the same effect of reducing how much interest the bank pays. It also makes the reward checking account less useful for savers as a replacement for internet savings accounts.
Reward Checking Model Changes
We have recently been seeing some variations of reward checking accounts. The reader AtlantaWolf described a new variation at Bank of Blue Valley in the discussion forum, and I just came across a new type of Kasasa Cash account at Mid Wisconsin Bank.
Rewards Based on Dollar Amount of Purchases
The Bank of Blue Valley introduced a new type of reward checking that it calls Ultimate Checking. Instead of requiring a certain number of debit card purchases a month, it requires the customer spend a certain amount with their debit card to qualify for one of two high rates:
- 3.00% APY for purchases of $300 to under $1,000
- 4.00% APY for purchases of at least $1,000
In this case, it doesn't matter if you have one debit card purchase or 20. Only the total amount matters. We have seen banks that have placed a dollar amount requirement on purchases, but they have been just a slight variation of the typical debit card requirement. For example, Randolph Bank & Trust Company requires 6 debit card purchases a month with each being at least $20. The Berkshire Bank also requires 6 debit card purchases a month, but it requires that the total in purchases be at least $100. BancVue maintains that these requirements don't comply with regulations. So hopefully we won't see too many more of these types of changes. They definitely make it harder for savers.
Kasasa Cash Back
Kasasa Cash is another name for reward checking. BancVue came out with the Kasasa brand of products to include not only Kasasa Cash but also other products like Kasasa Saver which is a savings account linked to Kasasa Cash. I just noticed a new type of Kasasa account called Kasasa Cash Back. This is being offered by Mid Wisconsin Bank. They have the details in their Kasasa Cash Back page. It basically operates like credit card cash back rewards. The cash back is high (currently 4%), however, the maximum cash back is based on your checking account balance. For example, your 4% cash back is limited to $6 if you maintain a balance under $2,500. The maximum cash back is $96 if your balance is at least $25,000. That requires a monthly total purchase of $2,400.
These new models are less favorable to savers. They require more spending to qualify for the rewards. Fortunately, these are still rare. If the new debit card regulation takes effect based on the current proposals, both these new reward checking accounts and the old ones will likely be hurt. As can clearly be seen in these new reward checking accounts, the debit card interchange fees help pay for the rewards. If those fees are significantly capped, the rewards will have to be cut.
For the last three years reward checking has proven to be of great value to savers. Their rates have held up better than internet savings accounts. However, the Perfect Storm isn't over. We'll have to see what the final debit card interchange regulation looks like and how banks react later this year.