One problem with reward checking accounts is that banks need their customers to be big spenders on the debit cards to be able to afford paying the high interest rates. Banks make a profit of about 1% on the amount their customers spend on debit cards. This is from the hidden debit card interchange fees that retailers pay. The fee is capped now for large banks due to the new debit card regulation, but it's not capped for small banks.
The company that powers most reward checking accounts, BancVue, maintains that regulation prohibits banks from requiring customers to make debit card purchases of certain values. There is in fact an FDIC bulletin that says "Banks may not require that transactions be of a certain dollar value (individually or in aggregate)." There are some banks that do require customers to make purchases of a certain amount to qualify for the high yields. However, these banks appear to be the ones that have created their own reward checking accounts without the help of BancVue. They probably either don't know about this FDIC rule or think they can get away with it.
So if a bank wants to follow the rules, the only way they can force higher debit card spending is by warning customers that they expect them to use the account as their primary checking account. We have seen banks do this several times over the years. I posted on one example over two years ago when City National Bank warned a customer who wasn't using the account in the "true spirit of our program".
The latest example of a bank "forcing" more debit card spending is Jeff Davis Bank. A reader just posted in the comments the message he received from Jeff Davis:
Kasasa Account Holder,
It has been brought to our attention that you currently have a Kasasa Cash account in which your spending behavior does not reflect the true spirit of the account. We began offering this account to allow our customers to earn interest stemming from the money Jeff Davis Bank would save through our Kasasa accounts. Unfortunately, some accounts have only been opened to take advantage of our interest rates and are not being used as a checking account.
Due to these circumstances, we will now switch your Kasasa account to a non-interest bearing free checking account on November 30, 2011.
We sincerely appreciate your business and we hope to continue to serve you in the future. If you have any questions please call 1-800-789-5159.
Thank you, Jeff Davis Bank
It would be interesting to know how much per month the commenter was spending with his or her debit card. For the case of City National Bank, the customer received the warning email with spending about $30 per month. At least with City National Bank, they just sent a warning. The bank didn't kick the customer out of the account. However, City National Bank's reward checking account did go down hill. The rate is now only 0.45% for all balances.
Jeff Davis Bank's reward checking account has also gone down hill. The top rate is now 3.25% APY for balances up to $10K. In my last review of the account in January, it was paying 4.01% APY for up to $15K.
Is it being fair to the bank to only make small purchases with your reward checking debit card? It does seem unfair to me for the bank to close or switch accounts without warning when the customer isn't spending enough to meet the vague "true spirit of the account." One reader had the following comment of this:
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 their TOS.
However, another reader provided this sensible advice:
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.
Spending around $100 a month appears to be high enough to prevent banks from closing accounts. If your account has been closed or switched, how much were you spending?
Even though spending $100 a month may be enough to prevent banks from getting mad at you, it may not be enough to be helpful in keeping the interest rates high. Fortunately, the "average Joe" does spend quite a bit with their debit cards. One credit union sent me stats for their reward checking account. About 12,000 of their members have this account, and on average they spend $960 per month with their debit cards. I didn't receive details on how much they get from the interchange fees, but if you assume 1%, that means the credit union gets $9.60 per month per member from this fee. Members maintain an average balance of $8,400. The $9.60 per month comes out to $115.20 per year. So if the credit union returns all of the $115.20 to members as an extra interest rate on the checking account, that comes out to an interest rate of 1.37% (100 x $115.20 / $8,400).
The nice thing about reward checking is that it's favorable to savers rather than 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
For more information and tips on reward checking accounts, please refer to my post 10 Common Traits of High-Yield Reward Checking Accounts.
We still have a few nationwide reward checking accounts that pay 2.00% or more on balances up to $25K. However, there are many better local deals with some paying as much as 4.00% on balances up to $25K. 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.