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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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Why Some Checking Accounts Have Higher Rates Than Savings Accounts


A reader asked an interesting question in the discussion forum of why some checking accounts pay higher interest rates than savings accounts. Cases like this are becoming more common.

Examples of Checking Accounts with Higher Rates

The reader pointed to Incredible Bank which offers an internet checking account that pays 0.93% APY for balances up to $250,000 (as of 5/8/2012). As you can see in our savings account table, this yield is higher than the yields of most of the internet savings accounts. However, it's a little lower than Incredible Bank's money market account which pays 1.00% APY for balances up to $250,000. Unlike the checking account, Incredible Bank's money market account has a monthly service charge if the balance falls below $2,500.

There are other examples with checking accounts with higher interest rates than savings and money market accounts. One is at ING Direct. For large balances, ING Direct's Electric Orange (EO) checking account has a yield higher than the Orange Savings Account. The EO account pays 0.90% APY for balances of at least $100K and 0.85% APY for balances from $50K to under $100K. The Orange Savings pays 0.80% on all balances. So if you have a large balance, you'll want to open the EO account to maximize your interest. You can even make more money in this checking account than in most of ING Direct CDs. Only the 5-year CD has a higher interest rate (1.00% APY as of 5/8/2012).

At Bank of Internet USA, the Rewards Checking account has a yield up to 1.25% APY on all balances (as of 5/8/2012). The highest savings account rate is only 0.80%.

Debit Cards Help Pay for the Higher Rates

The checking at Bank of Internet USA is not the typical checking account. It's a reward type checking account that requires certain activity to qualify for the high rate. We have seen similar reward checking accounts at many community banks and credit unions (see post). The main requirements for reward checking accounts are debit card purchases. That's one important reason why banks can pay higher interest rates on checking accounts. Each time you use your debit card, the merchant pays an interchange fee to the bank. The more you use your debit card, the more interchange fees go to the bank.

Even for the checking accounts at Incredible Bank and ING Direct that don't require debit card purchases, I'm sure some customers still make purchases with their debit cards.

Another way banks make money from debit card usage is from overdraft fees. It has been shown that when people use debit cards more, they will have more overdrafts. This might not be true for those of us with large savings, but for the average Joe who lives paycheck to paycheck, it has been shown to be true. Most banks charge large fees each time the customer has an overdraft. Even with the new regulation that requires customers to opt-in for overdraft protection, many customers choose to opt-in without really understanding that it will cost them (see post).

Reserve Requirements and Transaction Costs

If you exclude reward checking accounts and a few special cases like Incredible Bank and ING Direct, you will find that most banks do offer higher interest rates on savings accounts than on checking accounts. This My Money Blog post has a good explanation why this is generally true. In short, checking accounts are transaction accounts which have reserve requirements. You can review the latest reserve requirements set by the Federal Reserve. Savings accounts which have transaction limitations don't have these reserve requirements. Thus, this helps savings accounts to be more profitable for banks than checking accounts.

Another way checking accounts can be more costly for banks is due to the transaction nature of checking accounts. Check processing is a cost for the banks. Also, checking accounts probably have more teller transactions than savings accounts. With the growing popularity of online bill pay and ACH transfers, fewer paper checks are written. This type of checking account cost is probably going down for banks, especially for internet banks like ING Direct.

Bottom Line

Due to reserve requirements and some additional transaction costs, we probably won't see all checking accounts offering higher interest rates than savings accounts. The fees banks get from debit cards and overdrafts go down when people have larger balances. Except for a few cases like ING Direct and Bank of Internet USA, savings accounts still generally have higher interest rates than checking accounts for large balances.

If you can think of other possible reasons why some banks like ING Direct offer higher yields on their checking accounts, please leave a comment.

Related Pages: checking account, savings account

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  |     |   Comment #1

Many banks look at checking accounts as a way to build and maintain a relationship with a customer, and later on extend credit and sell other services. So the push has been on checking accts. and some banks do offer more attractive rates on their checking.  Checking accts. are traditionally "active" accts. and will get the customer in the bank more often, so even things like insurance can be marketed to them.  Studies show banks that savings accts. yield less business; CD's may yield the least so it makes sense now that the banks often could care less about getting a new customer in at an attractive CD rate.  Studies show that new CD customers often are not successfully "cross-sold" other products.  Hope this helps explain why some checking accts. have more attractive rates, at least initially (those last 3 words are key).  I worked in banking for a while. Like your site, keep up the good work.
  |     |   Comment #2
That explains why going into a large bank lately (like Wells Fargo or Chase) has been like going onto a car lot...
  |     |   Comment #3

I have a big gripe with Bank of Internet.  Early this year their savings account, UFB Direct AA Savings, earned 1.30%APY.  My mom and I opened accounts, like many of your readers and BOI promptly reduced the interest rate on that savings account below 1.00%APY.  We had not not done any transactions with our accounts after opening them early this year.  However, we got numerous phone calls from BOI from people who would not identify themselves or why they were calling.  I told them that we were not interested in talking with anyone from the bank and that their repeated calls were unwelcomed.  Then, last week I tried to transfer monies from those UFB Direct AA Savings accounts to our Alliant CU checking accounts, using ACH pulls from Alliant.  Three days later we each received Emails from Alliant that the UFB Direct Savings accounts could not be verified and the ACH transactions were reversed.  We then got $15 fees for each failed ACH transaction involving the UFB Direct Savings Accounts.  What made the situation even more infuriating was that the UFB Direct Savings accounts were funded when opened by our Alliant CU checking accounts months earlier, and those accounts had to be verified in order to fund the BOI accounts.  When I called Alliant CU to find out why there was a problem with the UFB Direct Savings accounts, we were told that those accounts had been frozen.  Now I was really angry and I called BOI to find out why our accounts were frozen. I was put on hold for several minutes and then was told that I would have to talk to a different CR and that he was not in the office, and he might not get back to me until late the following day.  Well, late the following day I finally hear back from BOI.  When I asked him why our accounts had been frozen, he cited records showing that the bank had tred to contat us several times and that we " were not co-operative. "  I told him that I had told the bank that I did not want to be contacted by phone, and that I told the people that who kept calling our home , over, and over and over.  He also claimed that they had sent us Emails asking that we contact BOI during that timeframe, but he could not produce any copies of those Emails, and I never received any.  They also never sent any letters to us about our accounts being frozen.  I told him that I checked our accounts online before performing the ACH transfers and there was nothing online that showed any problems with our accounts or the funds.  I asked him to refund us the fees that Alliant CU had charged us because the ACH transfers had been rejected by BOI.  He refused.  I then asked him to unfreeze our accounts and close the accounts and mail us the proceeds by cashiers checks.  I will still call Alliant CU and see if there is anything that they can do about reversing the fees for these transacions.  I would have nothing more to do with BOI given the experience we have had with what should have been  very simple savings accounts.  The company is grossly understaffed and they are obviously not interested in customer statisfaction, but are more interested in selling other financial products once they get your phone number.  Please warn others about BOI so they can save themselves the headaches that we have had to endure with this poorly run bank.
  |     |   Comment #5
#3: Your experience with BOI is appalling! The freezing of your accounts without notification, on the grounds that you were allegedly "uncooperative," sounds like bullying. Would the bank refuse to open an account for someone who doesn't have a telephone, I wonder? Is there anything in the bank's disclosures about the possibility of having your accounts "frozen" for no reason other than an inability to contact you by telephone? Since you mentioned having opened the accounts earlier this YEAR (that is, less than six months ago), it doesn't seem to be a case of a dormant account (by the way, is there a definition of a dormant account, and BOI's policies re. dormant accounts, in BOI's disclosures?). All this is bad enough, but your treatment by "customer service" was insulting, condescending, and retributive. I would suggest that you check BOI's disclosures to see if there is anything that gives BOI the right to act as it did. And if not, I would send a written complaint to the FDIC about this bank's conduct in your case. Anyway, thanks for the warning. Perhaps some good might come of it. You may have noticed that some banks and CUs routinely check this blog for complaints, and more reasonable CSRs will reply to complaints with offers to help. I hope that proves the case for you!
  |     |   Comment #4
Thank you #3 for writing about your horrific experiences with BOI. That's one bank I will never do business with. It makes me appreciate Alliant all the more. I hope you have been able to get your money out and close your BOI accounts without any more headaches!
  |     |   Comment #6
Im pleased with ING checking for my large savings account and billpay.

While they eat a day on billpays, otherwise, Im pretty happy with them.

Not withstanding the fact that they are not capital one and I HATE capital one.
  |     |   Comment #8
That is very odd your experience with Bank of Internet. I have been banking with Bank of Internet for years and have had no problems at all. Interest Rates do change that is actually quite normal and nothing to hold any Bank accountable for when it does unlesss you have a locked in rate. One of the other things that I have been able to take advantage of was the UFB Debit card that I earn miles on with American Airlines I LOVE IT. I do have accounts at Wells Fargo and BofA as well and they provide wonderful service when I go in they are all very nice in greeting me. The bottom line though for me is what am I getting for my money and is it convenient. Bank of Internet is that especially with my schedule. Because I travel so much I get the beneift from the Earn Miles program from the UFB AAdvantage program but also the fact that I can bank anytime from anywhere.

  |     |   Comment #9
My credit union offers a whopping 2.00% APY on its checking and only a .10 % on savings accounts. They do require a minimum of 15 debit card transactions per month exceeding $3 as well as an automatic monthly minimum total deposit of $500 per month.
I keep my "savings" in the checking account and pretend it is not here in order to earn the higher dividend.

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