Future of Free Checking and Reward Checking Accounts

I recently had a conversation with a manager of a credit union with a reward checking account. Like many institutions with reward checking accounts, they have found it necessary to cut rates. The manager provided many insights into their decision about cutting rates, and I asked him if I could share his insights to my readers. He agreed, but he preferred that I not disclose his name or institution name. Since his insights are still useful even without specifics, I decided to post the general aspects of our conversation. They should give us a better understanding of how institutions view reward checking accounts and how they make decisions about future rates and balance caps.

The first thing I asked is why cut now. It has been over four years since the Fed first cut the Fed funds rate to near zero. Why didn’t your rates bottom out a year or two ago? It appears the rate decisions don’t happen overnight, at least for this institution. They had considered the decision to cut the reward checking rate many months ago. Earnings had been strong enough to allow them to push off the cut, but that wasn’t the only consideration. He described four reasons that caused them to cut their reward checking rate:

First, their deposit growth has been very strong, and their loan growth hasn’t kept up. We have seen this issue hit the entire banking industry as banks have released their quarterly reports. Banks and credit unions have more deposits than they can use. If they can’t make loans, they have to invest the deposits into things like Treasury notes which have very low yields.

Second, they are focused on their local competitors. They view their reward checking account as still being very competitive in their region even after the rate cut.

Third, the credit union has lost revenue due to the Durbin Amendment even though its assets are under $10 billion (only four credit unions have assets greater than $10 billion). The Durbin Amendment is a provision in the 2010 financial reform law that gave the Federal Reserve the power to cap debit card interchange fees and increase competition in payment processing. The interchange fee cap only applies to banks and credit unions with over $10 billion in assets. However, other parts of the provision which cover things like payment processing apply to all institutions, and it appears these are driving down the interchange revenue for even the small institutions.

Finally, many of the free services that customers expect with checking accounts (online/mobile banking, online bill payment, phone teller, etc.) have rising costs. This drives the institution to lower rates to offset the higher costs.

The credit union manager wasn’t too optimistic about the future of free and reward checking. One thing that may add more pressure is more limits on overdrafts. When the Federal Reserve released new rules on overdrafts in 2009, banks and credit unions lost a significant amount of fee revenue. The new rules may have helped the careless who often have overspent with their debit cards, but they have cost the careful savers who have never overdraft since banks and credit unions had to offset the reduced overdraft fee revenue with lower deposit rates or new monthly service charges.

New limits on overdrafts aren’t a certainty, but according to my credit union contact, the Consumer Financial Protection Bureau (CFPB) is floating around a proposal that will limit the amount that a bank can charge for an overdraft or limit the number of overdrafts allowed in a day or month. That could drastically reduce the income to all banks and credit unions.

Reward checking accounts have been offering a good alternative to internet savings accounts for the last five years. They have allowed savers to earn more interest without giving up liquidity. However, they are definitely not as good of a deal as they used to be. At least we’re not locked into reward checking accounts. If rates and balance caps fall and the accounts are no longer worthwhile, savers can easily move their money into internet savings accounts or in CDs.

Searching for Reward Checking Accounts

To find reward checking accounts available in your state, please refer to our reward checking table. You can also use the table to find reward checking accounts available nationwide. Refer to this post to learn how to use the table.

To learn more about reward checking accounts, please refer to my post 10 Common Traits of High-Yield Reward Checking Accounts.