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Reward checking pays high yields

We usually try to steer readers away from checking accounts that have strings attached, but some deals are worth investigating.

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Reward checking accounts, offered primarily by community banks, pay high yields on the account balance as long as you stick to a few rules. Essentially, these are free checking accounts with CD yields. The rules are meant to contain costs for the bank and usually entail receiving monthly statements electronically, having one direct deposit or an automatic payment each statement cycle, and using your check card 10 to 15 times per cycle.

Gabriel Krajicek, CEO at Austin, Texas-based BancVue, the company that provides these reward checking programs to financial institutions, says encouraging customers to go online pays off for the customer and the bank.

"Free checking is expensive; a bank needs branches, drive-throughs, has to process paper checks, and all that overhead is being spread over a very small average balance of about $1,200. The cost to service a CD is almost nothing, and the average balance is around $16,000. Banks are realizing that (by altering customer behavior) they can reduce the cost of the free checking account and give account holders an incentive to increase their average balance. Reward checking accounts are twice as profitable to the bank as free checking and the attrition rates are 70 percent lower."

CDs for old fogies
State Bank of Toledo (Iowa) pays 6.01 percent on its Hometown Reward Checking account, which is available nationwide online. Executive Vice President Bill Skow says he realized in a conversation with another banker that the CD depositor will disappear as the baby boom generation ages and that his bank needed another way to attract deposits.

"The CD base is fairly solid right now in rural America, but we can see down the road," he says. "When estates settle, that money leaves us and never comes back. We just know that the younger generation wants to have more liquidity and flexibility in dealing with their financial matters. These cyberkids don't want anything to do with these (CDs). We've had an excellent response and have opened accounts from Maine to Hawaii.

"There's no magic. When you offer that exorbitant rate of interest and free ATM withdrawals, you can attract business. Upfront the disclosure is that we have the option to change the rate any time. I know our philosophy is that it's going to be a highly attractive rate no matter where the rate environment goes."

Patricia Gallagher, director of strategic planning at EVB, a community bank headquartered in Tappahannock, Va., says her bank's reward checking account pays 5.01 percent as of this writing, and also is available nationwide.

"For some people the technology requirements don't work with their lifestyle, but the vast majority of customers are already doing these things. Most people use their debit card even more (than required). So, we're paying people a lot of interest for something they were already doing and it's a very robust rate."

Low costs keep yields high?
Industry analyst Aaron McPherson at Framingham, Mass.-based Financial Insights notes that the accounts help eliminate monthly paper statements, which cost banks an estimated $2.15 each. But he says that's no guarantee the yields will stay so high.

"I don't know if they need to maintain the yield," McPherson says. "It's an interesting way to get people to move to electronic statements, but once enough people are doing it they may be able to back off."

BancVue's Krajicek offers a brighter scenario for high-yield fans and says these accounts could become a dominant high-yield product. "I believe that free checking is going to be one of the highest interest rate financial products in the financial industry. As people adopt high tech, the cost to service accounts comes down. Plus the banks are getting revenue from (check card usage). We know if we require people to use their check card 10 times that they're going to use it way more than 10 times. It's either what you buy stuff with or it's not."

Krajicek says his company's reward checking program is available at approximately 350 financial institutions, with about 30 banks adding the program each month. The best way to find one is to do a search for reward checking. Not all institutions may choose to make their accounts available outside their geographic area.

Keep in mind that if you don't meet the requirements each cycle your interest rate will drop significantly to the bank's standard rate. At State Bank of Toledo, for example, that's 0.25 percent APY.

While BancVue sells their program to community banks, you may want to consider high-yield checking accounts at other institutions, especially online banks.

Bankrate.com's corrections policy
-- Posted: Nov. 5, 2007
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