Rewards Checking Products. The Pros and Cons

Posted by Sean Swift on Jun 2, 2017

Rewards checking products have been around for some time. A rewards checking product is a checking account that provides consumer incentives or perks when certain monthly requirements are met. These perks may include high annual percentage rates, ATM refunds, cash back, iTunes credits, airline miles, cell phone insurance, shopping discounts, etc. Typically these perks are awarded to the consumer when several monthly requirements are met, such as: completing (12) debit card transactions, enrolling in eStatements, having at least one direct deposit, logging-in to online-banking at least once, etc. These products are primarily offered to customers and members at community financial institutions. A portion of these product offerings are free and charge no monthly fee in order to be an accountholder, however there are plenty of institutions nationwide that have fees in place on their respective rewards checking products. Some institutions have created internal rewards checking products and others work with 3rd party vendors in order to deliver these reward products to the consumer.

Let’s take a look at the history. Rewards checking products first hit the consumer landscape in 1997 when a small community bank in Taylor, Texas, City National Bank, teamed up with Kasasa Ltd., a wholesale financial services company formerly known as BancVue Ltd., to develop a product that was very keen on retaining its current customers while giving the bank a competitive edge over its larger competitors. It offered high yield rewards checking accounts that paid a higher APY to those that met their monthly requirements. Since then, the number of consumers utilizing these products and the number of community financial institutions offering these products has significantly increased.

One of the benefits to financial institutions offering these types of accounts include: growing deposits, customer/membership retention, cross-selling opportunities, and increased debit card usage. During 2016 the average APY on a high-yield interest-bearing rewards checking account was 1.65%, the average APY on a 1-year certificate of deposit was 0.28%, the highest APY on a money market account was 1.11%, while the national average APY offered on money market accounts was 0.11%. With the highest interest rates offered on DDA accounts, this can be a great incentive for financial institutions to get new depositors in the door. Financial institutions will often cap the balances needed to earn the reward interest rate. This is done to offset the expense associated with operating these accounts. While high-yield interest-bearing accounts are of the most common offered, it is important for financial institutions to be aware of their customer / member behavior. They need to take note of the competitive market to ensure that any rewards checking product, travel rewards, high-yield interest reward, shopping rewards, and ATM surcharge refunds etc., is going to be both accepted by the consumer base and profitable for the institution.

Some consumers may view meeting the monthly requirements a hassle, these monthly requirements can lead to a consumer vigorously utilizing the financial institution’s services and ultimately lead to customer retention and cross-selling opportunities, thus benefiting the institution in the long run. These rewards checking accounts can ensure consistency in frequent debit card usage by its consumers. Frequent debit card usage serves multiple purposes for a bank / credit union including keeping the consumer engaged, generating interchange income charged to merchants, and discouraging accountholders from utilizing other outlets as a source of payment (i.e. credit cards and paper checks). As of 2010, total debit and credit card interchange income was $41 billion, which equates to about 5% of a financial institutions yearly revenue stream. Debit cards are still the most popular noncash retail payment instrument by number of transactions. An increase in interchange revenue will help financial institutions to offset the expense of the rewards/incentives given to rewards checking accountholders.

While there are several pros to offering a rewards checking option, financial institutions need to understand the disadvantages that come along with these account types. The biggest downside of offering these type of accounts is the complexity and unease of usage it can cause the consumer. As prevalent as rewards checking accounts are, they still seem to leave some consumers wanting a simpler approach to a checking account. Rewards checking products force consumers to meet several of the requirements in order to qualify for the high-yield interest rate, receive ATM refunds, and any/all the other perks that can be associated with the product. These requirements can be somewhat strenuous on the consumer, especially the number of debit card transactions one is required to complete. The constant monthly hurdles to become eligible to receive perks can also deter consumers from these products. Some accountholders just prefer a more simple approach to banking.

Rewards checking products have shown significant increases since their inception in 1997, it will always be in the financial institutions best interest to understand their customer/member behavior in order to offer the right checking product for their specific consumer.

Sean Swift

Senior Consultant
Hometown: Huntsville, Alabama
Alma Mater: University of Alabama
Golfer, Guitarist and Outdoors enthusiast.

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