Smaller banks and credit unions may be offering the highest deposit yields lately, but watch for the strings attached.
You can search high yields in your area by typing in your ZIP code at www.checkingfinder.com or at www.bankingmyway.com.
Examples: The 6.01% yield offered on checking by First Robinson Savings Bank, in Illinois, which also promises to reimburse ATM fees. Or, the 5% checking yield, offered by FirstAtlantic Bank, Jacksonville, Fla., available exclusively in its local market. That yield, however, is slated to drop on Feb. 21 to 4%
Compare those with nationwide yields averaging below 2% on bank savings accounts and below 0.5% on money market mutual funds.
The catch: To qualify for high checking yields and reimbursement of ATM fees, there are several requirements you typically need to meet. At First Robinson, the account is limited to Crawford County Illinois and Knox County, Indiana, and contiguous counties. To qualify for its high yield, you must:
- Make a minimum of 10 debit card purchases, excluding ATM withdrawals, monthly.
- Deposit less than $25,000. Balances over that threshold earn a piddling 1.01 percent.
- Make one automatic payment or bill pay transfer monthly.
- Receive your account statement electronically.
Fail to meet all those terms, as some 30% of accountholders do, and you wind up with a free checking account yielding 1.01%, says First Robinson Savings Bank President Rick L. Catt.
Meanwhile, customers who do meet requirements are helping to offset the bank’s interest charges via lower overhead, lucrative debit card income and additional account relationships.
Among the nearly 585 banks and credit unions that offer what’s called a “RewardChecking” program, 15% to 25% of accountholders on average fail to meet similar requirements, according to Don Shafer, co-founder of BancVue, Austin, Texas. BancVue markets the “RewardChecking” program to financial institutions.
BancVue also is testing a business loan program with three banks, and plans additional savings and CD offerings in about 90 days, according to Shafer.
“Our sole mission is to give community banks and credit unions the ability to compete against big banks,” Shafer says. “A lot of banks need cash. This is a way to bring in cash so they can meet demand on the loan side.” At the end of January, he says, there were 900,000 RewardChecking accounts with an average balance of $8,700.
The largest player to participate, he says, is believed to be Provident Bank, Jersey City, N.J., which has $6.4 billion in assets.
Big, small banks see things differently
The high yields come as savings accounts by larger banks, which in 2007 promised yields as high as 4% to 6% to those who bank online, publish savings rates of less than 2.5%. Among those: EmigrantDirect, ING Direct and HSBC Direct.
About two years ago, you were able to snag an extra one or two percentage points by agreeing to bank online, notes David Kaytes, managing partner of consulting firm Novantas, New York. However, those who took advantage of the great deals already are in the habit of banking online. So there’s less reason for online banks to pay as much of a rate advantage over branches.
“Small banks and large banks use different formulas to decide on the yield,” Kaytes observes. Small banks set deposit rates on the basis of loan rates, while large banks set them on the basis of the wholesale funds marketplace. Kaytes says he expects the rate gap between large and small banks to level off within the next month or two.Shafer says that most institutions participating in his checking program don’t accept deposits nationwide. Whether nationwide deposits are accepted is a matter of bank policy and legal considerations.
To take advantage of an attractive credit union rate, you must be in a specific “field of membership.” For example, you must work for a specific employer or live in a certain geographic area. Also, you must open a share or savings account. Often there is a minimum required deposit or membership fee. Credit unions are nonprofit, and members own the credit union.
Browsing for dollars
In shopping high yields:
- Make certain the institution is insured by the FDIC or NCUSIF (National Credit Union Share Insurance Fund)
- Determine requirements to earn the high yield and make certain you’ll meet them
- Ask how long the interest rate is guaranteed, if at all
- For interest checking accounts, examine overdraft fees, which can be particularly onerous and easy to rack up with debit card transactions. Also, consider the cost to purchase checks
- Review the institution’s online privacy policies and evaluate its security measures.