High-yield checking accounts arrive in NoCo

If it sounds too good to be true, it probably is, right?

That worn adage is being put to the test by two Northern Colorado local banks, both offering interest-bearing consumer checking accounts boasting annual percentage yields of more than 6 percent.

Local bank customers have had product options for years. Solid competition for deposit dollars in Northern Colorado has driven certificate of deposit rates into the 5 percent range.

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But more than 6 percent on a checking account? There must be a catch.

“There’s no catch,” according to Bank of Choice president and CEO Darrell McAllister. “It’s the best product in the market.”

Bank of Choice launched its ChoiceRewards Checking account, which offers customers a 6.03 annual percentage yield, in early August.

There are some requirements, though. The account holder must make at least eight MasterCard point-of-sale debit transactions per month; make an automatic withdrawal, such as bill payment, or a monthly direct deposit; and receive monthly checking statements electronically.

The account does not have a minimum balance requirement, but if the amount exceeds $35,000, the APY drops to 1.01 percent.

Loveland-based Home State Bank is offering a similar product with a couple of differences.

The Hometown Rewards Checking offers a 6.01 percent APY and requires the account holder to use a Visa CheckCard 10 or more times per month. The other requirements are the same.

Both products aim to reduce bank costs by providing incentives to the customer to do more electronic banking. For example, mailing a paper account statement hits a bank’s pocketbook twice – once to pay for the printer service and a second time to pay for the mailing.

According to data from BancVue – the company that created this high-yield checking model – each time a customer comes into a bank branch and completes a teller transaction it costs the bank $2.50. That compares with a 25-cent expense for the same transaction done electronically. Additionally, the cost to a bank just to process a paper check averages 17 cents. On the other hand, banks actually earn a few cents on debit and check card transactions, since merchants pay for the privilege of taking the cards.

Once a customer is converted to electronic checking, ease and efficiency is likely to shift even more transactions to the electronic world.

“That means we save some money,”  McAllister said.

Catalyst for customers

Colorado State University economics professor Ronnie Phillips is skeptical that the accounts, by themselves, will be able to actually generate money for the banks.

“They can lower costs somewhat through electronic banking, but it must be subsidized for a while,” he said.

However, he concedes that the product will be a catalyst to draw new customers to the bank. Additionally, customers who set up electronic banking mechanisms, such as automatic deposit or bill pay, are not going to be easily swayed from switching banks. Studies show that retention increases 40 percent when there is an electronic relationship.

“It’s a good plan for the long run,” Phillips said.

Gaining customers with such a product hasn’t been as easy as putting up a few signs, though. Bank of Choice was ready to have people beating down the doors to sign up for the account. While the response has been good, it wasn’t the rush expected for such an offering. The problem, McAllister muses, might be that people don’t quite understand the account.

“The intent is that it will always be a high-interest account,” he said. “It isn’t meant to be a introductory offer.”

McAllister explained that fluctuations in the prime rate will cause the rate on the account to change – up or down – but “it will always be one of the highest rates in the market.”

Mary McCambridge, vice president of marketing for Home State Bank, said bank employees were told to be prepared for skepticism and plenty of questions.

“A lot of people think there is a catch or hook,” she said. “There really isn’t one.”

For Home State, it is a matter of getting people to change their habits to help the bank save money. McCambridge said that online banking has become very secure – a fear for many customers.

“We’ve gotten hundreds of new accounts with it,” she said.

Home State rolled out its Hometown Rewards product in June. McCambridge said the bank had been looking for a new product to add to its offerings that would be good for everyone.

“BancVue had the product we were looking for,” she said.

Both Home State and Bank of Choice purchased the model for their high-yield checking accounts from BancVue.

“BancVue is really like an outsourced research and development department and marketing company,´ said Gabriel Krajicek, CEO of the Texas company. He added that the goal is to develop products that allow community banks to compete with the industry giants. Large, multi-billion-dollar banks often have their own research and development teams with the sole purpose of crunching the numbers to offer the best possible deal – a luxury not afforded small institutions.

Decade-old model

The high-yield checking account was born in 1997 out of City National Bank, a small community bank in Taylor, Texas. President Andrew Littlejohn wanted a product that would lessen the impact of the inevitable tide of national banks expanding out of Austin into his small community.

With the goal of customer retention, BancVue built software that would allow City National customers to use electronic banking while earning a higher percentage rate on their checking accounts.

Three years later, BancVue reviewed the product to see how it was performing. Krajicek said the customers using the high-yield checking account were staying with the bank 70 percent longer than those not using it. The accounts also turned out to be twice as profitable as the regular free checking accounts City National was offering.

BancVue’s high-yield checking account was rolled out nationwide in October 2005, after the company worked with 10 banks to perfect the software and processes.

“We had some flops,” Krajieck admitted. “There’s a reason there’s not a lot of 6 percent checking accounts.”

The company is now serving nearly 300 banks and credit unions. BancVue analyzes its customers prior to installing the product, looking at demographics, financial data, customers’ current use of electronic products, etc.

The variability from one institution to the next is in the APY, the number of debit transactions required and the maximum balance. Bank of Choice and Home State are offering one of the better APYs.

“It’s on the upper end of what our customers are offering,” Krajieck said. He added that the lowest level that works with this model is around 4 percent, but the company often encourages customers to offer a higher rate.

Right now, BancVue’s only product is the high-yield checking, but the company is working on three other products, including one that could launch early next year.

Will it also be in the realm of “almost too good too be true?”

“It’s going to blow the doors off of reward checking,” Krajieck promised.