When the economy is in a downward spiral and the federal funds rate is stuck between 0 percent and 0.25 percent for the foreseeable future, you could reasonably assume that you're stuck with low-yielding deposit accounts if you want an FDIC guarantee.
Bankrate surveys show that the average yield for a three-month CD is 0.86 percent. Six-month CDs are paying 1.14 percent and you'll get about 1.37 percent if you sign up for a year. Money market accounts are typically yielding 0.49 percent, and interest-bearing checking accounts, a paltry 0.16 percent.
But there are high-yield checking accounts that continue to sport very good yields despite the low-rate environment. REWARDChecking is a particular brand, a product of BancVue in Austin, Texas. Company officials say their product was the first on the market, but other companies are now creating similar products for financial institutions, and some banks and credit unions are coming up with their own versions. (To find other high-yield checking accounts, search the Internet for "high-yield checking.")
In early 2008, REWARDChecking accounts often had a top yield of 6.01 percent. Currently, the top yield is 5.15 percent. The lowest rate we saw is 3.5 percent. While the yields will fluctuate, the accounts are always meant to be high yield.
"We will never allow anyone to come onto the site if their rate is so much above market that we don't think they can maintain it," says BancVue CEO Gabriel Krajicek. "If we think someone is trying to run a teaser rate we pull them off the site."
Requirements to open
These checking accounts are meant to be free -- no fees and no minimum balance to maintain. To open one you must abide by certain requirements each statement cycle. Traditional requirements involve using a debit card at least 10 times, access online banking at least once and have one direct deposit, ACH debit or online bill payment. If you don't meet the requirements in any given month, your interest rate will be significantly lower for that cycle, often no more than 0.50 percent.
Krajicek says the accounts are designed to help community banks compete against their larger brethren. When we first spoke with him in Nov. 2007, Krajicek said approximately 350 banks and credit unions were offering REWARDChecking. That number has now increased to 526 institutions with 912,000 accounts and just shy of $9 billion in deposits.
Some banks and credit unions choose to offer the product only in their local area; others allow consumers nationwide to sign up.
Going national
"Some (institutions) will go national for a while and get a good number of new accounts, then change to only go local for a while," Krajicek says. "Others will stop being strictly local and go national. The reason is that sometimes the institutions will be so successful when they go national that they achieve their goals pretty quickly and can back off. But from a bird's eye view there are always quite a few national offerings on site."
First Arkansas Bank & Trust has been offering REWARDChecking since Oct. 2007. The account is available nationwide and Larry Daniel, director of retail banking, says the response has been very strong. His bank currently pays 4.35 percent, with a yield of 4.44 percent on balances up to $50,000. Anything above that yields 1.76 percent. Daniel says the structure of the accounts is what allows the bank to maintain the yield.
"These are electronic-driven, behavioral accounts. The customers aren't as demanding, we don't have to provide people face-to-face, we don't have to have bricks and mortar, and because of the electronic nature we've either decreased expenses or increased revenue, and we're able to share a piece of that savings or that increased revenue with the customer."
Eastern Financial Florida Credit Union created its own high-yield checking account, which now yields 4.01 percent. The account is open to residents and workers in nine Florida counties.
"When we started the account we said that the rate may change but it will always be higher than the market," says marketing director Mark Holmes, "and I think we've proven that. Some people thought it may be a teaser, but it's not."
Malvern Federal Savings Bank in Paoli, Pa., was offering its Rewards Plus Checking account for about a year before deciding to open it up nationwide. Despite the economy, the bank is still paying 5.01 percent on balances up to $35,000 -- the same as it was a year ago.
Scott Sterling, director of retail banking and marketing, says it's the only account the bank offers online at present. "Basically, it's to drive deposits to the bank and, so far, the retention rate has been very high."
Be aware that these high-yield checking accounts are not alike in all aspects. In addition to varying rates, the balance that receives the top tier rate may be $25,000 at one bank and $50,000 at another. Some institutions may have a longer list of requirements to be fulfilled.
While these rates tempt many consumers, others may find the fixed rate of a high-yield CD more to their liking. As an example, you'll find one-year CDs on Bankrate's tables with yields as high as 2.85 percent. Not as good as high-yield checking, but without the risk of diminishing over time.
