In need of deposits, credit unions push high-interest checking

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A growing number of credit unions are offering high-interest checking accounts to lure deposits and boost fee income.

These accounts can pay upward of 4%, provided the member meets certain requirements, and experts say they can build member loyalty for credit unions offering them while also bringing in additional revenue, lowering non-interest expenses and gathering additional funding.

But these accounts can be costly and squeeze an institution’s net interest margin, so credit unions offering them need the proper analytics to ensure they are profitable.

“For the account to be worthwhile, you need some good analytics,” said Vincent Hui, who leads the merger and acquisition and risk management practices at Cornerstone Advisors. “You need to tell whether you are making any money off of this account to ensure it is economically sustainable."

As interest rates have increased, financial institutions have worked to attract additional deposits. Shares and deposits increased by almost 6% from a year earlier, according to first-quarter data from the National Credit Union Administration. At the same time, the loan-to-share ratio was 82.4%, an increase from 80.8% a year earlier, according to NCUA data.

Gathering more deposits could be a big motivator for offering a high-interest checking account, said Bob Kafafian, president and CEO of the Kafafian Group. Similar to certificates of deposit, these accounts may entice members to park their money there because of the higher-than-average rates.

The average annual percentage yield on reward checking accounts was 1.805% in July, more than 8% higher than the rate offered five years ago, according DepositAccounts, which looked at reward checking accounts from more than 1,000 credit unions and banks.

The average APY on reward checking accounts dropped by more than 13% from February to July, according to DepositAccounts. That’s likely because short-term interest rates are down from the beginning of the year in anticipation of the Fed cutting rates, said Bob Doby, a partner at DJ Consulting.

“Funding right now is at a premium,” Kafafian said. “For banks or credit unions to lend to customers or members, they have to find sources of funding.”

But high-interest checking accounts can provide some benefits not seen with CDs. For one, these accounts are more likely to bring in members who may use the account as primary checking and will be more likely to stick around than the rate shoppers who are usually drawn to CDs.

Credit unions can also bring in additional revenue and lower costs through these accounts. To qualify for these high-interest checking accounts, the member has to meet certain requirements, such as direct deposit, e-statements or using their debit card a certain number of times each month.

These measures can help offset the higher interest expense that comes with offering these accounts.

Doby was formerly a chief financial officer for a credit union that offered a high-interest checking account. After launching the account, the institution averaged 32 debit card transactions per account per month, up from eight.

“The interchange fee is a huge benefit,” Doby said. “On the surface, it will hurt the margin a little bit but once you add in money from debit fee income, it’s a winner.”

La Capitol Federal Credit Union in Baton Rouge, La., has offered a high-interest checking account for at least a decade, though the details have changed over that time. Right now its Choice checking account gives members a 4.25% APY on up to $3,000 and 2% APY on $3,000 to $10,000. After $10,000, the member receives 0.10% APY.

That rate cap helps control for interest rate risk, said Michael Hooper, president and CEO of the $507 million-asset credit union.

Additionally, the account has a minimum required balance of $1,000. Members can avoid an $8 monthly fee if their average balance falls below that by making at least 20 non-ATM debit card transactions per month, according to the credit union’s website. This drives additional fee income, which offsets the costs of paying higher interest rates on balances, Hooper said.

“This brings in good core deposits,” Hooper said. “You can do more with certificates if you need to bring in money. But this is a win-win for debit card users generating revenue for their swipes and then giving that back to the members through a dividend.”

Still, offering these accounts can be a challenge and are not for all credit unions, experts said.

Some institutions may try to offer a higher introductory rate on these checking accounts and then later reduce it to save on interest expense, Kafafian said. That plan could backfire by annoying some members.

“Those that are irritated may jump but there is a nuance factor to that as well,” Kafafian said. “It’s like when you get offered a toaster to open an account. You have to say to yourself, ‘At what point is it worth it to jump banks or credit unions?’”

These accounts need a product manager to actively oversee the service unlike simpler alternatives, Hui said. Detailed analytics are required to ensure the credit union is offering the right interest rate with the correct requirements – such as a minimum number of debit card swipes per month – to ensure the account is profitable. Most small credit unions won’t have these capabilities in house, he noted, so will likely have to turn to an outside vendor.

And credit unions with members who already actively use their debit cards and prefer e-statements to paper ones may want to offer a special money market account or something else to bring in funding since those institutions won’t be getting the full benefit of a high-interest checking account, Doby said.

La Capitol’s Hooper is a believer in high-interest checking accounts, especially as a way to reward loyal members. He advised credit unions interested in offering these accounts to look for ways to keep active debit users happy.

“Our mission is to improve the financial well-being of our members,” he added. “We want to return the earnings to our members, and we’ve been able to do that through our Choice checking program, which rewards people with a high interest dividend when they use their debit card.”

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Deposit insurance Checking Consumer banking CDs Net interest margin Interchange fees Fee income