Checking Goes High-Yield at Small Banks

Danversbank in Massachusetts caters to business owners, but many of those customers have personal accounts elsewhere, often at online banks that pay high rates on savings accounts.

To keep more of its customers' business, the $1.3 billion-asset unit of Danvers Bancorp Inc. started offering a checking account last month that pays an annual percentage yield of 6.01% and refunds all automated teller machine fees.

It has opened 200 Reward Checking accounts, about 90% of them for existing customers.

"We wanted something that would distinguish us in the market, and everyone is always looking for a good rate," said Judy Vail, the bank's retail branch director.

Danversbank is one of about 90 community banks and credit unions across the country offering a Reward Checking account marketed by BancVue LP in Austin.

Bankers say the account negates the biggest advantages that the large banking companies have over small ones: higher deposit rates and more ATMs. Though the account adds to interest expenses, the bankers say the cost is offset by higher deposit balances and interchange fees.

As happened at many other community banks, core deposits at Danversbank slipped last year, to 27.8% of total deposits as of Dec. 31, from 36.1% a year earlier. Some deposits were lost to online competitors, Ms. Vail said.

Danversbank's account has no minimum balance and no fees, but it does come with stipulations. Customers qualify for the high rate only if they have direct deposit, use online banking at least once a month, agree to receive an electronic statement, and use their debit cards for at least 12 transactions a month, Ms. Vail said.

The electronic statements save the bank $2 each over printed ones sent by mail, and the card use generates interchange fees, she said.

If a customer falls short of the requirements, the rate paid for that 30-day statement cycle drops to 0.25%, the same as Danversbank offers for a standard checking account, Ms. Vail said. "So we won't be paying this rate to everybody every single cycle."

John F. Heaps Jr., the president and chief executive of the $950 million-asset Florence Savings Bank in Massachusetts, said that it started offering Reward Checking accounts in March, and that the response has been "phenomenal."

In the first six weeks of offering that account, the number of accounts the Florence Bancorp unit opened doubled from the same period for each of the past two years. The average balance in the new accounts is triple the overall average for its accounts before March, and the number of times those customers use a debit card is more than triple the previous overall average. "We think those numbers are going to jump even higher," Mr. Heaps said.

In addition to attracting customers, the account is helping Florence Savings retain those who might have been lured away by rates at online banks, he said.

"We were looking at where our funds were going, and it was the ING-type accounts."

But the outflow has been reversed, and the account has helped his nine-branch mutual thrift lure customers even from such large competitors as Bank of America Corp., Mr. Heaps said. "We were hearing that people would love to leave the national banks, but they're providing all these ATMs wherever I go."

Not only are deposits on the rise at his thrift, but so is other business, Mr. Heaps said. "We're starting to see everything improve. Even our mortgage applications are up. I think a lot of it has to do with the fact that we're making a lot of noise in the marketplace."

Though all of its branches are in Hampshire County, Florence Savings has been advertising Reward Checking aggressively across three counties — in newspapers, on radio, and with billboards.

Mr. Heaps said the account attracts customers of all ages but is particularly appealing to young people, who use debit cards often. "My son is in Boston. He loves it. My daughter in Chicago has one."

Florence Savings found that ATM use drops significantly when customers open the account, because they get in the habit of using their debit cards instead of cash, he said. That drop has the benefit of helping keep down the cost of ATM fee refunds.

Don Shafer, BancVue's chairman, said each participating bank determines what reward to offer on the account and what criteria customers must meet to receive that reward. Customers generally get two benefits: a high rate (ranging from 4.05% to 6.25%) and refunded ATM fees. Some banks limit the refunds to $10 or $25 a month, but most have no limit.

He credited Andrew Littlejohn, the president of the $200 million-asset City National Bank of Taylor in Texas, for coming up with the reward checking concept.

The CNB Financial Corp. unit created a high-rate checking account in 2000. Mr. Shafer said he heard about it in 2003, thought it was a great idea, and had established BancVue within months to market to other banks the software City National was using to administer the account.

He said he initially negotiated an exclusive marketing arrangement with MoneyVue Financial Inc., the technology vendor that had helped City National develop the program. Within two years BancVue had bought MoneyVue.

So far 187 banks and credit unions have signed up to work with BancVue, and 90 of them, ranging from $80 million to $3.5 billion of assets, are offering the account. BancVue is also marketing the software to large banks and is in talks with two potential clients with roughly $10 billion of assets each, Mr. Shafer said.

BancVue charges banks a fee based on the number of participating customers. It supplies a monthly report to the bank, including a comparison of the Reward Checking account to its basic free checking account.

Data from participating banks indicates that customers with a free checking account have average balances of $150 to $1,800, while those with Reward Checking have $3,300 to $13,000.

Mr. Shafer said different goals account for the wide range in average balances among the participating banks; those with a high loan-to-deposit ratio want to attract more deposits than those with a low ratio.

The data from the banks also indicates that customers with free checking use their debit cards six to eight times a month, while those with Reward Checking use the cards 23 to 30 times, he said.

One banker told Mr. Shafer that a customer opened two Reward Checking accounts with $100,000 each, the maximum amount for which that bank pays the high rate. The customer had never used a debit card, "but he said, 'For this rate, I'm going to learn how to use a debit card,' " Mr. Shafer said. "This literally changes behavior. It gets people to use technology that never have before."

His reports show that a third of free checking customers have direct deposit, 25% to 30% use online banking, and 1% to 2% accept electronic statements. But among Reward Checking customers, 80% do all three.

The account lets banks add customers without adding employees, Mr. Shafer said.

City National, which has only one location, has increased its deposits by about 50%, to $220 million, since it launched the account in April 2000, but it now has about a dozen fewer employees, according to Federal Deposit Insurance Corp. data.

Mr. Littlejohn said City National is technology oriented, having been an early adopter of online banking in the 1990s, but one of the challenges of offering online banking was getting customers to use it.

He described the idea for Reward Checking as a collaboration that evolved from brainstorming about how to lure people online.

City National had two other goals: Eliminate the hassle and expense of mailing statements, which had to be assembled by hand, and collect customer e-mail addresses, so it could send them offers and save on advertising.

With help from the outside vendor to create a database query program, it introduced the precursor to Reward Checking seven years ago and attracted national news media attention with its eye-catching rate, Mr. Littlejohn said.

James Marek, City National's vice president of retail banking, said that it has added about 1,000 customers since the account launched, and that more than 65% of those who opened the account last year were new to the bank.

He cited the increased use of electronic statements as another plus. "After seven years of promoting electronic statements, primarily with these type of accounts, we are sending over 45% of all statements on all accounts, checking and savings, electronically."

For reprint and licensing requests for this article, click here.
Community banking
MORE FROM AMERICAN BANKER