Is High-Yield Checking Worth the Inconvenience?
Only a couple of years ago, the last place you'd want to keep a lot of money was in a checking account. If the account paid any interest at all, it was piddling — not even enough to cover the cost of a box of checks.
My, how times have changed. Even as yields on formerly top-earning money market funds have cratered to well below 1%, some checking accounts are paying interest in the lofty 4% range — or even higher. How did the once-lowly checking account go from worst to first?
High-yield checking is the brainchild of a Texas-based company called BankVue. After years of conducting market tests aimed at developing a model that would make high-yielding accounts profitable for smaller financial institutions, the company rolled out its RewardChecking software for community banks and credit unions in the fall of 2005.
In a nutshell, the high yield attracts new customers, but to get the high interest rate these new customers must agree to adopt a particular combination of bank services. The influx of customers — many from outside the normal marketing area of these relatively small banks and credit unions — provides working capital for making loans, increasing the profitability of these financial institutions. Meanwhile, the required list of services helps the banks and credit unions control costs and generate additional revenue on certain transactions.
The BankVue model caught on quickly. Over the past four years, more than 600 community banks and credit unions have signed on, and now offer customers better rates on checking accounts than are available (currently) from either money-market mutual funds or money-market savings accounts.
Typically, high-yield checking accounts require customers to agree to the following: (1) one monthly direct deposit; (2) a certain number of online bill payments per month; (3) regular debit card activity (usually 10 transactions per month); and (4) electronic rather than paper statements.
In addition, most banks cap the amount eligible for the high yield at $25,000. Any amount over the ceiling will earn the standard (i.e., paltry) rate.
Of course, one downside to having an account with a non-local bank is that accessing money via a local ATM incurs a fee. Knowing this likely would be a deal-killer for potential customers, banks with high-yield accounts will reimburse any "foreign ATM" charges (usually up to $25 per month).
Although the requirements related to high-yield accounts aren't especially onerous, it's easy to slip up. ("What? Only nine debit transactions? I thought I made 10!") If you goof, you forfeit the high rate that month — and you won't receive reimbursement of any ATM fees. Ouch!
Some customers, to ensure that all the requirements are met, have developed systems for making repeated trips to the gas station or grocery store early in the month, debiting a series of small transactions until they reach the required number. Another tactic: dividing the payment of one bill into several online transactions to meet the monthly bill-paying requirement.
In addition to the inconvenience of meeting the monthly account requirements, there's the front-end inconvenience of having to change one's current electronic transactions (deposits, auto pays, transfers) to match a new account. To ease the pain, some banks offer a free "switch kit," with pre-written letters for closing out accounts and switching direct deposits and auto-drafts. (A possible further inconvenience is signing up for a high-yield account just to see the interest rate drop shortly thereafter. Aaargh! Only a few banks guarantee to maintain their current rate through a certain date.)
A more fundamental issue to consider before you sign up for high-yield checking is the challenge of using an account designed for spending (bills, daily transactions) as a savings vehicle. Without discipline, you might find yourself accidentally eating into your emergency or accumulation funds. If the set-up of your accounts makes it more difficult for you to effectively save money, the extra interest isn't worth it.
Despite the inconveniences and caveats, a high-yield checking account may be a good option for your savings — if you're (1) organized, (2) disciplined, and (3) don't mind jumping through a few hoops in exchange for a greater return on your money. However, to figure out whether it's really worth making a switch, you'll want to run the numbers.
For example, if you have $25,000 in a 4% account, your interest will be around $80 per month (assuming you replenish money in the account as you spend). But if you have $5,000 in a 4% account, you'll earn about $15 a month. How many hoops are you willing to jump through for that $15? You decide.
Although many high-yield accounts are available to customers nationwide, others are restricted to those who live in a particular state or region. For listings of banks and credit unions offering high-yield accounts—and the particular requirements of each — check out HighYieldCheckingDeals.com or CheckingFinder.com (run by BankVue).
As you shop, you may notice that some banks and credit unions dub their high-yield checking accounts as "Kasasa Cash." This is the new brand for BankVue's RewardChecking, unveiled this spring (tag line: "Don't just bank. Kasasa."). The company is also marketing related niche products, including "Kasasa Giving" (interest goes to the charity of your choice) and "Kasasa Tunes" (in lieu of interest, customers earn iTunes downloads).
Over the next few months, community banks and credit unions across the U.S. are expected to adopt the Kasasa name for their high-yield accounts, effectively creating a national brand for high-yield checking.
November 25, 2009
© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. 
Originally published November 24, 2009.
