A new report on banking says checking accounts often pay higher interest rates than savings accounts, making them a better option for savers.
The idea contradicts everything we thought we knew about handling money, but bankers say it’s a solid business strategy under certain conditions.
Whether it makes sense for individual customers depends on what the account’s restrictions are and how well they line up with a family’s finances.
WalletHub, which conducted the study, reviewed fees, features and rates associated with almost 1,700 checking, savings and money market accounts. The personal finance social network also looked at certificate-of-deposit rates for the selected banks and credit unions. They included large and small, online and traditional, shareholder- and member-owned financial institutions.
The bottom line, says WalletHub, is that consumers need to do their homework on banking products now more than ever.
One northeast Indiana bank has made its interest-bearing checking account its calling card. Lake City Bank’s Rewards Checking account pays 1.01 percent interest on deposits up to $25,000 and 0.36 percent on anything over that amount. No minimum balance is required.
Nobody else in the market comes close to that rate.
A quick check last week of eight other banks doing business in Fort Wayne found checking interest rates ranging from 0.01 percent to 0.24 percent. At the highest, it’s still less than one-fourth as much as Lake City is offering.
And if you compare savings account rates, the landscape is even bleaker. One bank requires a $2.5 million minimum deposit to earn 0.18 percent interest. Another competitor offers 0.14 percent interest on accounts with at least $500,000. Most others pay 0.1 percent or less on savings.
David Findlay, Lake City’s president and chief financial officer, said the Warsaw-based bank set out to generate significant local deposits when it started offering Rewards Checking six years ago at an introductory rate of 6.01 percent.
The interest rate has declined over the years as the market rate has fallen, but the bank’s need for cash hasn’t diminished.
Lake City set a new record for loan growth – $142 million – in the quarter ended Dec. 31. The company’s loan portfolio grew by $278 million in 2013.
And how does the bank’s staff keep making more and more loans?
“It’s blocking and tackling every day to go out and find commercial customers that are borrowing money to build their businesses,” Findlay said.
Some banks rely heavily on wholesale funding sources, including the Federal Reserve. Findlay said the company’s strategy is to lend local depositors’ money to borrowers.
Relying on deposits is less expensive than wholesale sources, creating higher profit margins, according to Investopedia.com.
Lake City can afford to pay significantly higher interest rates on checking because it ties three requirements to the Rewards Checking accounts, Findlay said. Accountholders must:
•Make at least eight debit transactions a month
•Have at least one incoming automatic deposit a month
•Agree to receive monthly statements electronically.
Not having to print and mail monthly statements saves the bank money, Findlay said. Incoming deposits ensure a steady stream of new money, he said.
And debit transactions – whether completed with a PIN or a signature – generate interchange fees paid by retailers. The amount is small, averaging about 5 cents a transaction, Findlay said. But that adds up when you’re talking about 40,000 Rewards Checking accounts. If each account met just the monthly minimum of eight debit transactions, Lake City’s would receive $16,000 a month or $192,000 a year in additional revenue.
And chances are good that many accountholders pay with plastic much more often than twice a week.
Lake City’s noninterest income – or all fees collected, including those for bounced checks – was $30.7 million last year.
Melissa Collins, 1st Source Bank spokeswoman, said the weakness of Lake City’s high-interest checking account is that it doesn’t pay the advertised rate to depositors who don’t meet all the requirements.
“So some people will be dismayed when they get their monthly statement and they didn’t receive the interest rate they were anticipating,” she said. “We like to ensure our clients know exactly what they’re getting.”
Customers who want to keep money readily available – when they’re preparing to buy a car or make a down payment on a house, for example – might benefit from keeping it in a checking or savings account, Collins said.
Others, she said, can find higher interest rates in certificates of deposit than in regular savings accounts. South Bend-based 1st Source, like most banks, offers CDs that pay higher interest rates for longer-term commitments.
“What we want to do is look out for the long-term benefits for the client, to help them get where they want to go,” she said.
Officials with Cincinnati-based Fifth Third Bank also stressed the diversity of products available.
David Hosick, Indianapolis-based spokesman, said customers should seek professional help when choosing between banking options.
“There is no cookie-cutter approach or answer as to how consumers can get the best return rate, because there are too many factors at play,” he said in an email. “Consumers are best served to examine their specific needs and work with a banker to find the right solution.”
Oliver Barie was surprised to learn about the WalletHub study’s findings. His savings account pays a rock-bottom interest rate, and he’d assumed it was the best place to earn interest on money that isn’t channeled into his 401(k) retirement account.
The 24-year-old New York state native moved to Fort Wayne last year. Barie and his fiancée, Amanda Walsh, are saving for a wedding and a house. As a result, he watches every penny.
“Amanda would say I’m a tightwad,” he said. “She wants to go to Olive Garden tonight, but I’m like, ‘We’ve got chicken at home. Can’t we just have that?’ ”
Even so, Barie isn’t planning to move his account to another bank to chase higher interest rates. The former chief financial officer for a manufacturing company didn’t take time to run the numbers, but he’s sure that even a full 1 percent annual percentage yield isn’t worth getting excited about when it’s calculated on the balance in the couple’s joint account.
“I’m not going to live off the interest, that’s for sure,” he said.
Barie guesses that few people in their mid-20s have enough socked away in the bank to generate much interest income to worry about. And, anyway, he’s hooked on the mobile banking options his Chase checking account offers.
His loyalty would be severely tested, though, if Lake City Bank resurrected its introductory rate of 6.01 percent on Rewards Checking.
“Now that,” Barie said, “I would switch for.”