$211B left the banking system in the nine months following June 2022. The urgent need for liquidity has many banks offering high-yield CDs in an effort to bring in those needed deposits. This has made the gap between what banks are paying on deposits and what’s available in the market the widest in modern history. This creates the proverbial “rock and a hard place” for community financial institutions. How do they offer a high rate to be attractive and competitive while also remaining profitable?
Anyone working in the banking industry knows that most checking accounts don’t pay a very high APY — if any at all. The business of running a financial institution is all about paying the lowest, yet competitive rates you can on deposits while charging the highest possible rates that you can on loans. Simple enough.
So, it stands to reason if you’re running a bank or credit union, offering 5% APY on a checking account looks like net income suicide, right? You’d imagine your net interest margin is going to shrivel like a sponge that’s been left on the counter too long. In theory, paying out 5% on a demand deposit account sounds like a bad business decision, but in reality, it’s one of the smartest products you can offer your account holders.
Hold on to your balance sheet — we’re about to pull back the curtain on the largely misunderstood category of high-yield checking.
The truth is, you can absolutely maximize high-yield checking while turning a profit.
Get consumer attention with the promoted rate.
5% is a “wow” rate. If you advertise it, it’s going to get noticed. Which will bring in a good number of new accounts — as well as retain current account holders. And while this promoted rate may apply to any individual account holder’s balance, the reality is that you’re very unlikely to pay anywhere close to 5% on your account base.
Add qualifying activities that most people do anyway.
In order to earn that high APY, the account holder has to complete a set of qualifying activities designed to make and save your institution money. These activities can include taking an e-Statement, posting and settling 10 or more debit transactions, setting up direct deposit, and more.
Calculate the “blended rate.”
The high APY is only paid on a limited balance amount, called the balance “cap,” and you set that cap according to your deposit goals. Any balance above that limit earns a much lower APY, like 0.5% for instance. This results in what we call a “blended rate,” where the final APY earned is a combination of the below- and above-cap rates.
What’s the worst-case scenario for the account holder?
If the account holder doesn’t qualify, they earn the lowest published rate (the average is typically 0.05%) on their entire balance, and the account remains free (as in, no monthly maintenance fee).
How does all this shake out for your institution?
You want account holders to qualify because their activities make and save you money, while the high rewards build their loyalty, but for those high-net-worth individuals, you can rest easy knowing that your cost of funds (COF) is controlled by the “blended” structure of the account. In fact, the COF discount actually increases as rates rise. This uses simple math to demonstrate exactly how high-yield checking has a growing advantage as rates rise.
A promoted rate on Kasasa’s high-yield checking account of 5% would result in a COF of 2.62%. And when you take into consideration the non-interest income from the healthy debit card activity required for account holders to receive the promoted rate, and the noninterest expense, you get a true total cost of deposits of 1.65%.
So, while a vanilla, free checking account may feel like a more comfortable way to control your cost of funds, a high-yield checking account allows you to advertise a distinctive product and keep your balance sheet fundamentals strong.
More importantly, the premium rates of high-yield checking accounts enable you to retain and bring in new deposits with more engaged consumers. These relationships in turn will lead to more loans and more non-interest income.
And a more profitable bottom line.