The Pros and Cons of Reward Checking and Relationship Packaging

All banks and credit unions face the difficult task of attracting new customers and deposits, and growing these relationships in today’s competitive banking environment. There are many ways used to grow deposits and accountholder relationships that have varying degrees of success. Differences such as the structure, size, values, marketing, and institution type, factor into how successful a financial institution (FI) is at bringing in deposits, cross-selling or up-selling. One way of growing both deposits and relationships is looking at product alignment, and how the products are viewed and used by customers.

Two popular strategies offered by many FIs are reward checking and relationship packaging. In this blog, I’m going to breakdown the pros and cons of both reward checking accounts and relationship packaging:

Reward Checking Accounts

Pros:

Reward checking products provide incentives or perks to accountholders when certain preset monthly requirements are met. The perks for customers could include a higher annual percentage yield (APY), ATM surcharge refunds, or cash back on debit card purchases. The monthly requirements to earn the “reward” typically are a combination of debit card swipes, enrollment in electronic statements or online banking, and having a direct deposit or other ACH transaction into the account.

One of the pros to reward checking products is that customers frequently switch FIs, or open a new account for the perks and incentives, especially if more favorable than nearby competitors. Another is the rewards eligibility requirements generate revenue, by driving debit card interchanges, and adds to cost savings, by eliminating mailed paper statements and possible branch visits.

Cons:

Many community banks and credit unions use third party, one-size-fits-all reward product sets, which are expensive to purchase rights to and then operate. A financial institution pays the company monthly for the platform the product runs on, along with paying possible interest or cash back earned by the account. Another con is, if built incorrectly, rewards products can have a negative impact on the financial institution; for example having mispriced balance tiers or APYs cause the product to potentially lose money.

Relationship Packaging

Pros:

Relationship packaging helps already established customers expand their ties to the FI through cross-selling. It leads to larger deposit relationships from existing customers, and customers also using the institution as their primary credit lender. In addition, the strong relationship with the customer decreases risk for the bank or credit union. Credit card account holders with additional relationships at an institution tend to have higher usage rates and lower default and attrition rates. Common relationship packaging benefits include the following: loan rate discounts, free check orders, certificates of deposit (CD) rate bumps, identity theft protection, and safety deposit box discounts.

Cons:

The benefits from relationship packaging can attract interest from customers, but can negatively impact the financial institution. For example, the extra focus on cross-selling and promoting customer relationships can lead to misconduct from personal bankers and possible fines, as seen at Wells Fargo in the last five years.

A bank or credit union should ensure their relationship pricing is correct in relevance to the surrounding market and competitors, as well as enforce the requirements and rate perks laid out in the agreement. If the perks give away more than competing banks, the expense for the added benefit to the institution, will have a negative trade off. Also, the relationship pricing must be aligned with other services to maximize the benefit for the institution. Too much of a rate discount on a loan, or too high of an interest rate would outweigh the potential gains for other products.

Every bank or credit union is unique, and reward checking and relationship packaging should be designed to best fit the needs of the institution’s customers and remain competitive. Both strategies, when designed and used correctly, can benefit the institution by creating a steady source of higher balance deposits, bringing in new customers and growing the current customer base. Relationship and reward strategies can be tweaked by FIs in many ways to add a competitive advantage over direct competitors. When looking to implement a rewards checking, and/or relationship packaging strategy, a financial institution can seek help from an unbiased, ancillary party to help the institution set their own in-house products that meet the needs of new consumers, and at the same time, the needs for the financial institutions.