AUSTIN, Texas -- About 100 credit unions are successfullyutilizing BancVue's reward checking program to insulate balancesheets against flat yield curves and increased loan lossprovisions.

It's not the additional core deposits that generate revenue buta healthy increase in interchange income, thanks to rewardrequirements. Yes, members earn dividends comparable to specialrate CDs, but interchange income from required minimum monthlydebit transactions and savings from other required electronicaccess points, like estatements and online banking, make up thedifference. There's also a cap on the account, with excess balancesearning next to nothing.

"I've heard a lot of banks and credit unions commenting thatit's hard to get good loan yields because the net interest marginis squeezed so tightly, and at first glance, it may sound like ourproduct is part of the problem," said Gabe Krajicek, BancVue CEO."But what we're really driving up is noninterest income, which willoffset the cost of the account."

Not only does the account generate new business, inactive sharedraft accounts wake up to the offer, too. Additionally, checkingaccounts are high-touch relationships, which is a good foundationfor cross-selling efforts, he said.

Sound too good to be true? Balance sheets provide the proof attwo credit unions that have implemented the account for more than ayear. Representatives from $174 million Clearstar Financial CreditUnion of Reno, Nev., and $121 million Northern FCU of Watertown,N.Y. both reported BancVue's product does everything theconsultants promise.

Northern FCU launched BancVue's reward checking in February 2007in an attempt to give the institution's 100%-plus loan-to-shareratio some breathing room.

"We had previously driven deposits through CDs, which generatedvolume, but didn't develop a relationship," said Brian Caird, vicepresident of marketing and business development at the Watertown,N.Y.-based credit union.

Caird said that when CDs matured, members expected anotherhigh-rate offer, and if they didn't get it, they left and tooktheir deposits with them.

Reward checking certainly solved the loan-to-share issue forNorthern, raising more than $18 million in deposits withoutleeching dollars from the credit union's free checking ranks.

Members using Northern's reward checking account generate wellover 20 debit card transactions per month, in stark contrast tofree checking accounts, which only generate seven debittransactions monthly.

"By the end of the third quarter, about six months in, our 4,000reward checking accounts were already generating more debittransactions than our 10,000 free checking accounts," Cairdsaid.

Ritch Van Duzer, CEO of Clearstar Financial, also reportedsignificant gains in interchange income from his year-oldproduct.

"We've been pulling in $17,000 to $18,000 per month ininterchange income, which goes a long way toward mitigating thedividend payout," Van Duzer said. "We're averaging $7.50 in debitcard revenue off each reward checking account per month, comparedto our standard free checking account, which averages $3.50 ininterchange revenue per month. That's a big difference."

And, Van Duzer added, only 70% of his members meet rewardqualifications in any given month, so before even figuring in feerevenue, the true cost of funds is about 100 basis points less thanthe advertised rate, which puts it in line with CDs.

"So yes, I might be paying out 3.44%, but when you figure indebit card revenues of $18,000, there's half coming back rightthere; and if you factor in NSFs, it's not costing us 3.44% at all.It's really costing us more like zero," he said.

The program has been so successful for the two credit unions,both are planning to expand the program. Caird raised an additional$4 million in the first quarter by launching a high-dividendcompanion savings account, available only to reward checkingmembers. Van Duzer is raising the ceiling on his reward checkingfrom $25,000 to $50,000, and will launch a new print and outdoorcampaign soon to attract some business.

BancVue's background is in community banking, which explains whythe Texans were more successful among bankers than credit unions atfirst. However, after tapping industry consultants DollarAssociates for advice, new credit union clients make up almost halfof all new business.

The credit union pros advised BancVue not only on balance-sheetstrategies but also on overall philosophical differences.

"We had Dennis Dollar speak to our sales team during the fourthquarter of 2006, and he explained to them that the differences godeeper than calling customers members and checking accounts sharedrafts," Krajicek said.

Dollar said he's noticed credit unions encouraging debit carduse as a strategic measure, thanks to interchange income and adesire to increase share-draft penetration.

"Industrywide, the share draft penetration average is around 45%of total membership. That needs to increase if credit unions aregoing to become a more viable [primary financial institution],"Dollar said.

"A higher earning checking account with no ATM fees could becomethe vehicle to get more credit union members to switch theirchecking account from a bank to their credit union. The result isthat members will benefit from the higher earnings and eliminationof ATM fees, while the credit union will benefit from more memberswith greater fee income from the increased number of share draftaccounts."

Krajicek said BancVue's value proposition lies in itsconsulting. The vendor assists each credit union in determiningwhich dividend rates and requirements work best for thecooperative, its market and its members.

In fact, Krajicek is so confident his reward checking can turn aprofit, he said he'll cut a check to make up the difference if itdoesn't.

"This product is a loaded weapon, and it can be awesome ordangerous," Krajicek said. "We've learned how to set up so itmaximizes results, from incentives for [member servicerepresentatives] to rate setting to marketing, we've done ithundreds of times now."

While reward requirements are designed to boost revenue,Krajicek said the program encourages as many members as possible toqualify for the reward rate, which builds loyalty and cross-sellappeal. BancVue's number crunchers figure a healthy rate ofparticipation into their financials, creating a positive experiencethat drives word of mouth advertising.

"Coming to market with a product like this, there was quite abit of talk around town. And for quite a while, people wouldwrinkle their nose, asking, 'How can they do that?'" Cairdsaid.

"I'm sure there were naysayers insisting there was some sort oftrick, but we're still going strong a year later, and it supportsthe idea of rewarding members who contribute to the credit union'ssuccess."

[email protected]