An Austin, Texas, banking research and development firm says it's offering rewards checking to help community banks and credit unions take back market share from the largest national banks.

While acknowledging that credit unions and community banks have usually been more active competitors than cooperators, Don Shafer, CEO of BancVue, argued that the frequently strident competition has meant they have ignored their real challenge: big national banks.

“In 1994, only 15 short years ago, community financial institutions, banks and credit unions, had roughly 70% of the market for financial services, and the biggest banks had roughly 30%,” Shafer said. “Now it's reversed, the largest banks have roughly 70% of the market and community financial institutions have lost out.”

BancVue specializes in market research and product development to allow community banks and credit unions to compete effectively with banks. The most recent example of their products is rewards checking

Rewards checking accounts carry significantly higher interest rates than banks, credit unions or community banks have usually offered.

Shafer said BancVue developed the product and the software package to implement it at banks and credit unions after researching the products and services the large national banks implemented to lure consumers.

Shafer reported that the research had found interest-bearing checking accounts-particularly higher interest than credit unions and banks generally offered-were key to gaining new members or customers. It also showed that community banks and credit unions could profitably offer these accounts if the accountholders were willing to do certain things that, Shafer maintained, most consumers would do anyway.

Accountholders who want rewards checking accounts must agree to use direct deposit, if possible; to use their debit cards at least 10 times per month; to log onto to online banking once a month and to use e-statements instead of paper statements.

Shafer said that direct deposit is becoming steadily more popular and remains one of the stickiest parts of the banking relationships. He also said the requirement to use their debit cards 10 times a month serves as a threshold for greater debit card use.

“What we have generally found is that if they commit to using their debit card at least 10 times per month, they are probably going to use it 20, 25 or 30 times,” he said.

Requiring at least one log-on to online banking per month makes it more likely that the accountholder will become accustomed to checking balances and doing other routine tasks online rather than coming into a branch or using a call center. And the use of e-statements further cuts the cost of both resources and postage.

Once drawn in by the checking account, Shafer said the new customer or member can then get to know the institution and consider the full menu of services and loans, such as CDs, auto loans, mortgages and credit cards.

The rewards checking account benefits don't just stop at higher interest. The checking accounts also carry nationwide free ATM access for the accountholder, as the bank or credit union commits to reimburse the account holder for fees from ATMs deployed by other financial institutions or retailers.

Shafer also explained that rewards checking could be tailored to meet different criteria. For example, BancVue's research found that college students will often keep the accounts they open while in college for up to three, four, five or more years after they leave school. But since they generally carry only smaller balances, they are usually not impressed with higher interest rates.

The solution? Rewards checking accounts aimed at students can carry a slightly lower interest rate but also offer $10 per month in iTunes credits, Shafer said, a reward that more college students indicated they would find more attractive.

Of course, offering a great checking account is only good if you have a way of advertising it to consumers, Shafer added. So BancVue has a subsidiary firm, First ROI (www.firstroi.com) that helps credit unions and community banks develop a branded presence on the Internet to introduce their institution to consumers.

“People confuse having an online banking site and a Web site where you market your credit union,” Shafer said. “They are not the same thing and you really need the one to bring people to the other.”

Shafer said this is particularly true for younger consumers looking for convenience.

“My 22-year-old daughter could have a credit union branch built in her backyard,” Shafer said, chuckling. “And if she had to walk just a few feet across to it, that would be inconvenient compared to just accessing her account and information on her laptop computer.”

Shafer said that BancVue has over 600 financial institutions around the country using its rewards checking product, including more than 170 credit unions. The company has been in business since 2003 but only began working with credit unions in 2006 because, Shafer said, the company didn't previously understand credit unions or how they worked or that they were as much of a part of
community banking.

Jerrold A. Kinlock, CEO of the $329 million Sacramento Credit Union, recounted that his credit union was the first in California and maybe the first in the country to use the BancVue rewards checking in the fall of 2006.

“We are overall very pleased with the program-very pleased,” Kinlock said. “The program has pretty much done everything they said it would do.”

Kinlock said the credit union rolled the new checking accounts out to members internally first before approaching the market with it and found both current members and new members very enthusiastic about it.

“We have seen higher balances, on average, in the rewards checking accounts than in the others. We have seen those accounts more stable. We have seen the number of transactions per account, primarily debit, hit an average of 25 per account, per month,” he added.

He also noted that the ATM rebate program, which is a very popular part of the rewards checking account, cost the credit union less than a dollar per account last month.

BancVue plans to continue its push forward getting the message out and helping new and existing financial institution clients draw new accounts to rewards checking. The firm's most recent research indicates consumers are eager for the message.

The company noted that its most recent research found that two-thirds (67%) of bank account-holding Americans admit they wouldn't hesitate to consider a new banking relationship. This confirmed a recent J.D. Power and Associates' 2009 Retail Banking Satisfaction Study that found that only 35% of customers were highly committed to their retail bank in 2009, compared with 37% in 2008 and 41% in 2007.

This marks a two-year decline of six percentage points in customer commitment since the 2007 study, BancVue said. Again, according to the BancVue study, Americans with most of their money in large banks are antsy to change-three in four (75%) would be willing to make a change vs. 60% of those with their funds elsewhere.

But Russell Dennick, chief financial officer of the $900 million Oregon Community Credit Union, reported that the rewards checking has worked almost too well.

The credit union rolled out the program, which it called “Remarkable Checking,” in April of 2007 to help it gather deposits in an era of low liquidity and hoped for $85 million in the first year. Oregon Community wound up taking in about double that amount, Dennick said, without much marketing or advertising.

“It was viral marketing at its finest,” he said. “We didn't say much about it because we didn't have to-someone told someone else who told someone else.”

The credit union saw its average Remarkable Checking balance rise to $12,000, and Dennick said the CU finally had to cap the amount of money that could be put in a remarkable checking account at $100,000.

“We had some people coming in and making $500,000 deposits in the checking accounts and doing nothing else but making the minimum commitments to the accounts. Those size deposits have persisted even through the economic downturn despite Oregon Community cutting its interest rate on the Remarkable Checking accounts to 3.01%.

“What the BancVue product did for us was allow us to differentiate our products and break out of the mold in our market,” Dennick said. “Around here a checking account was a checking account was a checking account-but ours wasn't and that made all the difference.”

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