AUSTIN, Texas -- About 100 credit unions are successfully utilizing BancVue's reward checking program to insulate balance sheets against flat yield curves and increased loan loss provisions.

It's not the additional core deposits that generate revenue but a healthy increase in interchange income, thanks to reward requirements. Yes, members earn dividends comparable to special rate CDs, but interchange income from required minimum monthly debit transactions and savings from other required electronic access points, like estatements and online banking, make up the difference. There's also a cap on the account, with excess balances earning next to nothing.

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

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

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

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

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

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

Reward checking certainly solved the loan-to-share issue for Northern, raising more than $18 million in deposits without leeching dollars from the credit union's free checking ranks.

Members using Northern's reward checking account generate well over 20 debit card transactions per month, in stark contrast to free checking accounts, which only generate seven debit transactions monthly.

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

Ritch Van Duzer, CEO of Clearstar Financial, also reported significant gains in interchange income from his year-old product.

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

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

"So yes, I might be paying out 3.44%, but when you figure in debit card revenues of $18,000, there's half coming back right there; 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-dividend companion savings account, available only to reward checking members. Van Duzer is raising the ceiling on his reward checking from $25,000 to $50,000, and will launch a new print and outdoor campaign soon to attract some business.

BancVue's background is in community banking, which explains why the Texans were more successful among bankers than credit unions at first. However, after tapping industry consultants Dollar Associates for advice, new credit union clients make up almost half of all new business.

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

"We had Dennis Dollar speak to our sales team during the fourth quarter of 2006, and he explained to them that the differences go deeper than calling customers members and checking accounts share drafts," Krajicek said.

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

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

"A higher earning checking account with no ATM fees could become the vehicle to get more credit union members to switch their checking account from a bank to their credit union. The result is that members will benefit from the higher earnings and elimination of ATM fees, while the credit union will benefit from more members with greater fee income from the increased number of share draft accounts."

Krajicek said BancVue's value proposition lies in its consulting. The vendor assists each credit union in determining which dividend rates and requirements work best for the cooperative, its market and its members.

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

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

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

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

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

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