Washingtonians, like Americans across most of the country, will be subjected late this fall to a barrage of publicity from financial institutions inviting them to open checking accounts that pay interest as of Jan. 1, 1981.
A survey by The Washington Post reveals that 87 percent of the banks in this area definitely plan to offer this type of account -- usually called NOW (negotiable order of withdrawal) -- while another 7 percent are thinking about doing so.
Each naturally will proclaim its terms are better than the others'.Savings and loan associations, also a part of the NOW scene, are expected to advertize that their products are priced cheaper, while credit unions will publicize their share-draft accounts, another form of interest on checking. What's a customer to do?
As a prelude to NOW accounts, The Post analyzed the terms area banks currently offer on automatic funds transfer accounts, which are virtually identical to NOW accounts from the customer's standpoint. They pay interest on a customer's savings account and most often switch funds to his or her checking account only as needed to cover checks written on it.
(Automatic funds transfers are known by several generic names, such as electronic funds transfers and automated transfer systems, as well as brand names given them by the various banks, like the National Bank of Washington's Trans-flow and United Virginia Bank's The United Accounts.)
Because of the legal necessity of maintaining two accounts, the nuisance of switching from one to the other, the difficulty in pricing this service and the cost of paying interest on hitherto noninterest-bearing demand accounts, AFT has not been promoted widely. Just 55 percent of the 44 survey respondents now offer them.
Banks were about equally divided between those that charge a monthly fee and those that charge a monthly fee plus a transaction fee for each check. More banks charge a monthly fee only if the balance falls below a certain level than do those that charge a flat fee regardless of the balance or number of checks written. Very few charge just a hefty transaction fee.
The minimum required balance ranges from zero at two out of five banks to $5,000. Of those that set a minimum, half were over $1,000 and half below. About as many pay interest on the average monthly balance as on the daily balance.
Four out of five pay 5.25 percent interest, the maximum allowed by law, whereas some pay 5 percent and others scale the interest to the balance; zero interest below $500, 2 percent up to $1,000, 3 percent up to $1,500 and 5.25 percent thereafter. Three out of five banks charge no transfer fee; among those that do, the cost ranges from 15 cents to $1, with 25 cents the most common.
Putting all this together, the National Bank of Washington has figured out that the break-even point for its customers is $1,067. If a customer has a lower daily balance, the charges for checks will be higher than the interest earned on the savings. First Virginia Bank sets the break-even point at $704.
Some banks disclose this figure reluctantly for competitive reasons or because they think they can attract more new accounts if interest rather than costs is emphasized. Moreover, when banks charge a transfer fee, the break-even point shifts with the number of transactions.
In fact, most AFT customers currently have considerably larger balances -- the national average is between $2,000 and $3,000. Yet, as checking with interest continues to grow, less-affluent customers may question whether a NOW account is financially worthwhile.
In order to assess the terms offered by 25 area banks, The Washington Post ran three hypothetical cases: an average monthly savings balance of $750 and 16 checks a month -- a national average -- written on the checking account; $1,200 and 20 checks; and $1,700 and 12 checks.The charges on the checking account were subtracted from the interest earned on the savings account.
A balance below $500 does not make a NOW account worthwhile for either the bank or the customer. At $750 and an average number of checks, the customer could have a net gain of $37.50 per year or run up a theoretical loss of $152.62. (This was calculated by running a $750 balance through a bank with a much higher minimum requirement.)
For $1,200 and 20 checks, the results ranged from a net gain of $60 to a loss of $129. At $1,700 and 12 checks, the best a customer could earn was $89.25 and the worst was a loss of $30.75. (All of these figures are approximate and, as an aid to readers, calculated at simple annual interest rates instead of at daily compound rates used by many banks.)
Regionally, the breakdown showed Maryland averaged the best terms. At $750 and 16 checks, customers incurred an average annual loss of $18. In Virginia, there was an average loss of $39.56; and in the District, $70.06.
At $1,200 and 20 checks, Marylanders were earning $19.50 whereas Virginians were still paying out $34.50 more in costs than they earned in interest. In the District, the average loss was $47.
Everyone had a net gain at $1,700 and 12 checks. In Maryland, the average gain was $57.13: in Virginia and the District, $29.25.
At the $750 balance and 16 checks, the best deal -- a gain of $37.50 -- was offered by Central Fidelity Bank at Bailey's Crossroads.
At $1,200 and 20 checks, Central Fidelity, First Virginia Bank and Central National Bank in Silver Spring all paid $60.
At $1,700 and 12 checks, those paying the highest interest -- $89.25 -- were Riggs National Bank in the District; Citizens Bank and Central National in Maryland; and the McLean Bank and Bank of Virginia. These were followed by First yvirginia Bank, United Virginia Bank, Central Fidelity and National Bank of Fairfax at $85.
Though NOWs resemble AFTs, with the need for separate savings and checking accounts and transfers between them eliminated after Dec. 31, NOWs promise to be simpler and probably more of a bargain than the AFTs.