Bank of the Sierra: Are they legit? How can the checking interest APY be so high?

Question

As of February 8th, 2009, Bank Of The Sierra offers a free checking account which earns a 4.09% APY. It looks like the catch is that you pretty much have to use them as your main bank. You need to have direct deposit on the account, use their online bill pay for at least one bill and use the debt card at least twelve times a month. If you don't meet these useage requirements you get a much lower 0.12 APY. They only have physical branches in California.

To me they look like a normal bank. But I have trouble finding CD rates that high. Is there anything I should be aware of / look out for if I try to open an account with them? This is the first bank I have ever seen with such a high interest rate, are there others? Are they any better or worse?

Answer 1

The FDIC is pretty confident about them being legit.

http://www2.fdic.gov/idasp/main_bankfind.asp (type in Bank Of The Sierra in the name field and search on that)

You got to realize how much money they will make if you use them per the agreement. Every credit card / debit transaction gets them some cash. Businesses get between 1 and 5% of each transaction even on debit cards. Then there is a flat fee the merchant pays for accepting the credit card between .25 and .50 per transaction. Even at 12 transactions a month, the bank is looking at making around $6/month. Probably more because who uses a debit card just 12 times a month. It would be convenient for most people to juse use it all the time.

Does 4.09% APY beat $6/month? You would have to keep a balance of $2000 plus to cost more than you earn. And if you keep more than $2k in the account, they have other ways to make money off of you.

I would also assume they make money on the bill pay and direct deposit side of things, but I can't speak for certain about that.

Bottom line is this seems like a good deal to attract customers, they would rather make a bit less profit then BofA to grow their business. They are betting their offer restrictions will change your habits and make you more profitable to them.

Answer 2

I believe MrChrister's answer is correct: Since they're FDIC insured, they are "legit." Second, on the seemingly too-good-to-be-true rate: They're basically making up the difference on other fees (not necessarily paid by you) in order to offer you the higher-than-market rate.

I'd like to point out two things not mentioned about the current rate offer, though:

• The high 4.09% APY advertised is only on balances up to $25,000; anything over that threshold is at a lower 1.01% APY.

• The offer also states in the footnotes: "Rates may change after the account is opened."
  You might want to see if they have a good history of paying higher than average interest rates. You wouldn't want to switch only to find out the promotional rate was a teaser that soon gets reduced.