Back in April, I outlined the generous signup bonus of up to 22,000 American Airlines miles for a new BankDirect checking account.

The unique selling proposition for internet checking accounts through BankDirect is the 100 American Airlines miles per $1000 average balance that you earn each month. If you keep $5000 in your checking account, that’s 500 miles a month, which is actually quite rewarding — 6000 miles a year at a time when most of us won’t maange to get $50 in taxable interest off a $5000 checking account balance during that time, and probably even less.

Some folks used the account effectively to earn large quantities of miles with big balances, I never saw this as an especially great investment account earning miles rather than money, as a replacement for mutual funds for instance. But earning say 10,000 miles a month back when American counted miles earned from any source was non-crazy, and FDIC insured against losses which my stock picks certainly were not in 2008 and 2009!

For me, BankDirect has been my primary checking account in July 2003. And that’s how I’ve used it, as a checking account. I do wind up with some reasonably significant balances, just from floating expense reimbursements, it’s short term money that I need to pay off my credit card bills but it needs to be parked somewhere for a couple of weeks and so earns some miles each month.

I’ve always experienced good customer service, and they frequently didn’t charge me for things that they could have like overnighting bank checks. Over time they’ve rightened up some of their offerings, though, imposing a cap on the out-of-network ATM fees that they would reimburse, which somewhat limited the benefit of not just not charging out of network ATM fees but even rebating those charges imposed by the other bank. But that wasn’t an especially big deal.

The downside to the account for many has been the $2500 minimum fee in order to avoid monthly service charges. Unlike some banks, BankDirect didn’t waive monthly fees for doing payroll direct deposit. As I say, I met this through regular expense reimbursement checks. So even though I wasn’t using this account to park money per se it always had a big enough balance to avoid these charges.

Effective January 2012, however, they are beginning to impose a $12 monthly service charge on everyone regardless of balance.

I understand why they’re doing this. 100 miles per $1000 average balance is actually quite a pricey return to be offering customers in such a low interest rate environment. And at the same time, the cost to banks of holding deposits has gone up as the FDIC charges increased premiums to banks to insure their deposits, in order to shore itself up given the rising cost of paying out claims incurred as a result of bank failures.

So BankDirect’s costs to hold deposits have gone up, and at the same time they’re paying above market returns to depositors. I get it. But it still irks me, because I’m now faced with the question of whether or not to continue my relationship with my primary checking account bank — at a time when the miles from them are no longer quite as valuable (since they are still quite spendable but no longer count towards lifetime elite status with American).

And it seems as well as continuation of BankDirect’s continuing devaluation, they limit the number of miles you can earn (not that I ever kept over $200,000 with them!) and now charge you for the privilege of using their accounts.

So it’s partly that the mileage earning may not offset the fee except at higher average balances, and partly a sense that they value me less as a customer — that I am somehow the enemy for doing business with them — that has me rethinking my relationship.

And that makes all of the little annoyances more significant, their online interface isn’t much changed since I became a customer over 8 years ago which means that though they’re an online bank they don’t offer the most extensive or sophisticated online services. And they have a particularly annoying practice of putting a hold on large deposits and putting a hold on an equal sum out of your existing balance. If you have $5000 in your account and deposit a $10,000 check, they may cause your balance to go negative by $5000 as a result of making a deposit! They explain this as a quirk in the programming, but also tell me this is not on their radar as a priority to change. It’s meant that they regularly honor all of my payments that should be honored out of my available balance but will then automatically post a fee for not having the funds available to cover and then manually credit that fee. They’ve never not credited the fee, and I’ve never had to ask that they do so they always do it on their own, but it’s still something that angers me every time I see it.

BankDirect seems to want to chase away deposits, there are real perverse incentives for them to do so, and I’m faced with a decision about my own relationship there.

  1. Kaos said,

    rethinking=terminate your account?
    I predict that they will lose more than half of their AA accounts in the next few months. I agree the webinterface is ancient. It would need a significant upgrade for me to pay $12 a month ($144/year). I don’t live close to where any of their branches may be. It’s just to bad. I really don’t want to terminate my account, but it is on the top of my list for things to do next week.

  2. H.S. said,

    For those same reasons, I closed my bank direct account this week.

  3. ORD_TGU said,

    I used this account to “park” a small amount of cash used as a revolving amount to pay bills…the extra miles were welcomed. Now that there is a monthly fee, it does not seem profitable for me. I will close the account.
    My crystal ball tells me that a lot of low balance accounts will be closed, the high balance left open. It will not affect their cost of keeping high balance accounts, it will just bring a little revenue. As far as a business model is concerned, is it better to have a few high value customers or many small value customers?

  4. NR said,

    Of course everyone’s circumstances vary and for lower balance accounts it is most likely not worth paying another monthly fee in life, and yes the website is rather primitive. For myself the value derived is being able to earn enough AA miles for an F or J ticket on Cathay or Jal to Asia each year.
    This is worth much more than the paltry taxable interest rates available in the current market environment. Do I like being asked to pay a fee for a bank account ? No. Will I pay the fee ? Yes

  5. super bob said,

    BD was my “safety account”. The kind of scenario where I die unexpectedly and my wife can use those funds until everything else is sorted out. $10K transferred to Fidelity and account closed. Good while it lasted.

  6. Ezra said,

    Closed mine on Tuesday as well. $7 check fee when closing

  7. Bill said,

    Switch to USAA. They were my first bank in 1996 and still going strong. My favorite company to do business with. Have never paid a fee, ever. I can’t tell you all the great things.

  8. jan said,

    So at what point would you consider this a good deal still. I’m new to the game. We keep an emergency fund of 40k that we don’t expect a return on. I have it at Capital one and it makes next to nothing. Advice please. The miles sound good to me.

  9. NYBanker said,

    While the deal is slightly less sweet, this sort of fee, and the miles not counting towards lifetime status, are truly at the margin if you have an other-than-trivial balance with BD.

    How much do you value AA miles? $0.02 per? $0.04? My AA redemptions are usually in the 3 to 7 CPM range, so let me use 4 CPM for this example. If you keep $50k at the bank, you’ll get 60,000 miles over the course of a year. At the cost-avoidance level that I’m able to use AA points, this is worth $2,400 to me…in after tax dollars, or $4,000 in pre-tax dollars. Assuming I could earn 2% cash interest (a stretch) in another FDIC-insured account that levied no fee, I’d earn $1,000…pre-tax, $600 after tax.

    I’ll gladly pay the $144 annual fee for this deal.

    I guess one other risk you could highlight is that your “interest” is paid in freely cancellable currency (miles) issued by a bankrupt entity (AA). Against that, the corpus of the investment is FDIC protected. Earning 4x greater return seems worth this slight incremental risk.

    The indifference point…assuming you share my experience on valuation and redemption, is pretty low…in the $10k balance range.

  10. HikerT said,

    It’s a pretty simple decision. If you have small balance move it. If you have a large balance keep it. If you move the latter you will probably pay more than $144 / year in taxes.

  11. Gary said,

    @jan at 40k BankDirect is still a pretty good fully insured deal

  12. Travis said,

    i only had 35k in account, so not worth it after $12 monthly fee. If you have more than 100k, it is worth it I think.

    Pulled all my money out already and will close the account next week.

  13. Gary said,

    @Travis I think 35k is probably worth it. 42k miles per year. Call it 1.3 cents a mile, that’s $546 tax free minus $144 in fees = $402.

    If your relevant alternative is another FDIC insured checking account, let’s say you get 0.5% interest that’s $175 a year out of which you pay taxes so say you net $122.50.

    It doesn’t make sense to park money in a BankDirect account if the relevant alternative for that money is decent-yielding investment. It’s still a good deal if you’re going to have a big balance in a checking account.

    I don’t value the miles as highly as NYBanker does, because
    (1) miles can only purchase travel at a high value, cash can purchase travel and other things
    (2) miles don’t get nearly the same value when stripping away capacity controls. You have to find the award seats you want which often involves compromises, so miles aren’t worth as much as a paid ticket. (Plus mileage tickets don’t EARN miles and of course credit towards status)
    (3) while over time US dollars certainly depreciate — both in foreign currency markets as evidenced over the past few years but largely just due to inflation, the Fed purposely inflates even when they say they are trying to ‘limit’ inflation (they don’t target a 0% rate of inflation) — miles depreciate faster than money.

    While I love AAdvantage, I don’t trust them as much as the Fed. Which is saying quite a lot, because I don’t much trust the Fed… :P

  14. Summer said,

    Gary makes some interesting points about miles valuation.

    Also, It seems there are better, easier awards to earn from bank accounts out there. Citi recently offering 25,000 bonus miles for new checking account (50k for gold). Zero fees with a $6k balance. One direct deposit and one bill pay per month for two months, and the 25,000 bonus is earned.

    Considering what miles-crazed flyers go through to earn a few thousand miles (gift card churning!), this is an easy one

    It’s a big, quick bonus, no fees, and

  15. Summer said,

    dang, I obviously needed to edit that last comment. sorry folks!

  16. The Travel Abstract said,

    I like to do a though exercise. Would you pay a $144 fare for a flight that netted you “x” RDM miles?

    The number of miles you need to earn to make that $144 flight a good value is the minimum you should have in a BD acct.

    $25k=30k Miles/yr. $144 total fee/30k miles = 0.48 CPM

  17. Brandon said,

    I got the letter too, I am keeping my money market account and closing out my checking.

  18. Dave said,

    I closed out this past week. I only opened my account a month ago, and so they wanted to charge the $7 check fee and a $15 fee for early termination of the AA account. I wrote a short note questioning their fees and pointing out that the monthly fee represented a material change in our agreement.

    Fees waived. Account closed. I’m happy going back to Schwab.

  19. ColonelretWes said,

    +1 NR and Nybanker. We will keep our BD ckng accts open despite the $144 annual fee x2 (don’t like) but we like the many, many AA miles we earn monthly much
    more than the new fee. Thanks to BD (over last 18 months), made LG in early November..one month before rules changed.

  20. Carberrie said,

    I have been using Bankdirect for about 2 years. I started with $30k deposit and for the past year have maintained over $100k balance. I simply refuse to pay $144/year for them to use my money. I realize the miles payment is lucrative but I have enough miles to travel all I want over the next several years. I outright refuse on principal to pay for a bank account.

    If I keep my money here without any deposits or withdrawals (or if my deposits = my withdrawals), my balance will eventually, over the long run, go to $0 with these fees. I just don’t like this model. I agree it’s a small price for the miles and definitely a nice return. Yet I just cannot accept this on principal.

    My plan is to call BankDirect to confirm there is no way to avoid the fee and to then close out my account.

  21. Robert Hanson said,

    Wow ! People here are thinking of canceling a BD account with $100K in it, and putting it in a brokerage account that yields approximately “squat”, at least after taxes and inflation.

    I hate the fees too. But a $100K account will net you 120K miles a year. That’s 5K miles short of a “Saver” R/T FC US to EU ticket on AA. Which now will cost you $144 a year in fees.

    Seriously, if AA “mistakenly” offered a FC ticket from the US to EU for $144, virtually everyone on this site would be buying it immediately, before AA became aware of their “mistake”.

    Yes, a CD somewhere may offer you 1.5%, meaning $1500 a year in interest. But if you have that much to put away in a CD, you are going to pay $500 of that in taxes. Again, would you buy an AA R/T FC ticket for $1,144.00? Without even mentioning that the BD account is liquid, and the CD is locked in, probably for years.

    Of course, if you only have $1,000 in the account, it’s not worth it. And if you can’t imagine ever flying trans-oceanic in a premium cabin, it’s still not worth it. But then, why would you even be reading this blog? However, if you do aspire to wander the world, and have enough in savings to make that aspiration achievable, then the BD account is still a gift that goes on giving.

    Yes, it now costs $144 a year to play, and that grates when you know it WAS free. But as a new reader of this blog, it grates on me that the US Mint dollar deal was over by the time I heard about it. And that I never got the chance to churn Citi AA cards every few months the way others here did.

    But thanks to Gary and his blog, my wife and I each got our Citi 100K Visa cards, and went FC to London last summer. And now thanks to Gary and BD, we are already booked FC AA to London again August 2012. I’d like to spend more time complaining about the new BD fees, but I have to get back to planning our 2012 trip. Bruges, Rothenburg, Berlin, Prague, Budapest, Vienna…… :>}

  22. super bob said,

    @Robert Hansen
    This is a very poor analogy.

    “Seriously, if AA “mistakenly” offered a FC ticket from the US to EU for $144, virtually everyone on this site would be buying it immediately, before AA became aware of their “mistake”. ”

    Off the top of me head:

    1. You aren’t just paying $144, it’s $144 plus the cost of tying up $100K for a year.

    2. Your purchased ticket would earn miles and status. The Award would not.

    3. A purchased ticket has much greater seat availability than finding Awards Seats.

    4. Your miles will depreciate faster than cash. If you don’t have an immediate use of the miles your ROI increasingly drops.

  23. drbench said,

    I opened an account in November with $200k. I figure in one year I will net 241,000 AA miles for an out of pocket cost of $120 and foregone interest of $1,800 pretax (I am getting 0.9% in another savings account). (I added $120 to the account to cover the fee for the next 10 monthes.) After taxes the net cost to me is about $1300. That is worth it to me but if interest rates rise I will reevealuate.

  24. Robert Hanson said,

    @Super Bob:

    “the cost of tying up $100K for a year”…

    Nothing is “tied up”. Unlike a CD, or some types of mutual funds, you can withdraw it in part or in whole whenever you want. Write a check anytime.

    I’ll grant you, finding award availability for non-stop FC Saver seats is difficult. Unless you’re able and willing to schedule 10 months in advance, then you can have virtually any day you want. If you need to cancel later, it costs a couple hundred dollars to put your miles back into your account. Business class with a connecting flight is much easier to get.

    I just checked the cash price of LAX-LHR RT in FC, and the lowest price I found with anyone was AA for $12,687.00

    So for someone who does want to go to Europe FC, that’s a return of 12.687%, now minus $144, which comes out to 12,543%. Did I mention tax free? With FDIC insurance. Vs drbench getting 0.9%, pretax. Unless and until I have an immediate need for that cash, it’s staying in BD…

  25. drbench said,

    Robert Hanson, Exactly why my money stays there until rates start to climb! There are so many ways that I get much better value from the miles than the cost and foregone interest. Last summer I took 4 first class flights to the Caribbean which is not a great use of miles but still would have cost me about $7200. The value I get from the miles is well worth the foregone interest and $12 a month!

  26. SC Parent said,

    We should add up all the deposits BankDirect is going to lose!

    I have $45k in the checking account. After my direct deposit bonus miles post, I’ll start pulling out my money. Why?

    The $45k will earn me 49,000 miles over a year. It’s also pretty easy to earn 0.9% interest on your money. That’s an opportunity cost of $400 per year. Subtract out 25% for taxes and I’m left with $300. But, add in the $144 in fees I’d be saving and the 49,000 miles are coming at an opportunity cost to me of $444. That’s almost 1 cent per mile.

    Just like everyone with a Delta FF account isn’t rushing to buy or transfer miles at 1.1cpm, I’m not looking to buy AA miles at 1cpm. Yes, I know you can find awards with a much higher value, but it’s not worth the risk of (1) inflexible routes/dates on award tickets and (2) potential devaluation through bankruptcy.

    Add my $45k to the deposit base BankDirect is losing.

  27. Bikeguy said,

    After the Chicago DO, I saw an account from an attendee that had over $1.4 million. Was shooting for 1,000,000 miles before the deadline. Nothing like racking up 140,000 a month.

  28. Bikeguy said,

    0.8% at Ally for checking.

  29. Robert Hanson said,

    Where I live, we have 12 months in a year. So $45K in BD deposits equals 54K miles a year for me. Which puts my cost, after lost interest and fees, somewhere around 0.8 cents a mile.

    Even better, these are AA miles, not Delta miles. Apples, Oranges…. Making a RT AA Business Class 100K mile Saver award from the West Coast to Europe $800. Compared to todays cash value of $5K for non-refundable advance purchase BC.

    Would I prefer the option of a last minute booking on any routing I pick? Sure, but looking up the cost of that today I find United at $10K. Except that Seat Guru says United has “recliner” seats on many of their 777s in Business. No thanks. Which leaves AA, with at least “angled flat” seats, {slowly being replaced with fully flat seats}, at $13K cash price. My cost at 0.8 for an RT AA Any Time, {any available seat}, 200K mile BC award is now $1600.

    At 0.8 cents a mile, FC RT costs $1,000 for Saver. $2,000 for Any Time. Which means that retail cost is Six times the BD price.

    Again, if one doesn’t want to go trans-oceanic in a Premium class seat, these miles aren’t really worth much. Next summers AA NS First Class LAX-LHR trip is already booked for both of us, making it our third year in a row. Retail value for all 3 years is $75K. If we’d had to pay that in cash, we wouldn’t have been able to go even once.

    This despite the fact that the only AA tickets we have paid cash for in the last 10 years is one coach trip to Cancun. One way of which was upgraded to “first” with “stickers”, not miles.

    Thanks to Gary for having let me know about the Citi AA 100K mile Visa card, and then BankDirect, I made it to AA Lifetime Gold. Without BankDirect, I wouldn’t have made it before the new rules kicked in. Nor would we be going to Europe next summer.

    It all works for me, it may not be of value to you.

  30. Rick said,

    @gary:

    I’m closing my checking acct. Any creative ways to get around the closing fees & 90 days? Do they really hold your $ for 90 days & then charge you $12/month for 3 months? I could write myself a check, but they’d still charge me $15 to close it. Could I temporarily transfer $ to a new BD non-AA checking acct and then close that later? Ideas? It irks me that they’re going to charge me to get my own $ back.

  31. Gary said,

    @Rick see comment # 18 above.

  32. Denis said,

    @gary,

    What do you think of transferring funds currently in a AA mileage checking account (& closing it) to a new AA mileage *money market* account to keep earning some AA miles? The earnings with money market are half of that earned with checking, but given no fees and free miles, would you do it? (I had a AA mileage money market account years ago when I first started with BD, but I closed it after the first year — so I’m not sure if I’d earn another 1,000 mile bonus for a new account, but that’s gravy anyway.) I’ve already maxed out mileage earning with both TD Ameritrade and Fidelity. Are there other banks who offer this kind of deal for free? I’m not interested in buying debit/check cards unless the bonus is more than a few thousand miles.

  33. Avoiding Big Foreign Currency Surcharges and Fees When Traveling Abroad - View from the Wing said,

    […] the ATM owner to use the machine, and possibly by your bank for using another bank’s ATM. I use a BankDirect checking account and they don’t charge me out of network ATM fees, and they rebate charges to use a […]

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