I conjecture that this deal was constructed between AA and BD under the expectation that interest rates would be higher. When interest rates are very low, as they are now, it can be an excellent deal for BD customers. If AA sold the miles to BD at a fixed price, BD presumably is doing quite well from this at the moment, since I would imagine a significant gap between what they are getting on their deposits and what they are paying for the miles and tiny amount of interest.

Another wrinkle is that people with large bank balances in BD might not quickly move the money out once interest rates rise and the deal becomes less favorable. After all, setting up the accounts takes a certain amount of effort. So BD can end up with some high-net-worth customers whom they would not have gotten otherwise, and this could open up some opportunities for them.

If you deposit $10,000 you will receive 12,000 miles over the course of a year. Let's say those miles cost BankDirect $180 ($0.015 each). That's much less than other banks are paying to attract and hold checking accounts (see earlier messages in this thread).

Right, but at $250,000, the numbers are pretty different. That's $3750 over the course of a year. And if it weren't for FDIC limits, many would go even higher.

All good promo and teaser rates seem to cap out at $25K. There's a reason for that.

I'm pretty sure it's still profitable for them to pay out the equivalent of 1.5% or so on deposit accounts.

I think BankDirect would look at the average account balances and trends, not focus on the largest accounts. If it weren't profitable I expect they would reduce the amount of miles per dollar. I would be surprised if BankDirect's contract with AA specifies the rate at which they must award miles

Agreed. Ally Bank is paying 2.99% on 60 month CD with a very small penalty for early withdrawl...

http://bucks.blogs.nytimes.com/2010/...-more-interest

I realize that a time deposit is more valauble to a bank than a demand deposit, but I think the BankDirect program works for all parties primarily because the miles are more valuable to the consumer than they are to the Bank or the airline, while cash is (nearly) the same value to everyone.

I have a question for those who've participated w/ Bank Direct.

On their CD page https://www.bankdirect.com/products/cdmileage.aspx, it states:

* Earn 1000 miles for every $1000.00 spent on a two-year Mileage CD
* Earn 500 miles for every $1000.00 spent on a one-year Mileage CD
* Earn 250 miles for every $1000.00 spent on a 6-month Mileage CD

Is that xxx miles every month or within that period? I have about $200k I am looking to put in there, so the 1 yr CD would make good sense if I were to collect 500 miles per $1k every month equalling 1.2m miles at the end of the year.

No, it is a one-time award.

Then why isn't ANY other for-profit bank paying a similar amount on a checking account on similar terms (no low maximum, no debit card use requirement)?

I bet they are paying well below the equivalent of 1.5% on mileage accounts. Their parent company, Texas Capital Bank, doesn't break out the portion of their deposits that are mileage accounts but their overall cost of checking accounts in the first quarter was 0.29%. For savings deposits it was 0.81%. See link here: http://investors.texascapitalbank.co...943&highlight=

Note that their checking accounts nearly doubled in the first quarter from the prior quarter. I am speculating here, but I wonder if a fair number of those new accounts were mileage accounts. If that's the case, then the avg cost of a mileage account cannot be that high because the rate only went from 0.19% to 0.29% from the 4th quarter of 2009 to the first quarter of 2010.

We cannot make any firm conclusions without knowing the exact proportion of mileage accounts to non-mileage, but it does look like either (1) the number of mileage accounts they have is very small in relation to regular checking accounts, or (2) their cost of checking is well below 1.5%.

The former sounds much more likely to me. I think it should have been pretty obvious to AA that this product appeals to people who are likely to redeem a good fraction of the miles they earn this way, probably at decent value; if they didn't think that at first, it should have been pretty easy for them to realize it over time.

TCBI's filings barely mention BankDirect; it's clearly a minor part of their overall business. 75% of their deposits are from the Dallas area (which is just a portion of their physical branches); a bunch more are from their Cayman Islands branch; and some of BankDirect is non-mileage. I don't know if it's turned around lately, but their spending on miles had been declining sharply: $1.3 million in 2005, $1.1 million in 2006, $835,000 in 2007. They stopped reporting it after that, which probably means it became insignificant.

Using the 2007 figures, and assuming nobody bought mileage CD's, the cost of miles was about 0.85% of average total interest-bearing transaction deposits. If mileage accounts were 1/3 of that category, which seems unlikely, then they were spending 2.55% of mileage account balances to pay for the miles.

I assume people generally have had good experiences with BankDirect's customer service otherwise we would have heard about it. Has anyone had negative experiences banking at BD?

What bank is this?

See post #23

Using the link in post #23, the highest rate I found searching nationwide was 3.25 % capped at 25k and requiring that one make a minimum of 10 debit transaction per month. Failure to make the transactions results in the intrest rate being reduced to .2%.
Three accounts means 30 debit transactions per month....


The next highest rate (Citizens First, 25k cap)came with even more work:
-Make 15 VISA Debit Card transactions per statement cycle
-Make 1 automatic deposit per statement cycle
-Make 1 automatic withdrawal per statement cycle
-Receive an emailed statement instead of paper
-Write no more than 10 checks per statement cycle

If I had $100,000 and I was deciding the best way to put them to work for me in an investment that was both secured by a government agency, and liquid, the BankDirect accounts can not be beat.

Those teaser rates limited to $25,000 mean that I would have to open 4 accounts, and jump through a lot of hoops.

PS: If BankDirect is paying 1.5 cents per mile, big accounts {over $50,000} are not very profitable. They could offer Money Market accounts paying 1% and they would have one of the best rates in town.