PerkStreet Financial lived a short but eventful life, spanning its founding in November 2008 to its ignoble demise in September 2013. In its heyday, PerkStreet, an online checking account/debit card provider, offered spectacular rewards to its customers. Ultimately the offer was too good to be true, and more than $1 million in rewards was forfeited when PerkStreet went bankrupt.
PerkStreet, based in Boston, was an online bank with no branches and few (about 30) employees. The founder was Dan O’Malley, formerly an executive at Capital One. His concept was to offer basic online services while maintaining low operating costs, and to use those savings to attract customers looking for extraordinary rewards on their debit card usage, as well as no-fee ATM access. O’Malley financed the company with money (as much as $15 million) from private venture capital firms, including Highland Capital Partners of Cambridge and Globespan Capital Partners of Boston.
The idea of banking without using a brick-and-mortar bank was still fairly new in 2008. ING Direct had done much to normalize online-only savings accounts by offering high interest rates. PerkStreet provided online checking linked to a debit card and a large, fee-free ATM network. The physical accounts were actually managed behind the scenes by “real” banks Bancorp and Provident Bank. PerkStreet offered 24-hour call centers to resolve issues, email communications, online check deposit and mail-in check deposit with prepaid envelopes.
Customers received cash back from PerkStreet when they opened a checking account and used their debit card for swipe (rather than PIN-entry) transactions. The perks offered by PerkStreet included:
- 5 percent back on up to $5,000 spent per year on a monthly-rotating list of merchants
- 2 percent back on up to $2,500 spent per year on online purchases from specified merchants, including BestBuy.com, iTunes, Amazon.com, Target.com, and Walmart.com
- 2 percent back on up to $2,500 spent per year on in-store purchases from the same specified merchants, as long as you maintained a checking account balance of at least $5,000
- Unlimited 2 percent back when you and a friend both used your PerkStreet debit cards within 60 minutes at the same merchant
- Unlimited 1 percent back everywhere else
- Waived monthly maintenance fee (normally $4.50) if you used your account during the month
- Cashback available as gift cards from a list of vendors including Olive Garden, Starbucks, Target, and Amazon
- Cashback also available as a statement credit on your checking account at the rate of $20 back for each $22 earned in perks
PerkStreet claims it paid out more than $4 million in customer rewards during its operation.
The Dave Ramsey Connection
Dave Ramsey is the host of a popular radio show about personal finance. He’s heard on 500 radio stations with a combined audience of 6 million listeners. PerkStreet advertised on the Dave Ramsey Show as early as the fall of 2010, and Ramsey frequently recommended PerkStreet to his audience.
Ramsey says he had no advanced warning that PerkStreet would close its doors on September 26, 2013, as it announced in August of that year. It is true, however, that PerkStreet canceled its advertising arrangement with the Dave Ramsey Show at the end of July. After the announcement Ramsey said his Twitter feed blew up with angry investors who blamed him for touting PerkStreet. “Everyone is pissed off at me now … I’m pretty embarrassed, so I’m pretty ticked off” said Ramsey at the time. He called the PerkStreet executives “slimeballs.”
In hindsight, 2008-09 was a terrible time to launch PerkStreet Financial, as the mortgage meltdown had left the economy in shambles and interest rates near zero percent, meaning PerkStreet could generate very little interest income on its float – the money sitting in its checking accounts.
Fees for interbank debit transactions were curtailed in 2011 by the Durbin amendment to the Dodd-Frank Act. These are the fees banks charge merchants for the use of payment cards, and were a major revenue source for banks. Before the amendment, banks could charge whatever they pleased, and the average card-swipe fee was $0.44 per transaction. Heavy lobbying from merchants resulted in the passage of the Durbin amendment, which gave the Federal Reserve the right to regulate debit-card interchange fees. That it did, setting the maximum fee at $0.12 per transaction, costing the banks annual revenues of an estimated $14 billion.
However, the Durbin amendment applies only to banks with more than $10 billion in assets, which exempted PerkStreet from the fee cap. Nonetheless, competitive pressures meant that PerkStreet fee revenue probably fell well short of projections made at the firm’s founding.
In the end, PerkStreet said it could no longer raise venture capital, forcing it to close its doors. This meant, of course, that the company could not generate enough operating income to remain solvent. Customer checking accounts were FDIC-insured, but cashback was uninsured and many lost out. The combination of low interest rates, low fee income, and generous cash-back rewards doomed PerkStreet. It is survived today by competitors who have figured out ways to deliver online-only checking accounts profitably.