We are planning a referral program where a customer receives a $50 bonus into their existing checking account (can be either interest bearing or non interest bearing) if they refer a customer into the bank and that new customer opens either a new checking account (interest bearing account) or a specific consumer car loan product. If they open the checking account, the new customer must deposit at least $100 to open the account.

If the existing customer has a non interest bearing account, isn't this a violation of Reg Q to pay bonuses on a non interest bearing account?

If the $50 goes into a current interest bearing account, we are OK but planning on issuing a 1099- int. correct?

Don't we also have to include the APY in our advertising for the checking account product because the new customer ALSO receives the $50 bonus.

confusing??

Maybe. There are several loopholes to the Reg Q bonus issue. Read the article "Bonus on Accounts" found at our website (specifically, the top of page 2):
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm

I'm not a 1099 expert, so I'll let someone else answer that one.


If you mention a bonus in an advertisement, you trigger the APY [230.8(d)], which triggers all of the other TISA advertising requirements. Refer to section 230.8(c) for more info.

Also, you have a Privacy issue with this program. If you pay $50 only if the customer opens a new account, you are in affect telling the referrer the person they referred has opened an account. Privacy prohibits you from telling anyone who has accounts at your institution.

Maybe I am reading this wrong. You pay me, an existing customer, because I refer David to you and he opens a new account.

If I am correct in that, TISA and Reg Q don't matter. You are paying me a referral fee for getting you business. You didn't pay me based on my deposit relationship. I am a contract employee.

If I get to $600 you'll 1099-MISC me. You need to track it all so you'll know if I do get there. And you should have David sign some attorney approved Privacy release because when you pay me, I'll know he is your customer, and that violates (potentially) his privacy rights.

I have a real problem when banks try to use this to get out of the Privacy issue. They promote "refer a friend and we'll pay you $50". But to get the $50, my friend has to give up their legal right. If they don't sign the Privacy release, I don't get my money. I referred them. They opened the account, but if they don't sign the release, I'm out $50.

I think you have a problem on your hands either way:
1. If my friend doesn't sign the release, I'm mad that I played your game and didn't get my $50.
2. For me to get my $50, my friend has to give up their right to privacy.

Stinks all around.

Oh David - I don't think I would paint such a bleak picture on this practice.

I approach a friend of mine and ask them if they are happy with their bank. They say no. I tell them - "hey, go open an account at XYZ bank. I like them and if you do they will give me 50 bucks (and most programs give the new account holder a spiff also). My friend says sure, why not."

I already know that my friend is going to be a customer of the bank - how much of a breach in privacy is that?

These are not usually blind referrals and I have been at a bank that actively promotes this and you don't see that much activity. People don't switch banks very easily if the current bank has a large portion of their wallet share.

I don't like these at all. You can justify that the one referring knew the potential customer was going to get an account, but I don't see that exception listed in the Privacy regulations. I know it's technical, but I can't excuse it.

Second, let's go the other way. You refer me. I don't qualify for the account and the bank doesn't open it for me. You don't get your $50 so you call the bank and complain. They tell you "sorry, but your friend didn't qualify. We couldn't open an account for him".

Technically, Privacy doesn't apply to me since I'm not your customer, but I'm mad as he!! when Randy calls me up and tells me I lost him $50. I contact my attorney (Randy) and we sue for defamation of character. (OK, far fetched. But these programs stink all around).

This was an interesting read...I'd like to put a different "twist" on it and see the responses you guys might have...here goes:

Financial advisor wants to help customers diversify their deposits. If he sends them our way, he'd like a referral fee. Other than 1099 reporting requirements, do you see any issues with this? They are his customer and he knows their finances, so it's not even quite the same on the privacy front...okay...ya'll weigh in please!

It may make him a deposit broker and you may have to track these accounts as such for call reporting. The referral fees issues most likely remain the same.