Free Checking Is On the Way Out

How will banks cope with all of the new limits on the fees they can collect on credit and debit cards? That's easy -- they'll just charge all customers a little more for the services they had previous enjoyed for cheap. As a result, free checking will soon be something only economic historians talk about.

Pallavi Gogoi of the Associated Press reports:

The days when you could walk into a bank branch and open an account with no charges and no strings attached appear to be over. Now you have to jump through some hoops -- keep a high balance, use direct deposit or swipe your debit card several times a month.

Almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.

Anyone who understood the consequences of all of the financial regulation imposed on banks over the past two years won't find this surprising. Ever since the spring of 2009, the demise of free checking seemed inevitable, and it creeps nearer and nearer. Congress deprived banks of several major sources of revenue, so they will have to find that money somewhere else.

We saw how much regulation can cost banks earlier this week when Bank of America reported its third quarter earnings. It took a $10.4 billion third quarter charge due to new regulation, which resulted in a $7.3 billion loss overall. At this point, banks are forbidden from squeezing as many fees out of bad customers and have less freedom to charge merchants. So their only alternative is to demand more money from their good customers.

How they do so will be subtle. According to the Associated Press article, opting to have your monthly account statement mailed to you will cost you $8.95 at Bank of America. Customers who choose to bank entirely online can escape the fee, however. Of course, it doesn't likely cost anywhere near that much to be mailed a paper statement each month, so banks must be counting on such excessive fees to replace some of their lost fee income. Just like before, savvy customers will likely find ways to avoid some fees, while the less sophisticated customers will end up paying more.

Banks will find new ways to stay profitable. Free checking appears to be one of the first causalities in their search for new sources of revenue. It won't be the last.