Pizza, Long-Distance Calls, and the End of Free Checking

[Katherine Mangu-Ward]

As a child of the 1980s, I have never paid for a bank account--not even in college when my account frequently contained less than the cost of a couple of pizzas. (What? You don't measure your savings in pizza units?) The very notion of a monthly fee on a checking account seems vaguely ridiculous to me, like paying for porn or late fees on video rentals, or worrying about the length of a long-distance call.

But the era of free checking is coming to an end: In an forehead-smackingly obvious turn of events, bold action by Congress and regulators to protect the little guy from overdraft fees means many banks are gearing up to switch to charging those same little guys monthly fees instead. Of course, people who have lots of money in their accounts, use a bank credit card, or employ bank-based investment advisers won't pay these fees. Only people with small, relatively low-volume accounts will.

As Reason's Matt Welch notes, this is likely to send some folks back to good old fashioned mattress banking. Which banks may have mixed feelings about:

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

Overdraft fees minimized the losses on the smallest accounts. Now those costs will be spread evenly across people who don't have very much money in the bank.

Marginal customers pushed into the ranks of the "unbanked" will turn to check cashers and pawnshops to deal with everyday cash flow needs. While there are perfectly good reasons to choose those options over a pay-to-play checking account, the unbanked paradoxically spend more of their income on banking services than those who have been enjoying the last decade or so of free checking.

Having triggered this near-future cascade of fees and departures from mainstream banking, Congress is now gearing up to regulate the institutions that cater to the unbanked, along with payday lenders. ATM fees are up for some congressional scrutiny, too. No word yet on whether Congress will be looking into borrowing a twenty from your buddy Fred and promising to get him back on Friday.