The End of Free Checking?

Free checking is on life support. Those who follow the banking industry have been saying for some time that the day was quickly approaching when banks will begin charging its customers for this luxury Americans have enjoyed for years. The main reason why, of course, is the imminent prohibition of overdraft fees, which had been a boon for banks. With that source of revenue gone, banks will have to look to checking fees to make up the lost income.

A couple newspaper articles were written about this topic over the past few days. One, from the Washington Post, explains what some banks will lose after July 1st, when automatic overdraft fees disappear:

Still, Wachovia's parent company, Wells Fargo, expects that revenue from overdraft fees will fall by $500 million this fiscal year. Bank of America has estimated its losses at $160 million a quarter. Moebs estimates that total bank revenue from overdrafts will drop about $2 billion this year to $35.2 billion, the first decline in at least a decade.

Another article from the Wall Street Journal expands upon the problem banks will face:

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.

As you can imagine, unprofitable is not a term bank executives like very much. At the very least, they'll want to find a way to break even on the accounts that are currently unprofitable, and $250-$300 per year is quite a lot of fee income to squeeze out of customers.

So how will they do it? The WSJ article provides an example:

To generate new revenue, Bank of America is quietly testing new pricing models throughout the U.S., with most changes expected in early 2011. Executives have ruled out a flat monthly fee for all customers and are developing a tiered structure that encourages customers to increase banking activity or use other services to avoid future charges.

Indeed, if you go to Bank of America's website right now, you can see several different no-interest checking options (the details may differ for various areas, but here is a snapshot from one location):

  • MyAccess Checking: This is free if you have a monthly "qualifying" direct deposit or maintain a minimum balance of something like $1,500.
  • Regular Checking: This is free until your balance sinks below some minimum, like $750.
  • eBanking Account: This is free in Georgia, if you only do online banking.
  • CampusEdge: No monthly fee for students for the first five years.

If you suddenly find yourself not living up to those requirements, however, expect a prompt monthly maintenance charge. In time, these minimum balances or other requirements may become stricter as well. So while savvy consumers with responsible fiscal habits and ample income may continue to find a way to avoid monthly maintenance fees, expect others to pay up.

Of course, many of those unsophisticated or lower-income consumers who aren't described above are the same ones who paid lots of overdraft fees in the past. So even though banks may change the rules of the game, the essential fact stays the same: it pays to understand the mechanics of your checking account. Banks will likely continue to treat their best customers well, and rely on the others to subsidize their free services.