The End Of Free Checking

Bank of America made news in recent weeks by announcing that they are in essence ending their “free checking” product.  This is in and of itself is not a huge piece of news as banks have begun phasing out their free products for a while now as they are under the gun to increase profitability.  The fact that Bank of America, which serves about half of U.S. households, has now made the official announcement effectively ends the free checking product as part of the banking industry.

Free checking

This news comes as the banking industry continues to experience a wave of change following the mortgage market collapse.  In the wake of huge loan losses, banks are increasingly looking for new ways to increase revenue and add to the bottom line.  Banks used to offer the free checking product as a loss leader in order to attract the customer’s full portfolio – savings accounts, IRAs, and mortgages – and earn revenue from these balances.  With many loans no longer making money, banks are now getting rid of the freebies.

The new regulatory environment has also had a profound change on the way banks do business.  One of the more lucrative means of adding to the bottom line was through fee income.  Overdraft fees, maintenance fees and checkwriting fees all meant a huge influx of cash.  Washington lawmakers have begun cracking down on what they consider egregious practices and have begun outlawing altogether fees that they consider exorbitant or unreasonable.

Banks are still in the business of making money so now they’re being forced to be a little more creative in how they earn it.  It’s still possible to find a low cost checking product but you’ll have to agree to do a few more things in order to get there.  The big one is agreeing to receive electronic statements.  From both a financial and an environmental standpoint, paper statements are costly.  Many banks have begun charging ancillary fees for this and other things such as using a teller to perform a transaction and keeping a low balance.  In that sense, the banking industry isn’t all that different from the airlines.

Overdraft fees are one area that banks could have trouble making up the difference.  The Federal Reserve’s Regulation E now restricts the fees charged on overdrafts unless the customer has opted in to the bank’s program to allow such overdrafts to be paid for a fee.  Prior to this, many banks would pay the item and charge the overdraft fee regardless if the transaction in question overdrafted the account by $1 or $100.  This new rule will generally work out in favor of the customer but banks will be trying to make up the revenue lost from this regulatory change.

Free checking accounts may be dying a slow death but you’ll likely still be able to maintain a low- or no-cost account provided you’re willing to play by your bank’s rules.  If you’re someone who regularly maintains a balance and are willing to do most of your banking electronically, you’ll stand a much better chance of coming out ahead.

Just keep an eye on your bank in case they try to sneak a new fee past you. BTW, here are some free checking accounts that also pay nice interest rates. Photo credit: cafemama

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

4 Responses to “The End Of Free Checking”

  1. Michelle |  Nov 26, 2010 at 8:01 pm

    I think traditional banks are going in the wrong direction. Checks are going obsolete so this change in their policy should not make too big of an impact. Savings accounts such as ING should do better going into 2011 as more people are looking to save money.

  2. Brad Castro |  Nov 28, 2010 at 12:50 am

    I think it will be interesting to see how this all works out. Once you give the consumer something for free, I think it’s pretty precarious to begin charging for it.

    Let’s face it, after the last couple of years, banks are hardly the most respected institutions by Main Street.

    And banks have a lot of competitions – why would anyone pay for a checking account when they can choose a credit union or an online bank like ING (as Michelle pointed out). Even online brokerages are offering check writing features.

  3. Steve |  Nov 28, 2010 at 7:29 pm

    I agree with Michelle – it’s a bad move by banks, because to the extent I can I’ll start taking my business away from them and moving to others (PayPal, Lending Club, etc.) who actually provide some value. The main reason most of us stay with BofA and similar institutions is simply because it’s hard to change banks; but if they start charging fees, they’ll see some of their smarter customers leave in a hurry.

  4. Sun |  Nov 29, 2010 at 2:15 pm

    While online banks are becoming more and more popular, traditional B&M banks will still exist because they are convenient for, for example, making a physical check deposit. Not everybody is using direct deposit yet. And even though you pay all your bills online, a savings account or money market account won’t work in that case because of the monthly withdrawal limits (up to 6 per month).