The End Of Free Checking
By David Dierking
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.
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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