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The End of Free Checking?

posted by Adam Levitin

The Wall Street Journal has a story that Bank of America is contemplating the end of free checking in response to the paring back of fee income due to regulatory reform.  Banks are undoubtedly already adapting to the past year's regulatory changes, and that means attempting to figure out where they can charge new fees or increase existing ones, without losing too many customers so that the net result of the fee structure shift would be a loss.  

Yet, I'm dubious that free checking will go the way of the dodo. Here's why:

First, no big bank wants to be the first mover on this.  There's reputational risk, and there's also the chance that ending free checking could lose money for the bank.  If so, you know which bank executive's head is going to roll.  

Now to be sure, there's far from perfect competition for deposit accounts in local markets, and direct deposit and automatic bill payment create a lot of lock-in which might mean that consumers would tolerate fees.  Indeed, there are lenty of consumers who currently pay monthly bank fees, and it might well be possible for banks to raise these fees without losing these relationships.  (It sure would be interesting to know how many consumers pay monthly fees, how much, and how frequently...) 

But consumers who are used to free checking are unlikely to take kindly to monthly maintenance fees (perhaps better to brand them as mysterious "regulatory recoupment fees").  I know I'd drop my bank in a heartbeat if they started to charge me a monthly fee, even in the $5 range.  And banks really don't like to lose checking deposits--they're interest-free loans to the bank.  

Also weighing against the lock-in of existing relationships, even ones that are tolerant of some level of fees, is that competition for deposits is changing.  It used to be about a combination of rates/fees and convenient brick-and-mortar presence, but the brick-and-mortar presences is increasingly less important, and the rates/fees predominate.   Electronic banking means that retail deposit markets are shifting from local to national.  For younger consumers, in particular, as long as there is no-fee ATM access, brick-and-mortar presence isn't very important.  Internet and telephone can handle most transactional needs.  (I'm always surprised how few people use safe-deposit boxes, which are the ultimate in brick-and-mortar-only operations, but this is just a matter of observation--the number of boxes per bank branch are quite limited). 

As the trend away from brick-and-mortar increases, it only takes a couple institutions offering free checking to push the market in that direction.  Credit unions were originally at the forefront of free checking, and given their mutual structure, they have the ability to accept reduced returns on assets in order to offer their members services like free checking.  Having mutuals in the market serves as a check on the for-profits if there sufficient competition.  The key question is whether there is.  

For what it's worth, Bank of America doesn't really offer a pure free checking account. You can see a list of their checking account offerings here.  The full list of fees is here, though.  While BoA is offering a "MyAccess" checking account with no monthly fee if opened on-line, this is a relatively new offering; if you don't open MyAccess checking on-line, there is a $8.95 maintenance fee unless you do either 1 direct deposit/month or maintain a balance of $1,500.  There's also a free student checking account, but you have to be a student to get it, and it's only good for 5 years.   

What BoA (like most banks) really offers is free checking contingent upon various transactional patterns.  BoA is likely to rejigger its transactional pattern triggers, but that's not the same as ending free-checking.  It's just further restricting it.  That's a story of degrees, not binaries, and it's one that's much harder to get worked up about.  


Perhaps this may be related to ending interchange fees, although I strongly disagree with adam in his support with retailers and special interests as well as the "Cry wolf" of the so called subsidizing of the poor when in reality its not true, he does make a point that interchange can stay the same while rewards and benefits to the consumer go down, for instance credit card companies have scaled back rewards significantly over the last few years (which gives further ammunition to the argument that its rich consumers with their rewards against poor people), what may have been 5% rewards may now be 2% and that may be in special cases and subject to limitations and caps, its not uncommon now to see under 1% in rewards.

A lot of banks are requiring direct deposit for free checking, I long though banks would love free and student checking since they didn't have to pay interest while offering the student or new user frequent withdrawal ability and flexibility. The bank however would be at times have the money in the bank on its balance sheet and could get interest from it without paying the consumer anything. Reduced revenue for credit unions may affect their ability to offer this product, having said that there are still free checking availability with quite a few banks.

I wonder if Adam is in favor of regulating checking fees, its a separate but linked issue to interchange and merchants, but checking fees can affect lower income consumers and the general economy if they are too high and market consolidation leaves few branches, no fee atm access can also be restricted.

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