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"Free" Checking

posted by Katie Porter

With banks under pressure from the CARD Act's regulation of fees and the pending implementation of price limits on interchange fees under the Durbin amendment to Dodd-Frank, the scary tales are periodically resurfacing about how government is about to cause the death of "free checking," this great perk that consumers have enjoyed at the bank's largesse in recent years. As Adam Levitin wrote here at Credit Slips several months ago, free checking is often far from free. Adam focuses on the kinds of behavior requirements to obtain a free account, like maintaining a certain balance and having direct deposit.

There is another way to evaluate the prevalence of "free checking," which is to look at service charges on deposit accounts. The GAO concluded in a 2008 report on Bank Fees that banks  service charges on deposit accounts as a percentage of total income "increased overall during the period [2000 to 2006) with a slight decline in recent years." If free checking were really free, then we would have expected a sharp drop in services charges on deposit accounts. Yet even well before the financial crisis and the regulatory "horribles" of overdraft fee regulation, debit interchange regulation, and the mere existence of the Consumer Financial Protection Bureau that supposedly will be the death of free checking, deposit accounts were far from free. Consumers paid banks lots of money on deposit accounts even in the good ol' days when they were offering "free checking" to large swaths of Americans.

A study of "relatively financially sophisticated" consumers in 2006 and 2007 by Victor Stango and Jonathan Zinman found that 31% of consumers paid zero deposit account fees. Among the 69% who paid fees, the median paid was $4.83; at the 75th percentile; consumers paid $14.75. This included overdraft fees, ATM fees, monthly account fees, and transfer fees. I bet these numbers would look much higher for a representative cross-section of Americans who were not, as Zinman and Stango explain, more educated, more wealthy, and more technologically-savvy. I think gathering and publishing these data would be a great project for the FDIC's or the Consumer Financial Protection Bureau's research divisions. The public and policymakers cannot evaluate claims that we will lose the benefit of free checking without knowing the extent to which Americans really get free checking today. In reality, a minority of Americans has ever had free checking. Put another way,there is a big difference between an account that is marketed as free and whether a consumer actually pays any dollars in a given month for using a deposit account.

p.s. Perhaps my problem is definitional. I recently saw an advertisement that something was "absolutely free." Hhhmm . . . I had thought "free" was like "pregnant"; no such thing as a "little bit free". You are either are paying (not free) or you are paying (free). Now I'm wondering if I am being ripped off if I am not getting "absolutely free" things.  


I agree and i believe that there should be more enactments in the law removing service charges to great extent also.

Your comments about "absolutely free" remind me that for years and years, promotional advertising has included the phrase "free gift."

Freedom isn't free. Freedom costs a buck o five.
-Trey Parker & Matt Stone

You cannot hamstring fees in one area and not expect that banks (or any business for that matter) will not try to make it up somewhere else.

I've noticed all kinds of new nickel & dime fees. What makes them insidious is that they are relatively small and easy to overlook if you don't look at your statement's closely.

I work in the mortgage business and the Fed's new rule on loan officer compensation has raised rates and prices to ALL consumers across the board. It attempts to prevent a small minority of consumers from being taken to the cleaners by forcing banks to take ALL consumers to the cleaners. I am actually surprised this hasn't been discussed on this board given Ms. Warren's history with the mortgage industry.

That's the point. Banks are businesses, and gotta make money. The question is whether they make money out of everybody, or just make money out of their weakest customers.

I'm a strong customer, with excellent financial hygiene. I get free credit cards. Really free--I don't pay interest or fees, and get a month float and free use of a high-tech payment system and fraud protection and brownie points and the whole nine yards. It's wonderful!

Somebody is paying for this, and it ain't the bank. To some extent, it is the merchant. But it's really some poor schlub on the credit card treadmill who can't file for bankruptcy because the banks have made it too expensive.

That ain't right. As with taxes, I'm willing to pay more, but only if they make me. I'm not willing to make gift contributions to banks.

U.S. PIRG released a report on bank fees and fee disclosure policies (and violations of disclosure laws) yesterday http://bit.ly/eRFHAv We make a number of recommendations to the CFPB. We did find widespread availability of free checking accounts, although often these are free checking-lite-newest common fees appear to be to receive check images in statements or receive paper statements at all. Rules are getting tougher to get free checking by getting direct deposit.

The quip about pregnancy reminds me of a recently deceased Oklahoma Supreme Court Justice I had for class in law school.

He used to rail about "partial summary judgments" that lawyers would file, and I agree, they make no sense. He would liken them to pregnancy, and yell "You can't be partially pregnant, and there is no such thing as a partial summary judgment!" He was a great man and will be sorely missed.

I don't get it. As your definitional quip suggests, no banking relationship is "free" if you don't follow certain parameters set up for your account. Bounce a check - you're going to pay a fee. Make a foreign ATM withdrawal - you're likely to pay a fee, regardless of how "free" your account is otherwise.

I would take the bankers' point on this to be the following - as you squeeze the balloon in certain places, be it interchange fees, overdraft fees, or whatever, things will give in other places. "Free checking" may truly be a fiction, but it's nonetheless possible that account terms will get worse as the balloon gets squeezed. The direction of the movement, rather than the starting point, is the key (although the fiction of "free checking" does give the bankers at least a good starting point for their scary tales). And some people, who otherwise could largely avoid fees if they behaved in certain ways, may find it difficult, if not impossible, to do so when their account terms change for the worse.

This post and discussion seems to be about three points:

First, account holders may face fees for certain actions. You don't say! What's more interesting is whether one can actually hold an account, but also avoid any fees through certain types of behavior. And then how difficult it is to behave in the necessary way.

Second, account fees are complex, and may become more so. Again, however, the important point is the direction of these movements being spurred by the regulatory changes rather than the initial conditions. Account fees may be complex, but if policy changes are causing them to become more complex, at least in certain dimensions, how should we evaluate those policy changes?

Finally, unsophisticated and less affluent individuals tend to face worse terms for their accounts. Legitimate economic reasons may drive such discrepancies, but even if it's just third-degree price discrimination, I'm not sure that it's a surprise or a scandal. And again, it doesn't alter the fact that the rule changes may cause even greater discrepancies. While poor, ignorant overdrafters may have subsidized affluent, sophisticated folks in the past, the new rules might cause the banks to simply cut off those violators altogether.

Ultimately, I think that the "free checking" straw man is just that, a straw man. What's important is the direction in which things are moving, not where they started. And it would seem that many of the new rules are moving things in a way that disadvantages many bank account holders - perhaps, in the case of interchange fees, in favor of merchants or the extreme unbanked - regardless of where they started out.

It is very sad to see that many large banks are ending their free checking accounts. Many people are still unemployed and the new checking fees just seem out of place due to the current state of the economy.

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