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The Myth of the Disappearing Free Checking Account

posted by Adam Levitin

A regular trope sounded by opponents of consumer financial regulations is that the regulations have resulted in the disappearance of free checking. Whether it's the Durbin Interchange Amendment, the CFPB, or the Dodd-Frank Act in general, all are variously blamed for the supposed demise of free checking.  As it turns out, free checking is a little like Mark Twain--reports of its death have been greatly exaggerated.  Most Americans with bank accounts report paying nothing for their services.  The prevalance of such respondents has actually increased since 2010, from 53% to 61% of respondents. 

As an initial matter, what is called "free" checking isn't really "free."  Free usually means "free" assuming certain conditions are met, such as direct deposit, maximum number of transfers, minimum balance, etc.  This is because checking accounts are part of bundle of consumer financial services that can be priced in lots of ways. There can be an upfront fee and no additional fees or there can be no upfront fee and lots of additional, behaviorally contingent fees, and every variation in between. In this regard, the pricing of checking accounts is a lot like that of credit cards, where there can be an annual fee or not as well as various behaviorally contingent fees.  What the credit card industry learned a long time ago (thanks to Andrew Kahr) is that different types of fees have different salience to consumers.  Consumers are generally more adverse to inflexible upfront fees, like annual or monthly fees, and more receptive to behaviorally contingent fees...even if the total cost of using the product with behaviorally contingent fees is higher. We don't have to debate the behavioral economic explanation of this to accept its truth--just look at how credit cards are generally priced as market evidence.  The same is true for checking accounts. It's a lot easier to sell consumers on a "free" checking account, than on one with a fixed monthly fee.  

Once we understand that there's no such thing as "free" checking, then we recognize that changes in checking account pricing are really about how banks are shifting around pricing, but not necessarily about the total cost of financial services to consumers.  Instead, it is about changes in which behaviors are triggers for fees and the amount of those fees.  That, in turn, can affect the various cross-subsidies that exist among consumers, but it doesn't mean that total costs have risen, just that distributions might have changed (and in hard to see ways). 

That said, the evidence is that "free" checking has been increasing, rather than disappearing, as the opponents of sane financial regulation would have it. The chief evidence for the supposed disappearance of free checking comes from (no surprise), an unpublished paper by Todd Zywicki, Geoff Manne, and Julian Morris. I've previously criticized the paper as relying on really questionable evidence, namely BankRate.com's unscientific surveys.  BankRate surveys the largest banks and thrifts in 25 markets about the terms of two generic types of accounts.  That doesn't tell us about the prevalence of any sort of accounts consumers actually have at those banks, much less at other banks.  It doesn't tell us anything about the offerings available to consumers.  

But we don't need to rest on criticizing the data Zywicki et al. rely on. There's actually much better data that contradicts their findings. The American Bankers Association has been running an annual checking account survey for around two decades. Unlike BankRate.com, the ABA survey is based on a scientific polling of consumers (that is, there's a margin of error in the findings) about what they pay for their monthly bank services. While I have my own skepticism about consumer response surveys in general, the ABA surveys indicate that free checking is not only thriving in America (61% of consumers have such an account), but that it has been more prevalent since [Durbin, CFPB, Dodd-Frank, ObamaCare, other regulatory bugbear of your choice], up from 53%. In other words, if we accept the causal claim of financial regulations' critics, we would have to conclude that based on evidence from one of the main bank trade associations that the regulation has been a great success because more Americans enjoy free-checking. 

Truth be told, there are a lot of things that affect the pricing of financial services, and in the case of checking accounts, one can also point to the Fed's overdraft regulations in 2011 and compressed net interest margins as being just as likely culprits for changes in pricing. Ultimately, we don't know what is really driving pricing changes, and we don't have anything like reliable data on the terms of checking accounts. The best evidence we have says that "free" checking is more common than it used to be, but it's far from perfect evidence, and we don't really know what "free" means. All of this suggests that some humility and caution is in order when suggesting that we can determine the results of consumer finance regulations of the past few years. Unfortunately, in our age of truthiness, the facts in policy debates are too often what the advocates want them to be. 


Or, you can bypass the banksters entirely and do banking with a credit union ....

Yes for good credit unions (they are not all good, however). At one of mine there's no charge for checking and at the other there's no charge with a minimum $500 balance. I suppose each makes a bit of money from me because I have a credit card from each (because I don't want the banksters' credit cards even if I would get more money back) and a mortgage with one. But I never pay a fee.

From my white urban upper middle class perspective, it does seem like just about anyone ought to be able to find a bank at which they can enjoy fee-free checking, when you have banks that waive fees in exchange for having a regular direct deposit into the account, or even (as one bank where I live does) one deposit per month of any kind, or using some other product/service of the bank like a car loan, mortgage or IRA.

However, I have a feeling I don't know all the facts. Do government payments (Social Security, unemployment, SSI, etc.) qualify as fee-waiving direct deposits? How many employers do not offer direct deposit of paychecks? What about employers that pay in cash? (I suspect there are still some, even without counting "under the table" employment). Do rural areas and smaller communities with fewer banking choices for consumers offer accounts where lower income consumers can avoid fees?

Is there any data on truly free accounts without conditions? Any condition is really consideration for a fee waiver, and so not technically "free" - banks advertising conditional accounts as "free" can expect a nice UDAAP fine from their regulator.

But I do agree with the sentiment - just about anyone with a regular paycheck/direct deposit can qualify for a no cost account.

I am compelled to note that I am seeing a fairly typical form of upper-middle class arrogance here. Regular direct deposits are not available for large numbers of people who are self-employed (and if you don't think this is a growing group, you aren't paying attention to the job market), working on commission, doing day labor, or working for small businesses that aren't going to do electronic payrolls. And if you don't have automatic deposits, you certainly aren't going to approve automatic withdrawals. Credit unions have a bad habit of being located either at corporate headquarters or in picket-fence neighborhoods (The local exceptions are the two, biggest car lenders in the area and are quick do setoffs against accounts.). So yes, finding free checking can be problematic in the burgeoning, marginalized parts of our economy.

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