Bank of America and  Other  Banks Looking to Eliminate Free Checking

Bank of America and Other Banks Looking to Eliminate Free Checking

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New regulations on overdraft fees and other bank practices have sent banks scrambling to find new sources of the revenue. The first victim may be the concept of free checking.

Starting in November of last year, the Federal Reserve and Congress enacted a series of reforms that radically altered how banks make money. The biggest change required customer consent before overdraft charges could be automatically levied on ATM and debit card transactions that overdrew an account. It was estimated that banks made $27 billion per year on overdraft fees alone. Credit card legislation and other proposed regulations will further erode banks service fee income.

The hit to bank's bottom lines are significant. Bank of America for instance, expects to forego $500 million in income in 2011 because of the discontinuation of its overdraft program.

Banks aren't going to just let this revenue and income go out the door. Baanks are scrambling to find other sources of revenue and many analysts believe free checking may be a casualty. Free checking won't exactly disappear but the threshold required to receive free checking will rise. According to the Wall Street Journal, Bank of America has ruled out a flat fee for all customers but is developing a tiered structure of fees based on a customer's deposit level and the number of products they hold with the bank. For example, someone with a largely dormant checking account that has only $500 in it might be assessed a monthly fee. A customer with an active checking account who also has their mortgage with Bank of America would most likely pay nothing.

And Bank of America is not the only bank headed in this direction. Fifth Third Bankcorp dropped its free checking account last year. TCF Financial, which built its business on free checking, has eliminated a totally free account and now requires a certain balance threshold to waive the minimum feee.

The Journal article also had some interesting stats. It costs a bank between $250 to $300 per year to maintain a checking account. Approximately 50% of a bank's accounts are unprofitable. I know from my banking days that the least profitable account was one that had low balances and high activity - think college students.

So what does this all mean for savers? Maintaining branches costs the banking industry $80 billion per year. That cost alone has to be recouped. Online banks do not have the expense. Banks also have to answer to their shareholders who expect a certain rate of return. Credit Unions do not have the same pressure to be profitable. Conclusion: both online banks and credit unions will offer better deals in the future and continue to grow in popularity.

The impact to low-income customers remains to be seen. While low income customers benefited from free checking accounts, the also didn't like the unpredictability of overdraft fees. For many, a modest service fee may be more economical and manageable than expensive overdraft charges.

The large banks will continue to attract consumers who want the convenience of an ATM at every corner, access via their iPhone, and the most up-to-date online banking.

The split between price and convenience that has already started to develop between the online banks/credit unions and the major banks is about to get more pronounced.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • StupidOne

    June 19, 2010

    It is happening already. My HSBC Free Checking account became a Choice Checking account which now requires $1500 in total assets to avoid the monthly fee. For the 'convenience' of customers, the fee is being waived through August (this was announced in February, so a 6 month reprieve). It is such a headache to change banks but I am thinking about it. I have ING Electric Checking but I still need paper checks on occasion. Anyone know of a National Bank that still has Free or relatively low cost checking?

  • Yurlane Q.

    August 13, 2011



    New fees affecting the bank customer? The nation's banks haven't been having the best time of things over the last couple of years. Granted, lots of the destruction has been self-inflicted. Financial institution charges are how they are making up for missing profits. Lots of incentives have also been going by the wayside. Here is the proof: Lean years resulting in more, tougher bank fees . Money is barren so that people and financial institution need to use in a more effective way and strategic plan for it to earn higher.

  • Pissed

    September 21, 2011

    I've been with my bank (Regions) for over 10 years, ever since they merged with Amsouth, the customer service has been going down hill. Not they want me to pay 19 for the total lack of customer service, and worse yet, I recieved notice today ( Sept 21 ) that the new fees will take effect on Oct 1. Sorry, but that IS NOT SUFFICENT NOTICE.

    My Advice, pull your money out of the banks before they gobble it all up in fees, It's cheaper and safer these days to bury it in a coffee can in the back yard.

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