Banks Move to Eliminate Free Checking

Yahoo Finance posted an article over the weekend pointing to an end of the free checking accounts that we have all come to know and love.

In response to the Credit CARD Act of 2009 that will went into effect in February of this year, along with the new limits on credit card fees, banks have been scrambling to make up for the lost revenue.

The new regulations on interest rate increases, late payment fees, multiple fees on a single item, and the fact that bank account holders will have to “opt-in” to overdraft charges, will mean a significant loss of revenue for most banks.

The specific case of Bank of America was taken into consideration:

But Bank of America has decided to drop most of its [overdraft] program altogether. The nation’s largest bank, as measured by assets, said largely because of recent changes to its overdraft policy, it will forgo $600 million in revenue this year.

Bank of America makes 12% of it’s core revenue from service charges (according to Sandler Oneill + Partners), which means that these new regulations will have a large effect on their profits. They are not the biggest losers here, City Holding Co actually makes 28% of it’s core revenue from service charges – we can only imagine the changes coming to it’s customers!

According to the article, free checking accounts are not free to the banks:

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

They were able to offset these costs by charging various fees and service charges. Now with much of that eliminated or severely limited, banks are now looking for new ways to make a profit:

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

Many customers who now enjoy free checking will now be forced to pay a monthly fee in order to keep their accounts. One way to avoid these fees will be to utilize other services from the bank.

Since free checking is a large reason why many low income households have moved from using check cashing establishments to having bank accounts, this may have terrible consequences for many – especially those who do not make banking safely a priority! This may work to make the income disparity in this country grow at an even faster rate.

Paying $10 – $20 per month will seem pointless for many who simply deposit their paychecks and pay only a few bills from their account. They will probably move back to using check cashing stores and paying bills with money orders. This has the potential to make budgeting a nightmare (without an electronic trail of income and expenses), and can be detrimental to the finances of many households!

However, since these low-income households are not profitable to the banks, they are not motivated to keep them as customers and find other ways to replace lost revenue. To those customers I would say, if you are eligible (and most people are) for a credit union, it may be time to ditch your bank for one! Also, I would recommend that you take a look at some of the best cash investment options around.

So, what do you think about banks charging for even basic checking accounts? Some say that since banks are paying such low interest on savings accounts, they don’t need the additional fees from checking accounts – do you agree?

Do you currently enjoy free checking? Will you leave your bank if they levy a fee on your account?

photo credit: Hello Turkey Toe