Plain Money ideas

The end of free checking?

The traditional free checking account looks increasingly endangered. Many of us will start paying $48 to $132 per year for checking accounts that had been “free.”

Of course, we all know that “free” checking really isn’t free. But the traditional free checking account promised no monthly service charges, no per-check fees, and no debit card swipe fees if you would maintain a modest minimum balance. That’s the kind of account that is now endangered.

Why is it endangered? It seems to be an unintended side effect of regulation. I heard from a banking industry guy that it costs his bank $6 a month just to keep a checking account open. The bank would receive fees from a merchant every time the customer swiped a debit card. The revenue from this and other fees averaged way over $6 a month per account, so “free” checking was profitable for the bank.

Enter the Dodd-Frank financial reform law. It authorized reductions in various bank fees — but especially in debit card swipe fees. The bank will make less on those fees, but still incurs those costs for maintaining your account.

Banks are responding in different ways. Some are preparing to impose new monthly maintenance fees, generally between $4 and $11 per month. Others will charge for statements or impose new per-swipe fees on debit cards. Here are some suggestions for keeping your bank charges low:

  • Combine accounts where possible. If you have an extra checking account you rarely use, go ahead and close it. Sometimes you’re legally required to have funds in a separate account. And sometimes extra accounts are a good idea for couples. But a small-balance checking account will, under the new rules, lose value because of maintenance fees every month.
  • Opt for electronic statements. Many banks are beginning to charge for mailed statements. You can still print and save your electronic monthly statement — but be aware that some banks will charge you even for generating an electronic statement with pictures of the checks.
  • Seek out a bank that offers a better deal. This will often be a smaller or newer bank in your community. Here’s a bank, for example, that has no monthly service charge. It charges 50 cents per debit card swipe but waives the fee if you choose “credit card” at the checkout and sign your name. At many retail terminals, you have to swipe the card and hit “cancel” when it asks for your PIN to do this. And, whenever your swipe runs as “debit,” that’s 50 cents more coming out of your checking account.
  • Check mailings from your bank closely, even the back of the statement if you still get a paper one. The banks are implementing their fees under cheerful slogans such as “Bright Banking” or “Bank Your Way.” (What’s “bright” about more fees? Why is paying a new fee “my way”?) All the required disclosures are there, but you may miss them if you don’t pay attention.(That’s the practical advice. I have a few more points after the break.)

Just a few more notes about all this:

1. We economists are fond of saying “there’s no such thing as a free lunch.” Traditional free checking wasn’t really free, in that it was supported by invisible debit card fees paid by merchants to banks. Yet that wasn’t so bad, because it encouraged people to use debit card PIN transactions — and those made checkout lines move faster. There are lots of ways of shifting costs around, and the old method may look pretty good in retrospect, especially if a lot of people start writing paper checks again.

2. Another economist-type point. Some commentators imply that banks will raise monthly fees “to recover lost revenue.” Although they don’t quite say it, they imply that banks have a certain amount of profit they’ll always get. In this way of thinking, the banks will always get that profit one way or another.But it’s not so simple as that. If monthly fees would always have raised bank profits, then the banks would have implemented them without waiting for reduced swipe fees as an excuse. The point is: Under the old rules, monthly fees would not have raised bank profits, because competing banks could offer free checking and get profitable business away from their fee-minded rivals.The real cause is more subtle: with reduced swipe fees, regular free checking accounts are unprofitable. So competition can’t work in the same way. Under the new rules, a bank tacking on a monthly fee need not worry about losing customers to the bank down the street — because that bank won’t make money with free checking either.

3. I’m not bashing Dodd-Frank here. I’ll leave the overall evaluation of the law to others. On this one point, however, it’s not clear how it will all shake out. Even as banks get a worse deal on debit card swipes, the merchants get a better deal by paying a lower fee. Will those lower fees be passed along in lower prices? And, how will the banking changes settle out? Will competition keep monthly maintenance fees low? Or will the banks come up with bundles that allow many customers to avoid fees? It’s way too early to answer all these questions — but free checking and debit swipes, as they worked for years, may actually have been a pretty good way of sharing out the costs involved.

4. Did Congress adopt this particular part of the law to get back at banks for their role in the financial crisis? Did it envision higher monthly service charges for bank customers at the time, or did it think the reductions would be absorbed or shifted?