Comments on: Interchange and free checking A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: PunditusMaximus Sat, 19 Jun 2010 22:41:04 +0000 This seems like a problem with a fairly easy solution — since we’re all better off when households have access to basic financial markets, the government should simply subsidize checking under certain circumstances.

By: bff426 Sat, 19 Jun 2010 16:05:27 +0000 I have to agree with wow, the number of $300 a year per checking account is vastly inflated. Use the example that Felix cites in the article– a small (no economies of scale) credit union with 25,000 debit cards has cost of $521,000 a year. That’s $20.84 per card. Checking accounts are similar.

My calculations show the industry is saying checking accounts cost them $60 billion a year. I just don’t believe it. I’ll bet the branch network is included in that.

The incremental cost of adding checking accounts to already existing infrastructure is probably on the order of $20 a year. At that price, using Felix’s numbers, they’re making $50 a year per account.

Felix, why don’t you ask them for an accounting of their numbers.

By: BryceCovert Fri, 18 Jun 2010 19:05:07 +0000 Further reading: check out Mike Konczal’s reaction to this. Key quote: “The rich pay more or less the same in fees as the poor, but the poor are more likely to pay them.” so-called-death-of-free-checking-12856/

By: HBC Fri, 18 Jun 2010 18:43:25 +0000 The dark side of “free checking” as it now stands includes, among other indignities, having to pay a major bank (depending on which one) $5-$15 in immediate fees to them just for cashing any of their account holder’s checks. Can’t see them reversing this even if they start gouging their own customers for monthly maintenance.

Having a “free” checking account with most major banks these days is just the launch pad for a whole raft of other potential back-end costs. On top of which you’re supposed to feel sorry for them not making enough money to cover their gambling debts. You pay them to make better excuses, but they keep on recycling the same old tired ones.

Most American banks are like bad brothels into which go only the most desperate of customers. If they cared about customer service any one of the majors could, at any time, break ranks and start operating absolutely transparently, such that customers might make fully advised choices at all times, not just after getting hit on the head with supplementary fees. Chances of this actually happening? Not terrific.

By: MattJ Fri, 18 Jun 2010 17:36:31 +0000 TRK-

Executive comp and compliance are static costs; I assume they are not increased by an additional small free checking account. Wow is getting at the marginal costs of an additional account. I have seen free checking account that require direct deposit and charge for counter transactions; it’s hard for me to see how the marginal cost of that account can approach $300/year.

By: vk9141 Fri, 18 Jun 2010 15:17:09 +0000 I’ve just moved to the US from the UK.

Ok in the UK we have some pretty egregious overdraft charges from time to time but basic services are far better than the US and almost always free (free ATM at any bank not just your own, online instant transfers to any domestic payee account, direct debit for almost every possible payment, more security thanks to chip and pin etc).

Is it just US institutions are much more inefficient? I laugh when I see people over here using checks, nobody uses them back home, and the chase online banking is laughable.

By: Brutus123 Fri, 18 Jun 2010 14:08:55 +0000 Felix – like healthcare, the REAL problem is that this is an industry where the economic actor does not have the proper incentives.

Historically, banks were an important part of the economy in that they separated good loans from bad loans. However, with the advent of standardization (credit scores, Fannie/Freddie), this role has greatly diminished. So, we have to ask: What do most banks do today? What is their business model?

In short, it is just a place where we store our cash. It’s like a parking lot. We choose our parking lots based the easy of access, cost, service, and security. However, we don’t choose our banks this way.

Sure, under the current conditions the rich may be subsidizing the poor. However, if we removed the arcane system of hidden fees, I expect to see the rise of Walmart style banking which will be cheap for both rich and poor. A checking account should not cost $300 a year, but if you have as many bank store fronts as Starbucks, I guess it does. At the moment, Chase can offer free checking so there is no point for consumers to move to a cheap online bank that understands operational efficiency.

If the bill is properly constructed and passed, I don’t expect it to be the end of free checking. But I do suspect that your corner bank, with the granite lobby, air conditioned offices, and friendly, and well-paid management to go away.

By: y2kurtus Fri, 18 Jun 2010 13:56:36 +0000 Hi Felix,

This is your best article yet on the economics of debit / credit and interchange fees and the relitive impact on merchants and lower vs upper income consumers.

You will lose the bet with Adams though. At most small and medium sized banks (like mine) the interchange fees and interest income of the top 20% of customers reduce the cost of checking to zero for all our customers (who don’t overdraw their accoutns.)

If a hard working low income consumer earns $20,000 a year and spends every penny via a debit card paying the 1.3% interchange quoted in your article it is safe to assume that the merchants inflated the cost of goods and serices to the tune of $260… so that’s the “hidden cost” of their free checking account.

Now compare that to the person making 5 times as much… well they paid $1,300 for the same checking account.

Community banks like mine unquestionably benifit the little guy at the expence of the big guy. The best part is that the big guy doesen’t even grip about it because almost all our big fish started out as little fish at one point and they were glad to get their free checking accounts from us then.

Keep up the great writing but please don’t advocate for the death of free checking… the working poor at your credit union can’t afford “not-free” checking!

By: TRKAdvisors Fri, 18 Jun 2010 00:05:23 +0000 To wow: Executive Comp (plus, increasingly, compliance). Goldman’s checking accounts cost $1.2 million each in expenses.

Cynic: Thanks for the thinking, that’s why I like this venue.

By: wcw Thu, 17 Jun 2010 19:33:33 +0000 How can it possibly cost a bank $300 to provide my checking account? It gets deposists from my employer via ACH, which scales and hence costs roughly $0. It sends money hither and thither, also via ACH, still $0. It generates a PDF statement and emails me once a month, which scales, and costs $0. It covers debits via interchange, which as we know has negative cost.

Where are the $30/month costs?