When checking fees replace overdraft fees

By Felix Salmon
July 16, 2010
NYT has a look at the new sources of revenue that banks are turning to now that the financial reform bill has killed off (or will kill off) many of their old cash cows. From a consumer perspective, the new old thing is fees on checking accounts:

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The NYT has a look at the new sources of revenue that banks are turning to now that the financial reform bill has killed off (or will kill off) many of their old cash cows. From a consumer perspective, the new old thing is fees on checking accounts:

Free checking, a banking mainstay of the last decade, could soon go the way of free toasters for new account holders. Banks are already moving to make up the revenue they will lose on lower overdraft and debit card transaction charges by raising fees on other services.

Banks like Wells Fargo, Regions Financial of Alabama and Fifth Third of Ohio, for instance, recently began charging new customers a monthly maintenance fee of $2 to $15 a month — as much as $180 a year — on the most basic accounts. Even TCF Financial of Minnesota, whose marketing mantra championed “totally free checking,” started imposing fees this year in anticipation of the new rules.

To be sure, in many cases customers can escape the new checking account charges by maintaining a minimum balance or by using other banking services, like direct deposit for paychecks and signing up for a debit card.

Still, with checking account fees spreading, Bank of America rolled out a fee-free, bare-bones account on Wednesday, the eve of the Senate vote. The catch? To avoid any charges, customers must forgo using tellers at their local branch, use only Bank of America cash machines, and opt to receive only online statements.

I’d love to know whose account charges $15 per month — that’s a lot of money. But I don’t think it’s particularly fair to pick on BofA for being at the forefront of the monthly-fee trend. American Banker’s story on BofA’s new product, for instance, leads by saying that “Bank of America Corp. is charging some customers to receive their monthly statement in the mail, the industry’s most aggressive move yet to encourage paperless banking,” adding as context that “financial companies are eager to find new sources of recurring revenue.”

I’m more inclined to take the eBanking account, as it’s known, at face value for the time being. The marketing materials make it clear who it’s aimed at:

You’re always online and using ATMs – that’s how you manage your banking. Now Bank of America offers a checking account that helps you avoid the monthly maintenance fee just by doing what you already do.

In other words, if you never use tellers anyway, and you spend your life online, this could be a good product for you. Certainly that describes me and lots of people I know. If you sign up for an account called eBanking, then you’ve got to expect that it’ll be an online account which doesn’t include things like lining up at teller windows or carefully storing bank statements in a shoebox somewhere. (I would, however, hope that BofA allows instant access to the past 18 months’ worth of statements online: it’s incredibly annoying, when you have e-statements and you’re doing your taxes in April, to have to wait a certain number of hours or business days before the previous year’s statements are all available.)

Certainly there will be people at BofA thinking about rolling out these kind of fees more generally, for accounts which aren’t called eBanking. But I’m sure that all the other big banks are thinking along similar lines too, and it’s silly in any event to start prosecuting thought crimes.

Besides, monthly checking fees aren’t the end of the world. They were widespread and common as recently as my own arrival in the US, in the late 1990s, and their replacement with “free checking” was basically a nasty and invidious way of replacing a broadly-targeted fee with a much more narrowly-targeted set of charges on the people who could least afford it: those who regularly overdraw their account.

The real thing to be worried about, I think, is not the introduction of monthly fees per se, so much as any attempt by banks to use monthly fees to discourage large swathes of the population from banking with them at all. All big banks should have some kind of low-cost bare-bones checking product for people who aren’t always online and who don’t have $100 a year to spend on monthly fees. We don’t want the unbanked population to rise significantly as a result of the end of overdraft fees.

But I see no end to banks competing aggressively for customers, and that’s going to mean that for the time being, most Americans will be able to find a low-fee checking account nearby pretty easily. And, in general, fees which are up-front and clearly disclosed are much better for customers than overdraft fees and other ways of exploiting human psychology. They might even help banks become less hated.

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