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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I don’t know if all banks are doing this, but 5/3 is offering the chance for customers to opt in to overdraft fees. They dress it up as a service, with at least two different pitches. One is that you’ll always have money to buy gas, even if you don’t. The other is that it’ll save you the *embarassment* of having your card declined in front of people, at $35 a pop.

Posted by drewbie | Report as abusive

I’d be willing to bet that they would be happy to offer older statements – for a fee. Just a guess.

Posted by ajw | Report as abusive

My guess is that this could lead to account consolidations for many Americans. Many banks and credit unions will waive these monthly fees if you have a certain dollar amount on deposit, or use a debit card or credit card. In short, they’ll waive the fee for those that use the institution as one of their primary financial institutions. Once consumers start to see their fees, they should rationally reconfigure their finances to move funds to banks or credit unions with low or no monthly fees. I’m not sure the effect will be all that great. Many of those smaller accounts are not all that profitable, as I understand it.

Posted by Ademanaonge | Report as abusive

Wells Fargo sent my mother a letter, which she showed to me. It said that it would now cost $360/year for the checking account that used to be free — unless — she maintains deposits of at least $100,000 with them.

A few days ago, Dick Bove, a prominent Wall Street analyst, said that 10 million Americans will lose their banking services because they can no longer afford them, as a consequence of this bill.

Thanks, Congress!

This is a perfect example of how government hurts more people than it helps!

Posted by sbenard | Report as abusive

Does Felix is still believes that the pre fin-reg system subsidized the poor and the new system will exclude them?

This article notes that the poor may not have access to the internet. Having worked with poor communities, I can tell you that this is not the case. Many get access via the library, coffee shops, their phones, friend’s homes, etc. The fact is that getting free access is easy, but having home access is a small luxury.

Pre fin-reg, I have seen clients, who are not financially savvy, get ROBBED by their banks. I am quite happy that the bill will remove many of these excessive fees.

Overall, we should be happy that the recent banks offerings suggest that they are going to support ebanking. There is no reason for a bank to even have a physical presence. Commercial banking, especially checking, is supposed to be a boring, boring business. All indications suggest that the fin-reg bill means lower costs for the poor and the wealthier clients.

Posted by Brutus5000bc | Report as abusive

felix, there is no chance that banks will ever become less hated. Their businesses to maximize profits must treat retail clients as tenants whose rents shall be raised to the maximum the market will bear.

sbenard, that’s not Congress, that’s maximizing profit as above. WFC has decided, rightly it would appear, that your mother is unsophisticated. Unsophisticated clients get gouged the most. I haven’t read Bove’s analysis here, but if it resembles yours, it’s just as wrong.

Posted by wcw | Report as abusive

sbenard, perhaps your mom doesn’t NEED all those fancy features that come with Wells Fargo’s Premium Account? And even for that, it requires just a $25,000 balance not $100,000, for banking services. Unless she is taking advantage of that no-custodial-fee full service IRA?

If all she wants is basic banking, then keep a $1000 minimum balance and she can get free checking as always. If she is doing something more complicated, she ought to either keep enough money in the account that it isn’t a waste of time for all parties involved or she should switch to an institution with a cheaper cost structure.

I disagree with wow, they aren’t trying to take advantage of the unsophisticated. Your mother is in their PREMIUM product, for those with complicated needs. That’s expensive for them to maintain.

Posted by TFF | Report as abusive

Might this portend ways for financial institutions like credit unions to compete more for this segment of the population?

Posted by norge3 | Report as abusive

Exactly, norge3. I bank at a small community bank with simple products and low fees. I’ve always been suspicious of the “relationship banking” packages pushed by the larger banks, and even after you qualify for those packages you don’t get better rates or better service than the community bank offers.

Of course I have to keep my brokerage accounts at a different institution than my bank accounts, but that isn’t so terrible.

Posted by TFF | Report as abusive

It’s not like money belongs to people, is it? The best way to rob a major bank is to own one.

Posted by HBC | Report as abusive