Chart of the day, free checking edition

By Felix Salmon
August 30, 2011
American Banker runs this eye-opening chart today, showing what's happened to the availability of free checking over the past couple of years.

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American Banker runs this eye-opening chart today, showing what’s happened to the availability of free checking over the past couple of years. In a nutshell, at small and medium-sized banks, and at credit unions, things are little changed. It’s down a bit; it’s not down a lot. But America’s biggest banks, behaving in a pretty cartel-like manner, have nearly all abolished it in unison. Two years ago, 96% of them had free checking; now, only 35% do.

“Free checking”, of course, has always been a bit of a misnomer; as I wrote last year, checking is never free. It’s just that in recent years banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.

Still, for the time being, credit unions and smaller banks seem to be able to retain their free-checking services even as the big banks have abolished theirs. Some of this can be seen as a simple marketing expense:

Some community bankers see free checking as their latest opportunity to set themselves apart from the purportedly “Too Big to Fail” banks that have become lightning rods for public criticism since the financial crisis. The ultimate goal, of course, is to poach those big banks’ customers…

Marcus Schaefer, CEO of Truliant Federal Credit Union in Winston-Salem, N.C., calls free checking “an opportunity for us to have another way of differentiating ourselves from large financial institutions.” … he says the policy would change only as a last resort.

At heart, though, what we’re seeing here is the simple fact that there are no economies of scale in retail banking, once you get past a deposit base of a couple of billion dollars or so.

Big banks actually spend more on average to operate each deposit account than small banks, and they have long relied on overdraft fee income to help subsidize free checking. But a 2009 regulation restricted banks’ abilities to charge overdraft fees, which prompted the first wave of cutbacks in free checking.

Conversely, it costs less on average for smaller banks to operate checking accounts and they historically relied less on overdraft fee income, according to Moebs.

“Those that are in this huge bank group, they are truly beyond their economies of scale, and their expenses are usually high in processing areas,” he says.

In any case, I realize it’s now time for me to revisit the wager I offered Patrick Adams, the CEO of St Louis Community Credit Union, last year. Here’s what he wrote, about the Durbin Amendment:

Here’s another surefire lock of a bet. You will be more frustrated than ever. Your costs at the bank will be up. Your costs at the retailer will be up. You will be confused as to which retailers accept your debit card and which ones don’t. You will have no clue what the minimums and maximums of your debit card activity will be because there will be no consistency among retailers.

As a result, you will carry more cash and more checks… And, what about this double-dip possibility? You’ll use more checks at the check-out counter and the retailer will charge you a processing fee for doing it. (See, their handling of checks and cash are more expensive than debit cards.) You’ll pay for that, as well.

If this legislation is passed, I will mark my calendar to re-visit this issue a year after enactment. If I am wrong, I will eat the biggest piece of humble pie ever, including a public apology to everyone – starting with Senator Durbin. I must tell you that I’m extremely confident that an apology won’t be forthcoming.

It’s been over a year now since the Durbin Amendment was signed into law, and it’s time for Adams to re-visit this issue. Are his customers more frustrated than ever? Are their costs at the bank up? Are their costs at the retailer up? Are they confused as to which retailers accept their debit card and which ones don’t? Are they carrying more cash and more checks?

I offered Adams a specific wager — if he’s processing more checks per checking account today than he was at the time the legislation was passed, I said I’d donate $100 to his credit union. And I’ll honor my side of the bet, even though he didn’t formally agree to his side, and so I won’t expect a $100 check to come to Lower East Side People’s if he isn’t. So, Patrick, there’s a $100 bill lying on the table. Are you able to pick it up?

Update: Adams has replied, and we’ve agreed to push the bet back to July 2012, the one-year anniversary of when the Durbin rule was enacted, rather than just signed into law. The bet is on!


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I patronize a small bank and can’t imagine why your typical retail customer would do otherwise (unless they happen to prefer credit unions).

Changes? The interest offered on my free checking has dropped to practically zero, so I’ve been rather more aggressive about sweeping spare cash into my online savings account (despite very low interest rates there too). I continue to make weekly deposits at the counter, use little cash, and increasingly rely on a cash-back credit card for payments.

We’ve always refused debit cards. They scare me, as they offer only the weakest fraud protections. Check usage has dropped slightly as more businesses adopt web-based systems that can charge through Paypal.

Posted by TFF | Report as abusive

I am extremely optimistic that you have a winner here. In my experience, ever more stores are refusing checks, and fewer people seek to write them. Most utilities, credit card companies, etc. actively solicit on-line payment instead of checks. It is possible that the curve of debit card use has been bent, but I am confident that it is still rising, and paper checks declining.

Posted by kenjd | Report as abusive

You’ll probably still win the bet, but maybe wait until the Durbin Amendment has been in effect for a year. It only went into effect on July 21. So give old Patrick another 11 months to lay down his $100.

Posted by adambelz | Report as abusive

Felix “banks have been able to conjure the illusion of free through a system of regressive cross-subsidies, where the poor pay massive overdraft fees and thereby allow the rich to pay nothing.”

As a banker let me PROMISE you that the cross subsidies you refrence flow DOWN the income ladder not up! The “rich” pay the lions share of the cost of all checking services provided by U.S. banks.

If you want to crusade against evil overdraft fees which totaled 35 billion dollars in 2010, by all means sign me up. That’s real money sucked out of the pockets of people who can’t afford to waste it. Lets regulate the snot out of NSF fees!

Just don’t try and tell me that the rich get free services from the financial system. Total system wide deposits stand near 9TRILLION as of 6/30/11. Net interest margin stands around 3.5% so that’s ballpark 315 billion in net interest income. Allocate half that sum to the deposit and half that sum to the loan and we find that deposits generate something like 150 billion dollars in income per year for banks.

So to recap the “poor” defined as those who overdraw their accounts pay 35 billion per year towards the cost of the payments system.

Meanwhile the “rich” defined as those who have money pay 150 billion (by allowing banks to use their money nearly free of charge.)

The people who get a free ride are the ones who have an average checking balance of $1,000 and keep their accounts in good standing while having an average credit card balance of $1,000 but who pay the card off each month and so pay no interest on that $1,000 loan while at the same time receiving the benifit of a rewards program that kicks back 1% of spend.

The simple truth in banking is the poor pay a little, the rich pay a lot and the middle 70% get the free ride. (Well at least the ones who balance their checkbooks!)

Posted by y2kurtus | Report as abusive

While you’re on the topic of subsidies why don’t you tackle the fact that federal credit unions pay zero income taxes while banks do. Think that might result in a little extra cushion to give services away? Think taxing credit unions might pay for a few more services for the truly deprived? Especially since most now have as thier only membership criteria that you live in a particular area? I don’t like NSF fees either and I think they have been abused. However, they hit rich and poor alike. Plenty of poor people don’t overdraw thier accounts, plenty of rich people do. NSF fees target the careless, regardless of economic class. My grandmother has never had an NSF fee in her life. I’ve had plenty. And I’m a lot “richer” than her. And an awful lot of overdrawn accounts are charged off by banks. Isn’t it shocking that people who overdraw thier accounts walk away rather than pay for spending the money they didn’t have? Even if you take away the fees? Who would have thought it? Like I said NSF fees have been abused by the banks but let’s not overdo the poor poor people vs bad rich people talk.

Posted by larue65 | Report as abusive