Fees can drain your bank accounts,
but there are ways to plug the leaks
By Michael D. Larson • Bankrate.com

For bank customers, it may not be the worst of times. But it's sure not the best of times either.

Let's just call it the "so-so" era of banking.

Brick-and-mortar institutions continue to gouge their interest checking account holders with high fees and onerous requirements while giving them little in return, according to Bankrate.com's fifth semiannual Checking Account Pricing Study. But the nationwide survey of more than 1,200 accounts also shows that non-interest customers are faring pretty well since banks have left their fees and minimums alone.

Even better, banks have left a few loopholes open with their pricing -- whether they meant to or not. Consumers who take the time to review the data collected on monthly service fees, opening deposit minimums, ATM surcharges, overdraft protection and more might be able to use it to dodge the vultur ... er ... bankers circling overhead.

"Interest checking accounts may cost you more than you can ever earn in interest," wrote Bankrate.com financial analyst Greg McBride. But "by shopping around, the consumer can duck the rising fees and more efficiently use their hard-earned dollars.

Rising fees
It might just be the understatement of the century to say that the cost of banking has risen lately.

Lenders routinely charge consumers $20 fees to get mortgage amortization schedules they can easily compute for free online. Credit card companies whack borrowers with $29 fees for being a day late on their payments, then hit them with more fees when the charge pushes them over their credit limits. Some banks go so far as to charge $3 for saying "Hi" to their tellers. All told, these junk fees pad bank profits while offering consumers nothing in return.

But while there are plenty of evil bank charges, accounts and practices out there, there are also ways to avoid them. Some banks are even playing nice, lowering certain fees and leaving others alone, according to Bankrate.com's latest study. It covers 1,215 accounts offered by 353 institutions, which were chosen because they are the largest banks and thrifts in each of the 35 largest U.S. markets.

First, the bad news: interest checking accounts continue to degenerate into the worst banking product available, period.

The average yield on interest checking accounts has hardly budged in months and, at 1.17 percent, remains below the 1.33 percent found by researchers two years ago. Since the October 1998 survey, the percentage of accounts yielding less than 1 percent has risen dramatically, too. Some 18 percent of accounts surveyed fell into that category, up from just 5 percent back then.

This has occurred despite several interest rate hikes from the Federal Reserve Board, suggesting banks see little reason to pass the benefit of higher interest rates on to their checking account customers.

Part of the problem is that banks have long-term loans outstanding that they made when rates were low. Those tend to stay on the books for a long time and many have fixed rates that can't be changed. Deposits, on the other hand, usually have shorter terms or fluctuating rates. Savings deposit rates change all the time, for instance, while many certificates of deposit mature in five years or less.

When the Fed raises rates, banks have to pay more to depositors with maturing CDs in order to retain them and boost other savings rates, all while collecting loan interest at the same old low rates. To keep this dilemma from destroying profits, some leave their checking rates low.

"The focus has to be on bank profit margins," says Ken Mayland, president of ClearView Economics, LLC in Pepper Pike, Ohio. "In rising rate environments, bank profit margins frequently contract and so banks look to wherever they can to at least defend their profit margins. This is obviously one area.

"Deposits and loans and investments are always turning over. There's always some turnover of these assets and liabilities," he adds. "But the rates at which they turn over are not equal. Typically the deposits turnover or reprice faster than the loans and investments."

And the costs keep climbing
At the same time, average monthly service fees on interest accounts have climbed almost 9 percent in the past two years -- to $10.43 from $9.59. Most institutions don't charge per-item fees, thankfully. But the ones that do are allowing customers to write fewer checks, make fewer teller deposits and otherwise transact business before wielding the axe. The average number of free transactions permitted now sits at 16, down from 21 six months ago.

And while the average threshold to avoid fees for interest accounts has come down a bit in the past year, it's still over $2,200. Part of the decline is attributable to the way the survey is conducted. As more banks charge regardless of balance, it brings down the apparent average even though more consumers actually are paying fees.

That means a middle-class consumer who might keep $2,000 in checking over the course of a year will earn $23 in interest on average and pay about $125 in fees to do so.

Non-interest bearing accounts, on the other hand, haven't changed much over the past few surveys. They still remain the best bet for consumers who aren't comfortable banking online but who want a convenient, cheap way to manage their day-to-day expenses and savings.

The average monthly fee on the accounts, at $6.18, is much lower than on interest-bearing accounts and it's also virtually unchanged from two years ago. About two-thirds of the accounts don't charge per-item fees either and the minimum to avoid fees fell to $416.57 -- the lowest level since October 1998.

"The incentive for the consumer is to find a checking account that costs them nothing and has no minimum balance requirement," McBride wrote.

With all accounts, however, the cost of laziness and screwing up continues to escalate. That's because banks have jacked up bounced-check, or NSF, fees and ATM surcharges consistently over the past couple years. The NSF fee average hit $23.87 in the most recent survey, up about 10 percent in two years.

Mellon Bank took home the gold medal in the 100-meter fee gouge, charging the highest NSF penalty Bankrate.com has ever found -- $35 in the Pittsburgh and Philadelphia markets.

Service charges up, too
As for ATMs, almost 90 percent of the institutions polled now tack surcharges onto transactions by non-account holders. That compares with around 67 percent two years ago.

The average surcharge hit $1.43, up 10 cents from back then, too, while the percentage of banks and thrifts charging $1.50 or more climbed to 65 percent from 41 percent.

But that's not all. Customers' own banks are increasingly charging them for using "foreign" ATMs. Only 8 percent of the institutions surveyed don't charge these fees, down from almost 12 percent a year and a half ago.

The average fee has inched up to $1.35 as well.

"Banks would say, 'Hey look. Banking is a service and it's a service that costs,'" Mayland says.

"It costs the bank when you walk up to the counter and take out money or put in a deposit. It's a cost to the bank to have a network of ATMs that you can use to tap your deposits. This is a considerable and important service."

Forget ATM, say POS
There is some good news, though. An increasing number of banks and thrifts don't charge customers for using their ATM cards in point-of-sale transactions (POS). Some 83 percent let people do it for free now, up from 73 percent two years ago. As a result, customers who need access to their cash 1,000 miles from home can just buy a pack of bubble gum at the nearest grocery store and get $20 back free.

Since 95 percent of the interest-bearing accounts and 96 percent of the non-interest ones studied offer overdraft protection, most consumers have an easy way to dodge NSF fees, too.

Just because banks are jacking up fees, consumers aren't necessarily paying more, says an industry trade group representative. The American Bankers Association released a study in late July saying that 46 percent of consumers polled indicated they paid nothing for banking services. An additional 13 percent pay $3 or less a month and only 9 percent pay $10 or more, according to spokesman John Hall.

"I think you're making an assumption that people are paying those fees and our survey really shows they don't," he says. "here are a multitude of ways to avoid these fees and consumers are doing just that."

With each survey, however, banks seem to be making it harder and harder.

"Finding that free checking account requires more effort than in years past," wrote McBride.

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--Posted: Oct. 2, 2000