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Open any newspaper and you'll probably find an ad touting free checking at a bank near you.

Bankrate.com's Fall 2001 Checking Account Pricing Study surveyed 1,276 accounts and found that the number of free checking accounts is at an all time high of 7.5 percent, up from 7.1 percent in the previous study.

"It's not that we've seen a massive jump," says Bankrate.com financial analyst Greg McBride. "A great deal of this has to do with marketing -- having a fee-friendly option for consumers.'

Defining 'free'
Fee friendly is fine, but what is the definition of "free?"

The 96 accounts that qualified as free in the Bankrate.com study met the criteria of no monthly service charge or per-item fees regardless of balance.

A per-item fee would be, for example, a charge for writing a check. Most institutions that impose such charges usually allow a customer to write, perhaps, 10 checks each month before the fee kicks in.

But free checking can mean different things to different institutions -- and consumers. If maintaining a minimum balance of $500 or writing fewer than 10 checks a month is fine with you, then the universe of free checking accounts becomes much larger.

Comerica Bank, based in Detroit, offers free checking if you meet one of three requirements: you're a homeowner, you're willing to direct deposit a payroll or government payment check, or you'll maintain a $500 minimum balance.

Bank of America's MyAccess checking account didn't qualify as free for the Bankrate.com study because unless a customer uses direct deposit for a payroll, Social Security or some other regular payment, there's a $5.95 monthly maintenance fee.

But Bank of America considers MyAccess a free checking account.

"MyAccess rolled out this past May. And it's done very well," says spokesman John Perkner. "It's definitely one of our highest growth accounts. This is the one with the least number of attachments in terms of getting free checking. We can help customers avoid fees altogether. The account allows us to get the relationship started and build it."

Big banks join the party
Free checking accounts are primarily the domain of small and regional financial institutions. While more of those institutions are offering free accounts, some larger companies such as Bank of America and Washington Mutual also have found it worthwhile to offer free accounts.

"I think you're seeing a little movement by some of the larger institutions in terms of introducing the product, but they're very careful in how this account is created," says Bankrate's McBride.

"It has to be something that generates new business walking through the door and minimizes the cannibalization of their fee income from other accounts. That's why with the Bank of America account you have to sign up for direct deposit."

First Union doesn't actually call its checking accounts free, but you can avoid fees if you follow "certain behaviors," says spokeswoman Mary Beth Novarro.

"We give customers two fundamental choices in avoiding monthly fees: maintain a certain balance or bank by phone or online using direct deposit and ATMs.

"Designing and pricing products is complicated," says Novarro. "Each bank has its own philosophy. We have two goals when creating any product. We want it to be part of a full set of products to meet customer needs throughout their life cycle -- a cradle-to-grave approach. And, we need it to be profitable for the bank."

Making up for low rates
Todd Davenport, a banking analyst with SNL Securities in Charlottesville, Va., says lower interest rates may be one reason for the increasing number of free checking accounts.

"Banks are acknowledging that at a certain point they can't lower the rates on deposits any further. If that's the case, what do you do to make your deposit accounts more attractive than the guy's next door? Do away with deposit fees. It effectively increases the annual percentage the customer is getting because they're not paying monthly fees."

National City Bank, headquartered in Cleveland and doing business in six states, is jumping into the free checking fray.

"This isn't a knee-jerk reaction or a sudden decision," according to spokesman William Eiler. "It's a customer enhancement we've been planning for several months. This is something customers told us they want and it's aimed at attracting and bringing in customers. It's a continual drive to be competitive, strategic and to make the customer an important part of our universe."

Cincinnati-based Fifth Third Bank didn't have a free checking account when it took over Dayton, Ohio's Citizen's Federal in 1998. Spokeswoman Stacie Yee says Citizen's had a free checking account that Fifth Third researched and decided to adopt.

"We instituted "Totally Free Checking" in 1999," says Yee. "It's our most popular account. Since its launch we've opened more than 600,000 accounts worth more than $682 million."

Yee says "Totally Free" has attracted at least twice as many customers as Fifth Third's previous account, which had fees but gave customers $50 for opening the account.

Upselling 'free-account' customers
Banking analyst Todd Davenport maintains that a free checking account can be a good way to get customers to try other products.

"It's not as important to get fees from your customers if you can turn them on to the insurance business you now own. Rather than trying to milk all they can out of customers on the deposit side, find other ways."

Apparently, it's a tactic that's worked at Fifth Third.

"Typically, these customers end up doing more business with us," says Yee. "We try to do a lot of cross-selling with the free checking account. Credit cards are pretty easy to cross-sell, and we like to have people have a loan with us. We'll market installment loans, such as car loans to them, mortgages, and if they have a son or daughter, we like to get their student account."

SNL's Davenport thinks that's a smarter way to do business.

"As someone who looks at bank income statements, a bank that attempts to meet its numbers by boosting fee income through deposit fees raises a red flag. The higher the deposit fees are, the more concerned I am that the bank is burning through its customers' good will."

Bankrate.com has created a chart listing the 96 checking accounts in our survey that qualified as free within our definition: no monthly service fees or per-item fees regardless of balance. If your definition is broader than that, you'll find a lot more checking accounts that can be considered free -- probably some in your own neighborhood.

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