Free checking: Make sure it's really free

Free checking accounts have been around for decades, but like Elvis sightings, their popularity comes and goes. Right now they're hot, hot, hot!

The 2004 Community Bank Competitiveness Survey published by the ABA Banking Journal asked bankers if they had noticed an upsurge in local competitors offering free checking in the past year. Nearly 61 percent said yes -- a 40-percent increase over the 2003 survey.

"Free checking is not only a necessity, it's almost insulting to the customer if you don't offer it," says Frank Trotter, CEO at EverBank. "Checking is the centerpiece of your financial life. Free checking is required in the market today whether it's a traditional bank or a direct bank."

Serves the bank's interests, too
Free checking can be an aggressive way for banks to increase their customer base and to find a cheap source of funding, according to Steve Cocheo, executive editor at ABA Banking Journal. Once a bank snares you with a checking account, the next step is to cross-sell you -- encourage you to take out a personal loan, a mortgage, credit card or, perhaps, use its investment services. But when bankers in the ABA survey were asked to speculate on why they were seeing an upsurge in free checking, the No. 1 answer was to generate a base for fee income.

"It's the 'free checking, let's make money' era," says Michael Moebs, president of Moebs Services, an economic research firm. "For the vast majority of consumers, financial services is way down on their list of things they want to do on a day-to-day basis, and they can be misled."

Consumers need to realize that "free" may not always be free. The federal Truth in Savings Act requires that a "free account" have no minimum balance requirement and no maintenance or activity fees. A maintenance fee might be a monthly service charge, while an activity fee could be a charge for writing more than a specified number of checks in a month.

But that doesn't mean there can't be other fees.

"Most consumers think their checking account is free, but they're doing something for it to be free -- maintaining a balance or paying something. A very small percentage actually has totally free checking," says Genie Driskill of Atlanta-based Synergistics Research Corp.

Some fees considered OK
There are plenty of "legitimate" fees that can be charged in conjunction with a free checking account. Fees for nonsufficient funds, balance inquiries, stop payments, check printing, dormancy and closing the account early are just a few examples.

But some fees surprise consumers. Many banks include a debit card with free checking accounts. More and more people are finding out that their banks charge a fee every time they swipe their cards at a cash register.

Another popular service that's being automatically included with many free accounts is fee-based overdraft protection. These programs charge a flat fee when an account is overdrawn. Federal regulators are examining the fees that, in some cases, have been pegged by consumer advocates as exorbitant. The ABA survey shows that 40 percent of banks offer fee-based overdraft protection and that 75 percent of those banks provide it automatically. Oddly, nearly half the banks that offer the service won't allow employees to use it.


Requirements that might disqualify an account from strictly fitting the definition of free checking aren't necessarily bad.

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