The days of free checking in its purest form -- no minimum balance required and no monthly service fees -- are numbered. A new federal regulation regarding a controversial method of covering overdraft transactions is expected to curtail the fees banks receive. Fees, banks say, that help pay for services associated with free checking accounts. To recoup their losses, most banks will impose rules on free checking aimed at wringing more profit from customer transactions.
The rule, which takes effect July 1, makes overdraft coverage an opt-in service. This rule affects an overdraft service that most checking account customers are automatically enrolled in, not the standard overdraft protection which requires your signature and is linked to a savings account, credit card or line of credit.
Banks that offer overdraft, or bounce, protection will send opt-in notices to customers explaining the service. Banks will not be allowed to charge a fee for paying an overdraft that occurs because of an ATM transaction or a one-time debit card transaction unless the customer agrees. The rule does not apply to overdrafts that occur through the use of checks or ACH transactions such as bill pay.
Changes could cost billionsThe Federal Reserve said it focused the rule on ATMs and debit card transactions because they have been "a key driver behind the growth in the volume and cost of overdraft fees," accounting for 41 percent of insufficient funds transactions, according to one study.
Hank Israel, director at Novantas, a New York-based consulting firm to the financial services industry, says changes to overdraft rules could cost the industry billions in fees.
"You look at banks that rely heavily on fee income and they cross the gamut -- and it's unfair to leave credit unions out of here, too. This is going to go across the board in terms of who's going to be impacted. What's really sad is that some of these community banks -- the ones that survived the credit crisis because of not having large commercial real estate portfolios -- may get hammered by this because that meant they were probably a more traditional consumer-focused bank."
Unfortunately, free checking is one product banks are targeting to pick up some of the slack.
"I don't think free checking will completely go away but I think we'll see innovation around free checking, and we'll see a lot more segmentation of checking accounts. We'll see some really creative products with fee structures attached to them," says Ken Patrick, senior vice president at Fiserv, a Brookfield, Wis., company that specializes in financial services technology.