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Banks losing big on free checking

By Claes Bell ·
Wednesday, December 14, 2011
Posted: 11 am ET

According to one banking industry analyst, on average, banks are losing money on free checking accounts, and are predictably unsuccessful at making it up in volume. From Victoria Finkle at American Banker:

The average checking account cost banks $349 in 2011, says Mike Moebs of Moebs Services Inc., a research firm. But the average revenue per account is just $268, implying a loss of $81.

That equation helps explain the thinking behind some of the recent, highly-controversial steps banks have taken to raise the prices their customers pay for checking accounts.

"Banking is a subsidized business," says Hank Israel, a partner at New York-based consulting firm Novantas LLC, pointing to the fact that the profitable accounts balance out those accounts maintained at a loss. "When the plane flies full, coach covers the whole cost and first class is the profit," Israel says.

But thanks to new regulations, including the Durbin amendment in the Dodd-Frank Act, which caps fees on debit interchange, the number of profitable customers is falling. Those fee caps, which went into effect on Oct. 1, are expected to eliminate more than $5 billion in annual bank revenues.

As Finkle notes, numbers like these speak to why we saw banks try to introduce debit card fees a few months ago. If you look at a typical debit card fee, it would have added up to about $60 a year in extra revenue per customer for banks, bringing them much closer to that critical break-even number.

But if you're wondering why it was large national banks that socked customers with debit-card fees and not a local bank or credit union, here's the other key stat from the article:

For the largest banks with assets greater than $50 billion, the average checking account costs between $350 and $450 a year, according to Moebs. Overhead, or the institutional costs not associated with a specific division or service, is what weighs down some of the largest banks, making it more difficult to cut costs, he says.

But he adds that for some of the smaller banks with less than $5 billion in assets, the costs are much lower — around $175 to $250 a year.

I've been skeptical in the past about Moebs' contention that costs per checking account at big banks are higher than those at smaller banks, mostly because it seems really counterintuitive that large banks wouldn't benefit from economies of scale.

But if Moebs has it right, when you add that to  the $10 billion-and-under exemption for Durbin's debit card swipe-fee caps, it goes a long way toward explaining why small banks have remained really comfortable offering free checking, and large banks haven't.

If big banks are really paying more than small banks to maintain customers' checking accounts, that's really bad. Big banks have the edge in technology and infrastructure, and that, combined with the scale they operate at, should make it much cheaper for them to keep a checking account going.

Fact is, if the average revenue from a checking account is $268 and a big bank is paying $450 a month to keep an account going, it's going to take an additional monthly fee of $15 from every checking accountholder to close the gap, which seems much higher than what most people are willing to pay for a checking account right now.

It seems clear fees aren't going to make checking divisions break even by themselves; it's going to take some serious changes in the way big banks do business, including massive cost cuts, to get there.

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eric g
January 17, 2012 at 5:27 pm

I can't believe the numbers thrown out here.

Why does it cost so much to maintain a stupid checking account? Software fees?

I'll be waiting to see which banks drop checking accounts.

Jane Epperts
January 17, 2012 at 3:02 pm

Even with so called free-checking, the banks make money by using the money I store with them via investing it, earning interest on it, loaning it out to others, etc. So while the checking is in theory "free" for me, the bank is putting my money to work and earning money. The issue here is corporate greed not do banks provide a necessary service that we should pay them for (we already do).

January 17, 2012 at 1:00 pm

You receive a service that includeds tellers, ATMs, 24-hr customer service, interest (in some cases), discounts on checks, currency exchanges, coin ordering, and general financial advise. Why shouldn't you pay something? People need to get over this notion that they should receive everything for free no matter what. Banks are doing a huge service to this country and if they fail we'll all be in big trouble.

Jane Epperts
January 16, 2012 at 10:25 pm

Why has published a banking industry PR puff-piece? Seriously. The headline should read, "Banks Claim Free Checking Is A Loss." The way the title stands now this assertion is stated as "fact" by Claes Bell owes the reader a more critical reporting.

January 16, 2012 at 9:04 pm

Banks are not really needed anymore for checking accounts. Have your money put on a reloadable card and use it to pay for eveything.

Kent Allard
January 16, 2012 at 6:48 pm

Cole - no-fee checking accounts do earn banks money, if they manage it well and dont skim off the top for executive salaries - it doesn't just sit in a vault - customers who use free checking accounts inevitably use the banks for other services that are more profitable once the bank has earned their trust.

Perhaps the lesson here is that many smaller banks is a better model for the US than a few mega banks since they can't seem to make money off of millions of customers giving them money to hold and invest.

I fascinated that you would rush to stand up for banks that repeatedly have violated the public trust, that taxpayers have repeatedly bailed out, whose executives make princely salaries while asleep at the wheel.

January 16, 2012 at 5:54 pm

Yeah the banks are telling how much the are losing, but are they also telling you how much they are making? Don't feel sorry for the banks people. 

December 21, 2011 at 2:22 pm

Smaller banks spend less on payroll plain and simple, the bigger the bank, the more levels you go up in pay before you get to the CEO who is bringing in a cool couple of million a year. Those costs go straight to the consumer.

December 14, 2011 at 7:43 pm

At what point did we decide that we shouldn't have to pay for a service that's provided to us? I always hear how banks are "fleecing" customers. Just because there is no tangible product that you can hold in your hands doesn't mean there isn't a cost attached. Why are we entitled to get something for nothing?

December 14, 2011 at 3:49 pm

Or the big banks could eliminate some of the ridiculous overhead they maintain to get the average cost per account down. That is counter intuitive to them though since instead of thinking of ways to control interanl costs and reduce expenditures they come up with new ways to extract the difference from customers wallets. That is a perfectly viable option of course. Both reducing overhead and fleecing the customer do the same thing which is get the cost of the average account down to a level they can live with. But one drives customers away and the other doesn't. No one in large corporations think outside of the box anymore. They just seem to want to get to the next earnings call or to the next bonus. No one wants to look at the big picture it's all about right now and forget later on.