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Charging for checking may be risky for banks

By Claes Bell, CFA ·
Thursday, October 28, 2010
Posted: 3 pm ET

This week Bankrate released its 2010 Checking Study, and it turns out a number of banks are phasing out free checking by introducing minimum balances or monthly maintenance fees.

Banks who phase out free checking may find it hard to hold on to customers

Banks that phase out free checking may find it hard to hold on to customers

This shift away from free checking may be due in part to new Fed rules requiring customers to opt in for overdraft protection on debit cards and new limits on how much banks can charge merchants for processing debit card transactions. Being that overdraft fees and debit interchange fees are among the largest sources of revenue for banks these days, it's not unreasonable to expect banks to make some changes to the way they do business.

That said, getting rid of free checking might not be the best way to make up the difference. A recent study commissioned by the financial services firm USAA found free checking is really, really important to consumers.

The study, which surveyed 1,007 randomly chosen U.S. adults, found 70 percent of checking account holders considered free checking to be one of the most important services a bank can offer. Further, 44 percent of respondents cited free checking as the most important service a bank can offer.

No other banking feature came anywhere close to that 44 percent figure. Only 18 percent cited online banking access and tools as the most important, followed by 13 percent who thought having branches close to where they live is key, 13 percent who wanted easy access to ATMs and only 7 percent who thought rewards programs were the most essential feature.

Along with my own conversations with people, this poll makes me think banks are going to have a hard time holding on to customers if they implement checking fees. Just as newspapers and magazines who had been giving away their content away for free online to anyone who wanted to see it are now having a hard time getting people to pay for online subscriptions, banks are going to have a hard time rolling back the free checking wave. Because, while it's not quite as easy to switch banks as it is to switch online publications, if you're charging people $10 a month for something they can get for free somewhere else, why wouldn't they move?

People just aren't used to paying for checking anymore, and as long as free options exist, consumers will gravitate to them. My guess is that banks will have to find other ways -- cutting brick-and-mortar branches, increasing fees in other areas, cutting rewards programs or, God forbid, reducing executive compensation -- to make up those lost dollars.

And just to be clear, we're talking about a lot of dollars. The banking industry generated $37.1 billion in overdraft fees in 2009, according to Moebs $ervices. To put that amount in perspective, Apple's total revenue in 2009 was $36.5 billion. Even if a lot of regular overdrafters opt in to overdraft protection, as they so far appear to be doing, that's still a big hit to banks' bottom lines.

Do you think banks will get away with charging for checking? Would you switch banks to avoid maintenance fees?

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December 22, 2010 at 8:16 pm

Yeah I don't know. Ive been with BoA for a long time now but if my primary account started getting hit with a 10 dollar a month fee, I think I would switch. I mean that 10 could go somewhere else.

November 01, 2010 at 7:19 pm

I would never pay for checking. I have several accounts at brick and mortar banks (BOA, Chase, BankAtlantic, Wachovia, CNB), one credit union, and two online accounts at Ally and Centera. I pay no checking fee at any of these. I am very computer literate and can move my money anytime between these accounts. If one of them starts to charge a fee, I will close that account in a heartbeat.

I also link two bank accounts to my investment accounts at two brokerage firms, where I have money market accounts. If necessary, I can transfer funds to my brokerage firms. So my message to the banks is: do what you want. If I don't like you, I will simply move hundreds of thousands of my savings to a friendlier institution. I am considering closing some of my brick and mortar accounts anyway, so your monthly fee will simply push me to do it sooner.

October 29, 2010 at 5:35 pm

Although Debra makes very good points, I would definitely switch banks if my bank started to charge for checking. I am lucky enough to live in an area with many banks to choose from. I would probably switch to a bank that I had some affiliation with, such as my car loan or mortgage.

Debra James
October 28, 2010 at 7:09 pm

There will be a lot of people who will stay with their bank even if free checking goes away. A few factors that will play into their decision are: 1) direct deposit - it just a pain to make a change for this service, especially for government benefits or retirement checks; 2) limited availability of banking options in a particular community or neighborhood; 3) comfort and familiarity - my elderly mother knows the employees at her bank; it's her routine to go inside the branch and withdraw her weekly allowance, and the employees know to watch the activity on her account for her; 4) laziness - this one (in)activity probably earns the banks more money than anything else; 5)lemming behavior - if people find out that others are paying a checking fee, they will go along with the program, because they feel that what everyone else is doing; 6) online bill pay- if a person has several auto-payments then it will be cumbersome to change them.

I am sure there are quite a few more credible reasons, but these are the ones that popped up in my mind straight away.