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Why checking accounts are like bananas

By Marcie Geffner · Bankrate.com
Friday, July 9, 2010
Posted: 3 pm ET

A supermarket chain in my neighborhood sells bananas for 19 cents each -- or a bit more for the organic variety.

A no-name doughnut shop across the street from the market sells the same bananas for 60 cents each.

I've long harbored a suspicion that the proprietors of the doughnut shop walk across the street, buy the 19-cent bananas and resell them for 60 cents, a markup of 41 cents, or 200 percent above the cost. That's a nice profit on an impulse item: Buy one doughnut, and buy one banana. It makes perfect sense to me.

But what do bananas have to do with checking accounts?

I don't have any evidence, but I think it's a fair guess that the supermarket sells those 19-cent bananas at a loss. They're in the front of the store, and they're quite popular, judging by the contents of other people's shopping carts. I figure the store sells them at such a cheap price to bring in customers, especially heath-conscious people who have banana-eating youngsters and buy lots of groceries.

A product that's sold at a loss to bring in business is called, for those who aren't familiar with the term, a "loss leader." It's impossible to make a profit with a store full of loss leaders, but selling a few loss leaders to bring in big spenders can be smart. You lose money on the bananas, but you make it up and then some on the other products.

This is the strategy of free checking accounts. The bank loses money on the accounts, but aims to make up the loss on the other services. That's why free-checking customers usually have to maintain a hefty minimum balance, make monthly direct deposits or swipe a debt card so many times per month. The bank lends out those deposits at interest and charges the merchants for those debit card transactions. In a way, the free account is a giveaway not unlike the proverbial toaster.

If the free checking account is indeed a loss leader, it's a clever misdirection for banks to complain about the supposed "cost" of that account.

Because if there were no profit in free checking, why would the banks offer it?

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