Free Checking Becomes Fee Checking

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The era of free checking appears to be on its last legs. For months, signs have been regularly appearing indicating that this day would come: early rumors that Bank of America would roll out fees to make up for lost revenues due to new overdraft regulations, BofA testing new checking fees around the country, other big banks such as Chase tweaking account requirements and adding new fees of their own. Now, as all the big banks are adding new fees and requirements, and as less-huge regional banks are expected to do the same, it’s just about time to accept it: Free checking as you know it is a goner.

The LA Times is the latest publication to observe the coming end of an era:

Free checking, RIP. It was nice while it lasted.

To clarify, it is still possible to have free checking. Free checking just isn’t as common as it was in the past, and consumers shouldn’t expect to have the free service without jumping through several hoops. For the most part, free checking is available if a) you meet a big bank’s often-confusing account requirements, which typically include maintaining a sizeable balance (say, over $1,500) and making regular direct deposits; or b) you do your checking with a small bank or credit union that offers free checking without such requirements and fees. (The absence of these requirements and fees is certainly one reason that credit unions and small banks routinely cream big banks in customer satisfaction surveys.)

The big banks’ goal is to make money from its customers, quite obviously. In the recent past, fees from sneaky debit card overdrafts were a huge source of revenue for banks, bringing in billions annually. But since reforms have made it more difficult for banks to collect overdraft fees, the banks have been actively on the hunt for new money makers. One strategy, which can hardly be called innovative, is to revert back to charging for most checking accounts, which was standard practice not long ago. The LA Times offers a little history lesson:

Industry experts trace the widespread availability of free checking to 1994, when Washington Mutual, a fast-growing Seattle savings and loan angling for middle- and lower-income customers, introduced unconditionally free checking.

It wasn’t until 2003, in part because the industry enjoyed a favorable configuration of interest rates, that big banks fully followed WaMu’s example and embraced no-cost checking. Typically the only condition was a regular direct deposit.

Today, bank customers can expect checking accounts to come with more fees, more requirements, or both. For consumers, confronting the ever-changing fee schemes is like playing Whack-A-Mole, in which new fees pop up after regulators or the marketplace get rid of old ones.

While no fees are obviously best, in some ways the new upfront fees are preferable to the older ones that were prone to sneak up on unsuspecting customers. Again, from the LA Times:

“A reasonable, upfront monthly fee is much better than abusive back-end overdraft fees or other junk fees that target those who can least afford them,” said Lauren Saunders of the National Consumer Law Center.

So what constitutes a “reasonable, upfront monthly fee”? While account requirements and fees vary widely, and while new rules and fee structures are sure to be in flux for some time, the banks are typically charging $8 to $12 a month for checking accounts with small balances. So figure around $100 a year, ballpark.

Is that reasonable? Not if you’re used to totally free, mostly hassle-free checking, which many customers have grown accustomed to. And not if there are other options available that still are free of hassles and fees—which is the case with many small banks and credit unions.

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