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We've grown accustomed to free checking accounts. The thought of paying anything for checking feels like highway robbery, even though research shows accounts cost banks up to $300 annually to maintain. Checking accounts have become like soft drinks and peanuts on an airline flight: Even if it's a service that costs businesses money, we expect to get it for free. Why? Because it's always been free. No other reason.
That's starting to change. Big banks from Bank of America (NYSE: BAC ) to JPMorgan Chase (NYSE: JPM ) to Citigroup (NYSE: C ) have either raised, or are proposing to raise, fees on checking accounts. Basic checking? That'll cost you. Want a paper statement? That's extra. Talk to a teller? There's a fee. Bounce a check? Lose a firstborn.
The response has been predictable: Consumers are angry. And not just angry, but confused. Why are banks -- those bloodsuckers that took a shower in federal bailout money -- now nickel-and-diming the life out of us? Some thanks.
But the truth is banks have to begin charging more. They're justified to. A slew of new regulations are about to begin curbing the ways banks made money off checking accounts in the past.
Let's start there. The dirty secret is checking accounts were never free. Just because you never paid a set monthly fee doesn't mean they haven't found ways to mine money out of you.
One of the largest ways banks have made money off checking accounts has been interchange fees on debit card transactions. Consumers never see these fees, but here's how they work: Most checking accounts come with a debit card. When consumers use those debit cards, the merchant on the other end pays an interchange fee, which ranges from 1% to 3% of the transaction value. So when you buy $100 of groceries and pay for it with your debit card, the grocer may only get $97 or so; $2 goes to your bank in interchange fees, and a smaller amount goes to Visa (NYSE: V ) or MasterCard (NYSE: MA ) , which processes the transaction. The merchant makes up for these fees by charging consumers higher prices. There's nothing shady about this. Operating a card network costs money. Banks have to pay for it somehow.
But pending regulation is set to crimp banks' ability to charge interchange. In December, the Federal Reserve proposed limiting interchange fees to $0.07 to $0.12 per transaction, or about 80% below the current average. The new restrictions could take roughly $12 billion in revenue away from banks. They're going to replace that revenue. And they're going to do it by charging you monthly fees. Totally justified.
Who wins from these new regulations? Hard to say. The usual story is that lower interchange fees will save merchants money, and merchants will pass the savings along to customers via lower prices. This sounds neat, but it isn't backed up by much history because it's hard to verify empirically. Australia limited interchange fees in 2003, but there's no conclusive evidence showing consumer prices ever fell. Asked if she thought lower interchange fees would reduce consumer prices, Federal Deposit Insurance Corp. Chairwoman Sheila Bair said this week, "I'm not sure that's going to happen, and if it does happen, the benefit would be so tiny to most retail customers."
There is, however, evidence showing that regulating interchange fees leads to higher bank fees -- checking account fees, credit card fees, lending fees, etc. These fees hit consumers and businesses alike, potentially eliminating the savings of lower interchange. The uncomfortable reality is that banks have bargaining power. They'll collect money whether it comes from interchange fees or other service fees.
Overdraft fees are another major method banks use to get checking account holders to cough up money. Research shows the average household is charged $375 per year in nonsufficient-funds fees for overdrawing bank accounts. Banks know this. They count on it. So they can get away with avoiding set monthly fees simply by waiting for consumers to rack up billions in other "you've been naughty" fees on their accord.
But that, too, is changing. Since last summer, new regulation says consumers have to "opt in" to receive overdraft protection. If those who don't opt for protection overdraw their account, their transactions get declined and no overdraft fee is charged. Losing that group of overchargers means billions in lost fee revenue for banks. Bank of America's fee revenue from checking accounts fell 26% last year. Wells Fargo (NYSE: WFC ) saw its service-fee revenue fall by $825 million. This is real money even for banks. They're going to make up for it. And they're going to do so by charging you set monthly fees. Again, totally justified.
One question that remains unanswered: How will consumers respond? Most consumers don't need old-fashioned banking anymore. Their employers offer direct deposit and they pay their bills online, not by paper check. Protesting new checking account fees, some consumers might flock to online-only banks that are still truly fee-free, like ING Direct and E*TRADE (Nasdaq: ETFC ) . These banks usually don't offer physical branches, but who needs those anymore? Not many. And not me -- I recently dropped my bricks-and-mortar bank after it imposed monthly fees for an online-only bank that doesn't charge me a penny. A taste of things to come, I'd like to think.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
Fool contributor Morgan Housel owns B of A preferred. Visa is a Motley Fool Inside Value recommendation. The Fool owns shares of Bank of America, JPMorgan Chase and Wells Fargo. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.